[Federal Register: January 14, 2009 (Volume 74, Number 9)]
[Notices]
[Page 2143-2145]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14ja09-109]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-59218; File No. 4-575]
Program for Allocation of Regulatory Responsibilities Pursuant to
Rule 17d-2; Order Approving and Declaring Effective a Plan for the
Allocation of Regulatory Responsibilities Between the Financial
Industry Regulatory Authority, Inc. and the Boston Stock Exchange,
Incorporated
January 8, 2009.
On December 8, 2008, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') and the Boston Stock Exchange, Incorporated (``BX'')
(together with FINRA, the ``Parties'') filed with the Securities and
Exchange Commission (``Commission'') a plan for the allocation of
regulatory responsibilities, dated December 5, 2008 (``17d-2 Plan'' or
the ``Plan''). The Plan was published for comment on December 22,
2008.\1\ The Commission received no comments on the Plan. This order
approves and declares effective the Plan.
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\1\ See Securities Exchange Act Release No. 59101 (December 15,
2008), 73 FR 78402.
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I. Introduction
Section 19(g)(1) of the Securities Exchange Act of 1934
(``Act''),\2\ among other things, requires every self-regulatory
organization (``SRO'') registered as either a national securities
exchange or national securities association to examine for, and enforce
compliance by, its members and persons associated with its members with
the Act, the rules and regulations thereunder, and the SRO's own rules,
unless the SRO is relieved of this responsibility pursuant to Section
17(d) or Section 19(g)(2) of the Act.\3\ Without this relief, the
statutory obligation of each individual SRO could result in a pattern
of multiple examinations of broker-dealers that maintain memberships in
more than one SRO (``common members''). Such regulatory duplication
would add unnecessary expenses for common members and their SROs.
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\2\ 15 U.S.C. 78s(g)(1).
\3\ 15 U.S.C. 78q(d) and 15 U.S.C. 78s(g)(2), respectively.
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Section 17(d)(1) of the Act \4\ was intended, in part, to eliminate
unnecessary multiple examinations and regulatory duplication.\5\ With
respect to a common member, Section 17(d)(1) authorizes the Commission,
by rule or order, to relieve an SRO of the responsibility to receive
regulatory reports, to examine for and enforce compliance with
applicable statutes, rules, and regulations, or to perform other
specified regulatory functions.
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\4\ 15 U.S.C. 78q(d)(1).
\5\ See Securities Act Amendments of 1975, Report of the Senate
Committee on Banking, Housing, and Urban Affairs to Accompany S.
249, S. Rep. No. 94-75, 94th Cong., 1st Session 32 (1975).
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To implement Section 17(d)(1), the Commission adopted two rules:
Rule 17d-1 and Rule 17d-2 under the Act.\6\ Rule 17d-1 authorizes the
Commission to name a single SRO as the designated examining authority
(``DEA'') to examine common members for compliance with the financial
responsibility requirements imposed by the Act, or by Commission or SRO
rules.\7\ When an SRO has been named as a common member's DEA, all
other SROs to which the common member belongs are relieved of the
responsibility to examine the firm for compliance with the applicable
financial responsibility rules. On its face, Rule 17d-1 deals only with
an SRO's obligations to enforce member compliance with financial
responsibility requirements. Rule 17d-1 does not relieve an SRO from
its obligation to examine a common member for compliance with its own
rules and provisions of the federal securities laws governing matters
other than financial responsibility, including sales practices and
trading activities and practices.
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\6\ 17 CFR 240.17d-1 and 17 CFR 240.17d-2, respectively.
\7\ See Securities Exchange Act Release No. 12352 (April 20,
1976), 41 FR 18808 (May 7, 1976).
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To address regulatory duplication in these and other areas, the
Commission adopted Rule 17d-2 under the Act.\8\ Rule 17d-2 permits SROs
to propose joint plans for the allocation of regulatory
responsibilities with respect to their common members. Under paragraph
(c) of Rule 17d-2, the Commission may declare such a plan effective if,
after providing for appropriate notice and comment, it determines that
the plan is necessary or appropriate in the public interest and for the
protection of investors; to foster cooperation and coordination among
the SROs; to remove impediments to, and foster the development of, a
national market system and a national clearance and settlement system;
and is in conformity with the factors set forth in Section 17(d) of the
Act. Commission approval of a plan filed pursuant to Rule 17d-2
relieves an SRO of those regulatory responsibilities allocated by the
plan to another SRO.
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\8\ See Securities Exchange Act Release No. 12935 (October 28,
1976), 41 FR 49091 (November 8, 1976).
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[[Page 2144]]
II. Proposed Plan
On August 29, 2008, BX was acquired by The NASDAQ OMX Group, Inc.
(``NASDAQ OMX''). At the time of this acquisition, BX was not operating
a venue for trading cash equities. BX has since adopted a new rulebook
with rules governing membership, the regulatory obligations of members,
listing, and equity trading.\9\ The new BX rules, in particular the
member conduct rules that would be the Common Rules under the proposed
Plan, are based to a substantial extent on the rules of the NASDAQ
Stock Market LLC (``NASDAQ Exchange''),\10\ which, in turn, are based
to a substantial extent on the comparable rules of FINRA.
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\9\ See Securities Exchange Act Release Nos. 58927 (November 10,
2008), 73 FR 69685 (November 19, 2008) (SR-BSE-2008-48) (notice of
proposed rule change); and 59154 (December 23, 2008), 73 FR 80468
(December 31, 2008) (SR-BSE-2008-48) (order approving proposed rule
change).
\10\ See Securities Exchange Act Release No. 58927 (November 10,
2008), 73 FR at 69686 (November 19, 2008) (SR-BSE-2008-48) (notice
of proposed rule change).
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The NASDAQ Exchange currently is party to a 17d-2 plan with
FINRA.\11\ The proposed Plan would allocate regulatory responsibility
between BX and FINRA in a manner similar to the allocation of
regulatory responsibility that currently exists between the NASDAQ
Exchange and FINRA.
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\11\ See Securities Exchange Act Release No. 54136 (July 12,
2006), 71 FR 40759 (July 18, 2006) (File No. 4-517) (order approving
and declaring effective the plan between the NASDAQ Exchange and
NASD (n/k/a FINRA)).
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Accordingly, the proposed 17d-2 Plan is intended to reduce
regulatory duplication for firms that are common members of both FINRA
and BX.\12\ Pursuant to the proposed 17d-2 Plan, FINRA would assume
certain examination and enforcement responsibilities for common members
with respect to certain applicable laws, rules, and regulations.
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\12\ The proposed 17d-2 Plan refers to these common members as
``Dual Members.'' See Paragraph 1(c) of the proposed 17d-2 Plan.
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The text of the Plan delineates the proposed regulatory
responsibilities with respect to the Parties. Included in the proposed
Plan is an exhibit (the ``Rules Certification for 17d-2 Agreement with
FINFA,'' referred to herein as the ``Certification'') that lists every
BX rule, and select federal securities laws, rules, and regulations,
for which FINRA would bear responsibility under the Plan for overseeing
and enforcing with respect to BX members that are also members of FINRA
and the associated persons therewith (``Dual Members'').
Specifically, under the 17d-2 Plan, FINRA would assume examination
and enforcement responsibility relating to compliance by Dual Members
with the rules of BX that are substantially similar to the applicable
rules of FINRA, as well as any provisions of the federal securities
laws and the rules and regulations thereunder delineated in the
Certification (``Common Rules'').\13\ Common Rules would not include
the application of any BX rule or FINRA rule, or any rule or regulation
under the Act, to the extent that it pertains to violations of insider
trading activities, because such matters are covered by a separate
multiparty agreement under Rule 17d-2.\14\ In the event that a Dual
Member is the subject of an investigation relating to a transaction on
BX, the plan acknowledges that BX may, in its discretion, exercise
concurrent jurisdiction and responsibility for such matter.\15\
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\13\ See paragraph 1(b) of the proposed 17d-2 Plan (defining
Common Rules). See also paragraph 1(f) of the proposed 17d-2 Plan
(defining Regulatory Responsibilities). Paragraph 2 of the Plan
provides that annually, or more frequently as required by changes in
either BX rules or FINRA rules, the parties shall review and update,
if necessary, the list of Common Rules. Further, paragraph 3 of the
Plan provides that BX shall furnish FINRA with a list of Dual
Members, and shall update the list no less frequently than once each
calendar quarter.
\14\ See Securities Exchange Act Release No. 58806 (October 17,
2008), 73 FR 63216 (October 23, 2008) (File No. 4-566) (notice of
filing and order approving and declaring effective the plan). The
Certification identifies two Common Rules that may also be addressed
in the context of regulating insider trading activities pursuant to
the separate multiparty agreement.
\15\ See paragraph 6 of the proposed 17d-2 Plan.
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Under the Plan, BX would retain full responsibility for
surveillance, examination, investigation, and enforcement with respect
to trading activities or practices involving BX's own marketplace;
registration pursuant to its applicable rules of associated persons
(i.e., registration rules that are not Common Rules); its duties and
obligations as a DEA pursuant to Rule 17d-1 under the Act; and any BX
rules that are not Common Rules.\16\
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\16\ See paragraph 2 of the proposed 17d-2 Plan.
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III. Discussion
The Commission finds that the proposed Plan is consistent with the
factors set forth in Section 17(d) of the Act \17\ and Rule 17d-2(c)
thereunder \18\ in that the proposed Plan is necessary or appropriate
in the public interest and for the protection of investors, fosters
cooperation and coordination among SROs, and removes impediments to and
fosters the development of the national market system. In particular,
the Commission believes that the proposed Plan should reduce
unnecessary regulatory duplication by allocating to FINRA certain
examination and enforcement responsibilities for Dual Members that
would otherwise be performed by both BX and FINRA. Accordingly, the
proposed Plan promotes efficiency by reducing costs to Dual Members.
Furthermore, because BX and FINRA will coordinate their regulatory
functions in accordance with the Plan, the Plan should promote investor
protection. The Commission notes that the proposed Plan would allocate
regulatory responsibility between BX and FINRA in a manner similar to
the allocation of regulatory responsibility that currently exists
between the NASDAQ Exchange and FINRA.\19\
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\17\ 15 U.S.C. 78q(d).
\18\ 17 CFR 240.17d-2(c).
\19\ The proposed new BX rules are based to a substantial extent
on the rules of the NASDAQ Exchange which, in turn, are based to a
substantial extent on the comparable rules of FINRA. The NASDAQ
Exchange currently is party to a 17d-2 plan with FINRA. See
Securities Exchange Act Release No. 54136 (July 12, 2006), 71 FR
40759 (July 18, 2006) (File No. 4-517) (order approving and
declaring effective the plan between the NASDAQ Exchange and NASD
(n/k/a FINRA)).
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The Commission notes that, under the Plan, BX and FINRA have
allocated regulatory responsibility for those BX rules, set forth on
the Certification, that are substantially similar to the applicable
FINRA rules in that examination for compliance with such provisions and
rules would not require FINRA to develop one or more new examination
standards, modules, procedures, or criteria in order to analyze the
application of the rule, or a Dual Member's activity, conduct, or
output in relation to such rule. In addition, under the Plan, FINRA
would assume regulatory responsibility for certain provisions of the
federal securities laws and the rules and regulations thereunder that
are set forth in the Certification. The Common Rules covered by the
Plan are specifically listed in the Certification, as may be amended by
the Parties from time to time.
According to the Plan, BX will review the Certification, at least
annually, or more frequently if required by changes in either the rules
of BX or FINRA, and, if necessary, submit to FINRA an updated list of
Common Rules to add BX rules not included on the then-current list of
Common Rules that are substantially similar to FINRA rules; delete BX
rules included in the then-current list of Common Rules that are no
longer substantially similar to FINRA rules; and confirm that the
remaining rules on the list of Common Rules continue to be BX rules
that are substantially similar to FINRA rules.\20\
[[Page 2145]]
FINRA will then confirm in writing whether the rules listed in any
updated list are Common Rules as defined in the Plan. Under the Plan,
BX will also provide FINRA with a current list of Dual Members and
shall update the list no less frequently than once each quarter.\21\
The Commission believes that these provisions are designed to provide
for continuing communication between the Parties to ensure the
continued accuracy of the scope of the proposed allocation of
regulatory responsibility.
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\20\ See paragraph 2 of the proposed 17d-2 Plan.
\21\ See paragraph 3 of the proposed 17d-2 Plan.
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The Commission is hereby declaring effective a plan that, among
other things, allocates regulatory responsibility to FINRA for the
oversight and enforcement of all BX rules that are substantially
similar to the rules of FINRA for Dual Members of BX and FINRA.
Therefore, modifications to the Certification need not be filed with
the Commission as an amendment to the Plan, provided that the Parties
are only adding to, deleting from, or confirming changes to BX rules in
the Certification in conformance with the definition of Common Rules
provided in the Plan. However, should the Parties decide to add a BX
rule to the Certification that is not substantially similar to a FINRA
rule; delete a BX rule from the Certification that is substantially
similar to a FINRA rule; or leave on the Certification a BX rule that
is no longer substantially similar to a FINRA rule, then such a change
would constitute an amendment to the Plan, which must be filed with the
Commission pursuant to Rule 17d-2 under the Act and noticed for public
comment.\22\
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\22\ The Commission also notes that the addition to or deletion
from the Certification of any federal securities laws, rules, and
regulations for which FINRA would bear responsibility under the Plan
for examining, and enforcing compliance by, Dual Members, also would
constitute an amendment to the Plan.
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The Plan also permits BX and FINRA to terminate the Plan, subject
to notice.\23\ The Commission notes, however, that while the Plan
permits the Parties to terminate the Plan, the Parties cannot by
themselves reallocate the regulatory responsibilities set forth in the
Plan, since Rule 17d-2 under the Act requires that any allocation or
re-allocation of regulatory responsibilities be filed with the
Commission.\24\
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\23\ See paragraph 13 of the proposed 17d-2 Plan.
\24\ The Commission notes that paragraph 13 of the Plan reflects
the fact that FINRA's responsibilities under the Plan will continue
in effect until the Commission approves any termination of the Plan.
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IV. Conclusion
This Order gives effect to the Plan filed with the Commission in
File No. 4-575. The Parties shall notify all members affected by the
Plan of their rights and obligations under the Plan.
It is therefore ordered, pursuant to Section 17(d) of the Act, that
the Plan in File No. 4-575, between FINRA and BX, filed pursuant to
Rule 17d-2 under the Act, is approved and declared effective.
It is further ordered that BX is relieved of those responsibilities
allocated to FINRA under the Plan in File No. 4-575.
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\25\ 17 CFR 200.30-3(a)(34).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-613 Filed 1-13-09; 8:45 am]
BILLING CODE 8011-01-P