[Federal Register: April 19, 2007 (Volume 72, Number 75)]
[Notices]
[Page 19733-19737]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19ap07-65]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55631; File No. SR-NSX-2006-16]
Self-Regulatory Organizations; National Stock Exchange, Inc.;
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto
Regarding the Annual Certification of Compliance and Supervisory
Processes
April 13, 2007.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on November 22, 2006, the National Stock Exchange, Inc. (``NSX''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. On April
9, 2007, the NSX filed Amendment No. 1 to the proposed rule change
(``Amendment No. 1'').\3\ The Commission is publishing this notice to
solicit comments on the proposed rule change, as amended, from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1, which supplemented the original filing, the
NSX provided more information regarding the certification process
and corrected a grammatical error.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to adopt NSX Rule 5.7 and accompanying
Interpretations and Policies .01 (Annual Compliance and Supervision
Certification) to require each Equity Trading Permit (``ETP'') Holder's
Chief Executive Officer (``CEO'') to certify annually to having in
place a process to establish, maintain, review, modify, and test
policies and procedures reasonably designed to achieve compliance with
applicable Rules of the Exchange, and federal securities laws and
regulations. The text of the proposed rule and interpretation is set
forth below. Proposed new language is italicized.
* * * * *
CHAPTER V.
SUPERVISION
* * * * *
Rule 5.7. Annual Certification of Compliance and Supervisory Processes
Each ETP Holder shall have its chief executive officer (or
equivalent officer) certify annually, as set forth in
[[Page 19734]]
Interpretations and Policies .01, that the ETP Holder has in place
processes to establish, maintain, review, test and modify written
compliance policies and written supervisory procedures reasonably
designed to achieve compliance with applicable Rules of the Exchange
and federal securities laws and regulations.
Interpretations and Policies .01 Annual Compliance and Supervision
Certification
The Exchange is issuing this interpretation to Rule 5.7, which
requires that the ETP Holder's chief executive officer (or equivalent
officer) execute annually a certification that the ETP Holder has in
place processes to establish, maintain, review, test and modify written
compliance policies and written supervisory procedures reasonably
designed to achieve compliance with applicable Rules of the Exchange
and federal securities laws and regulations. The certification for each
ensuing year shall be effected no later than on the anniversary date of
the previous year's certification. The certification shall state the
following:
Annual Compliance and Supervision Certification
The undersigned is the chief executive officer (or equivalent
officer) of [name of ETP Holder corporation/partnership/sole
proprietorship] (the ``ETP Holder''). As required by Rule 5.7, the
undersigned makes the following certification:
1. The ETP Holder has in place processes to:
(a) Establish, maintain and review policies and procedures
reasonably designed to achieve compliance with applicable Rules of the
National Stock Exchange, Inc. and federal securities laws and
regulations;
(b) Modify such policies and procedures as business, regulatory and
legislative changes and events dictate; and
(c) Test the effectiveness of such policies and procedures on a
periodic basis, the timing and extent of which is reasonably designed
to ensure continuing compliance with Rules of the National Stock
Exchange, Inc. and federal securities laws and regulations.
2. The undersigned chief executive officer (or equivalent officer)
has conducted one or more meetings with the chief compliance officer in
the preceding 12 months, the subject of which satisfy the obligations
set forth in Interpretations and Policies .01 to Rule 5.7.
3. The ETP Holder's processes, with respect to paragraph 1 above,
are evidenced in a report reviewed by the chief executive officer (or
equivalent officer), chief compliance officer, and such other officers
as the ETP Holder may deem necessary to make this certification. The
final report has been submitted to the ETP Holder's board of directors
and audit committee or will be submitted to the ETP Holder's board of
directors and audit committee (or equivalent bodies) at the earlier of
their next scheduled meetings or within 45 days of the date of
execution of this certification.
4. The undersigned chief executive officer (or equivalent officer)
has consulted with the chief compliance officer and other officers as
applicable (referenced in paragraph 3 above) and such other employees,
outside consultants, lawyers and accountants, to the extent deemed
appropriate, in order to attest to the statements made in this
certification.
* * * * *
The Exchange provides the following guidance in completing the
Certification above. Included in the processes requirement is an
obligation on the part of the ETP Holder to conduct one or more
meetings annually between the chief executive officer (or equivalent
officer) and the chief compliance officer to: (1) Discuss and review
the matters that are subject of the certification; (2) discuss and
review the ETP Holder 's compliance efforts as of the date of such
meetings; and (3) identify and address significant compliance problems
and plans for emerging business areas.
The report required in paragraph 3 of the certification must
document the ETP Holder's processes for establishing, maintaining,
reviewing, testing and modifying compliance policies, that are
reasonably designed to achieve compliance with applicable NSX rules and
federal securities laws and regulations, and any principal designated
by the ETP Holder may prepare the report. The report must be produced
prior to execution of the certification and be reviewed by the chief
executive officer (or equivalent officer), chief compliance officer and
any other officers the ETP Holder deems necessary to make the
certification and must be provided to the ETP Holder's board of
directors and audit committee in final form either prior to execution
of the certification or at the earlier of their next scheduled meetings
or within 45 days of execution of the certification. The report should
include the manner and frequency in which the processes are
administered, as well as the identification of officers and supervisors
who have responsibility for such administration. The report need not
contain any conclusions produced as a result of following the processes
set forth therein. The report may be combined with any other compliance
report or other similar report required by any other self-regulatory
organization provided that: (1) Such report is clearly titled in a
manner indicating that it is responsive to the requirements of the
certification and Rule 5.7; (2) an ETP Holder that submits a report for
review in response to a NSX request must submit the report in its
entirety; and (3) the ETP Holder makes such report in a timely manner,
i.e., annually.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant parts of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
It is critical that each NSX ETP Holder understand the importance
of employing comprehensive and effective compliance policies and
written supervisory procedures. Compliance with applicable NSX rules
and Federal securities laws and regulations is the foundation of
ensuring investor protection and market integrity and is essential to
the efficacy of self-regulation. Consequently, the Exchange is
proposing to adopt Rule 5.7, that would require ETP Holders to have
their CEOs, or equivalent officer, certify annually to having in place
processes to establish, maintain, review, modify, and test policies and
procedures reasonably designed to achieve compliance with applicable
NSX rules, and Federal securities laws and regulations.\4\
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\4\ This new rule should not impose substantial new obligations
on NSX ETP Holders as the National Association of Securities
Dealers, Inc. (``NASD'') and the New York Stock Exchange LLC
(``NYSE'') have implemented similar rules. See NASD Rule 3013(b) and
Interpretative Material--3013 (``IM 3013'') (effective Dec. 1, 2004;
amendment to IM 3013 effective March 17, 2006); NYSE Rule 342.30
(effective Nov. 16, 2005). As a result, a similar requirement is
already in place for NASD and NYSE member firms, addressing member
firms' compliance with the rules of those self-regulatory
organizations. The first certifications pursuant to those rules were
due by April 1, 2006.
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[[Page 19735]]
Specifically, the proposed rule change would require the CEO to
certify annually that senior executive management has in place
processes to: (1) Establish and maintain policies and procedures
reasonably designed to achieve compliance with applicable NSX rules and
Federal securities laws and regulations; (2) modify such policies and
procedures as business, regulatory and legislative changes and events
dictate; and (3) test the effectiveness of such policies and procedures
on a periodic basis, the timing of which is reasonably designed to
ensure continuing compliance with applicable NSX rules, and Federal
securities laws and regulations. The proposed rule change further would
require the CEO to certify that those processes are evidenced in a
report that has been reviewed by those executing the certification, as
well as the member's board of directors and audit committee. The
proposed rule change also would create a new Interpretation and Policy
.01 to Rule 5.7, which sets forth the language of the certification and
gives further guidance as to the requirements and limitations of the
rule.
The proposed rule change states that included in this processes
requirement is an obligation on the part of the ETP Holder to conduct
one or more meetings annually between the CEO (or equivalent officer)
and the chief compliance officer to: (1) Discuss and review the matters
that are subject of the certification; (2) discuss and review the ETP
Holder's compliance efforts as of the date of such meetings; and (3)
identify and address significant compliance problems and plans for
emerging business areas. The CEO also may be the same person as the
chief compliance officer.
As noted in the proposed rule change, the periodic and content
requirements for meetings between the CEO (or equivalent officer) and
the chief compliance officer, as well as the pertinent requirements of
paragraphs 3 and 4 of the certification, are intended to indicate the
unique and integral role of the chief compliance officer both in the
discharge of certain compliance processes and the reporting
requirements that are the subject matter of the certification and in
providing a reliable basis upon with the CEO can execute the
certification. The chief compliance officer is the primary advisor to
the ETP Holder on its overall compliance scheme and the particularized
rules, policies and procedures that the ETP Holder adopts. This is
because the chief compliance officer should have an expertise in the
process of: (1) Gaining an understanding of the products, services or
line functions that need to be the subject of written compliance
policies and written supervisory procedures; (2) identifying the
relevant rules, regulations, laws and standards of conduct pertaining
to such products, services or line functions based on experience and/or
consultation with those persons who have a technical expertise in such
areas of the ETP Holder's business; (3) developing, or advising other
business persons charged with the obligation to develop, policies and
procedures that are reasonably designed to achieve compliance with
those relevant rules, regulations, laws and standards of conduct; (4)
evidencing the supervision by the line managers who are responsible for
the execution of compliance policies; and (5) developing programs to
test compliance with the ETP Holder's policies and procedures.
It is that expertise in the process of compliance that makes the
chief compliance officer an indispensable party to enable the CEO to
reach the conclusions stated in the certification. Consequently, any
certification made by a CEO under circumstances where the chief
compliance officer has concluded, after consultation, that there is an
inadequate basis for making such certification would be, without
limitation, conduct inconsistent with the observance of the high
standards of commercial honor, and the just and equitable principles of
trade--a violation of NSX Rule 3.1. Beyond the certification
requirement, it is the intention of both Rule 5.7 and Interpretations
and Policies .01 to foster regular and significant interaction between
senior management and the chief compliance officer regarding the ETP
Holder's comprehensive compliance program.
The chief compliance officer and other compliance officers that
report to the chief compliance officer (as described in the sentence
that immediately follows) shall perform the compliance functions
contemplated under paragraphs 3 and 4 of the certification. Nothing
herein is intended to limit or discourage the participation of other
employees both within and outside the ETP Holder's compliance
department in any aspect of the ETP Holder's compliance programs or
processes, including those matters discussed herein. However, it is
understood that the chief compliance officer and, where applicable, the
most senior compliance officers having primary compliance department
responsibility for each of the ETP Holder's business segments, will
retain responsibility for the compliance functions contemplated by
paragraphs 3 and 4 of the certification.
As may be necessary to render their views and advice, the chief
compliance officer and the other officers referenced in paragraph 3 of
the certification who consult with the CEO (or equivalent officer)
pursuant to paragraph 4, shall, in turn, consult with other employees,
officers, outside consultants, lawyers and accountants.
The Exchange recognizes that supervisors with business line
responsibility are accountable for the discharge of an ETP Holder's
compliance policies and written supervisory procedures. The signatory
to the certification is certifying only as to having processes in place
to establish, maintain, review, test and modify the ETP Holder's
written compliance and supervisory policies and procedures and the
execution of this certification and any consultation rendered in
connection with such certification does not by itself establish
business line responsibility.
The requirement that an ETP Holder's processes include providing
the report to the board of directors and audit committee (required by
paragraph 3 of the certification) does not apply to ETP Holders that do
not utilize these types of governing bodies and committees in the
conduct of their business.\5\
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\5\ As a part of their process, ETP Holders must have the report
reviewed by their governing bodies and committees that serve similar
functions in lieu of a board of directors and audit committee.
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The report required in paragraph 3 of the certification must
document the ETP Holder's processes for establishing, maintaining,
reviewing, testing and modifying compliance policies, that are
reasonably designed to achieve compliance with applicable NSX rules and
Federal securities laws and regulations. Any principal designated by
the ETP Holder may prepare the report. The report must be produced
prior to execution of the certification and be reviewed by the CEO (or
equivalent officer), chief compliance officer and any other officers
the ETP Holder deems necessary to make the certification and must be
provided to the ETP Holder's board of directors and audit committee in
final form either prior to execution of the certification, at the
earlier of their next scheduled meetings or within 45 days of execution
of the certification. The report should include the manner and
frequency in which the processes are administered,
[[Page 19736]]
as well as the identification of officers and supervisors who have
responsibility for such administration. The report need not contain any
conclusions produced as a result of following the processes set forth
therein. The report may be combined with any other compliance report or
other similar report required by any other self-regulatory organization
provided that: (1) Such report is clearly titled in a manner indicating
that it is responsive to the requirements of the certification and Rule
5.7; (2) an ETP Holder that submits a report for review in response to
a NSX request must submit the report in its entirety; and (3) the ETP
Holder makes such report in a timely manner, for example, annually.
In summary, this proposal recognizes that responsibility for
discharging compliance policies and written supervisory procedures
rests with business line supervisors. The proposal also clarifies that
execution of the certification does not by itself establish a signatory
as having such line supervisory responsibility. The proposal also sets
forth the particulars regarding the report that must evidence a
member's compliance processes. It states that the report must be
produced prior to execution of the certification and reviewed by the
CEO, and such other officers as the member deems necessary. The report
also must include the manner and frequency in which the processes are
administered and identify those officers and supervisors with
responsibility for such administration. The report need not contain
conclusions that result from following the specified processes, such as
compliance deficiencies. Additionally, the report may be combined with
other reports required by a self-regulatory organization, provided the
report is made annually, clearly indicates in the title that it
contains the information required by Rule 5.7, and that the entire
report is provided in response to any regulatory request for all or
part of the combined report. Finally, with respect to review of the
report, this clarifies that review by a member's board of directors and
audit committee only applies to those members whose corporate
governance structure have such or similar governing bodies and
committees--it does not impose a requirement that members create them
if they do not currently exist.
ETP Holders should understand that the requirements of Rule 5.7 and
Interpretations and Policies .01 represent, in part, a principle-based
requirement to certify that the ETP Holder has in place processes to
establish, maintain, review, test and modify written compliance
policies and written supervisory procedures reasonably designed to
achieve compliance with applicable NSX rules and Federal securities
laws and regulations. Consequently, compliance with the periodic and
content requirements of the Interpretation pertaining to meetings
between the CEO (or equivalent officer) and the chief compliance
officer does not satisfy the full extent of these principle-based
obligations that will vary with the facts and circumstances of an ETP
Holder's business activities and organizational structure. Moreover,
NSX emphasizes the testing aspect of this principle-based requirement;
an integral purpose of NSX rules pertaining to supervision is that ETP
Holders adopt policies and procedures that are effective as to both the
scope of, and the achievement of compliance with, applicable NSX rules,
and Federal securities laws and regulations.
NSX believes the proposal provides an effective mechanism to compel
substantial and purposeful interaction between senior management and
compliance personnel, thereby enhancing the quality of ETP Holders'
supervisory and compliance systems. NSX further believes the rule
change imposes the minimal additional burden on ETP Holders that is
necessary to achieve the proposal's purpose, as the firms are already
obligated to provide similar certifications in connection with rules of
other self-regulatory organizations.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\6\ in general, and furthers the
objectives of Section 6(b)(5) \7\ of the Act, in particular, in that it
is designed to promote just and equitable principles of trade, to
prevent fraudulent and manipulative acts and practices, and, in
general, to protect investors and the public interest. NSX believes
that that the proposed rule change is consistent with the provisions of
the Act noted above in that it will enhance focus on ETP Holders'
compliance and supervision systems, thereby decreasing the likelihood
of fraud and manipulative acts and increasing investor protection.
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\6\ 15 U.S.C. 78(f)(b).
\7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such longer period (i) As the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the NSX consents, the Commission will:
(A) By order approve the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NSX-2006-16 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File No. SR-NSX-2006-16. This file
number should be included in the subject line if e-mail is used. To
help the Commission process and review comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the
[[Page 19737]]
proposed rule change between the Commission and any person, other than
those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room. Copies of such
filings also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
file number SR-NSX-2006-16 and should be submitted on or before May 10,
2007.
For the Commission by the Division of Market Regulation,
pursuant to the delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-7428 Filed 4-18-07; 8:45 am]
BILLING CODE 8010-01-P