[Federal Register: November 22, 2005 (Volume 70, Number 224)]
[Notices]
[Page 70648-70650]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22no05-115]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-52774; File No. SR-NSX-2005-07]
Self-Regulatory Organizations; National Stock Exchange; Order
Approving Proposed Rule Change, and Amendment Nos. 1, 2, and 3,
Thereto, Relating to the Creation of a Regulatory Oversight Committee
November 15, 2005.
I. Introduction
On August 1, 2005, the National Stock Exchange SM
(``NSX'' SM or ``Exchange'') filed with the Securities and
Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to create a Regulatory Oversight
Committee (``ROC''). Notice of the proposed rule change, as amended,
was published for comment in the Federal Register on October 14,
2005.\3\ No comments were received regarding the proposal. This order
approves the proposed rule change, as amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 52573 (October 7,
2005), 70 FR 60113 (``Notice'').
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II. Description of the Proposed Rule Change
NSX proposes to amend the text of Article VI, Section 1.1 of the
Exchange's By-Laws to allow it to create, and specifically identify, a
ROC that would be subject to the control and supervision of NSX's Board
of Directors (``NSX Board''). The NSX also proposes to establish a
Regulatory Oversight Committee Charter (``ROC Charter'') that would set
forth the functions, scope of responsibilities and composition of the
ROC.
NSX filed the proposed rule change in accordance with undertakings
made by it and as set forth in Section III.F.1. of the Order
Instituting Administrative and Cease-And-Desist Proceedings Pursuant to
Sections 19(b) and 21C of the Securities Exchange Act of 1934, Making
Findings, and Imposing Sanctions entered May 19, 2005.\4\ In its
filing, NSX represented that the ROC Charter would include provisions
that mirror the terms of its undertaking to the Commission and
certification procedures that are consistent with the certification
procedures contained in the Order.\5\
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\4\ See In the Matter of National Stock Exchange and David
Colker, Securities Exchange Act Release No. 51715 (May 19, 2005)
(``Administrative Order'') at Section III.F.1.
\5\ See Notice.
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Pursuant to the ROC Charter, the ROC shall be responsible for
overseeing all of NSX's regulatory functions and responsibilities and
to advise regularly NSX's Board about NSX's regulatory matters.\6\
Specifically, the ROC shall: \7\ (i) Oversee NSX's regulatory functions
to enforce compliance with the federal securities laws and NSX rules,
including monitoring the design, implementation, and effectiveness of
NSX's regulatory programs; (ii) recommend to the NSX Board an adequate
operating budget for NSX's regulatory functions; (iii) approve the
promulgation, filing, or issuance of new rules, rule amendments, rule
interpretations, and regulatory circulars; (iv) take any other action
necessary to fulfill its oversight and advisory responsibilities; and
(v) adopt policies and procedures to ensure the independence of NSX's
Chief Regulatory Officer (the ``CRO''). The ROC shall also:
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\6\ Proposed ROC Charter.
\7\ Proposed ROC Charter, Section A.
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Be authorized to retain, at NSX's expense, outside counsel
and consultants as it deems appropriate to carry out its
responsibilities; \8\
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\8\ Proposed ROC Charter, Section B.
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On at least an annual basis, report to the NSX Board on
the state of the Exchange's regulatory program; and \9\
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\9\ Proposed ROC Charter, Section C.
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Create and maintain complete minutes of all of its
meetings, and create and maintain records reflecting the ROC's
recommendations or proposals made to NSX Board, and NSX Board's
decision as to each such recommendation proposal.\10\
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\10\ Proposed ROC Charter, Section D.
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In the event that the ROC's recommended operating budget for NSX's
regulatory functions either: (1) Is less than the previous year's
budget by a material amount, (2) is rejected by the NSX Board, (3) is
reduced by the NSX Board by a material amount, or (4) is altered by the
NSX Board in a manner that, in the judgment of the ROC, materially
impairs the ability of NSX to meet its regulatory obligations, then NSX
shall, within fifteen (15) business
[[Page 70649]]
days of such NSX Board action, notify the Director of the Commission's
Division of Market Regulation in writing, providing copies of all
minutes and other records reflecting the ROC's budget proposal and the
NSX Board's decision regarding such proposal.\11\
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\11\ Proposed ROC Charter, Section E.
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The CRO shall certify compliance with the required items of the
Administrative Order to the ROC on a form and frequency basis set by
the ROC, and shall have the authority to require such additional
compliance certification from the staff as he deems appropriate and in
such forms as he may prescribe.\12\
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\12\ Proposed ROC Charter, Section A.
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In accordance with the functions and responsibilities set forth
above, the ROC shall perform certain oversight functions with respect
to the CRO and other regulatory personnel. Specifically, NSX
represented in its filing that the ROC shall: \13\
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\13\ See Notice.
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Review with the Exchange's CRO and other appropriate
regulatory personnel various aspects of the design, implementation, and
effectiveness of NSX's regulatory programs;
Review, revise, or approve the CRO's recommendation for a
regulatory budget to formulate the ROC's recommendation of an adequate
operating budget and staffing level for NSX's regulatory function to
the Board;
Review, evaluate, and, if appropriate, recommend to the
Board the implementation of any and all actions recommended by the CRO
and the Regulatory Services Division (``NSX Regulatory Division'') to
fulfill the NSX Regulatory Division's and the ROC's oversight and
advisory responsibilities;
Assess the performance of the CRO and review the CRO's
assessment of the NSX Regulatory Division's staff in fulfilling their
responsibilities and recommend compensation and personnel actions to
the NSX Board; and
Review, amend, approve or reject the CRO's recommendations
respecting the promulgation, filing, or issuance of new rules, rule
amendments, rule interpretations, and regulatory circulars, including
the approval (or ratification) of all regulatory circulars issued by
the NSX within thirty five days of the issuance of such regulatory
circulars.
In addition, NSX represented that, on at least an annual basis, the
ROC will review the structural protections that separate NSX's
regulatory function from its commercial interests by reviewing the
supervisory responsibilities of its Chief Executive Officer (``CEO'')
and CRO. Further, the ROC will take all steps necessary to provide
reasonable assurance that NSX is and remains in compliance with the
Administrative Order and will take any other action necessary to
fulfill its oversight and advisory responsibilities.\14\
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\14\ Id.
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The ROC shall be comprised of no less than three members, who have
been appointed by NSX's Chairman with the approval of the NSX Board in
a composition consistent with federal securities laws and NSX's By-Laws
and Rules. At a minimum, the ROC members shall not be, nor have been
during the preceding three years, employees of NSX or any NSX member
firm. The ROC shall elect a Chairperson from among its members.\15\
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\15\ Proposed ROC Charter.
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III. Discussion and Commission Findings
The Commission has reviewed the proposed rule change, as amended,
and finds that it is consistent with the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\16\ Specifically, the Commission finds that the proposed rule
change, as amended, furthers the objectives of Section 6(b)(1) \17\ of
the Act, which requires the Exchange to be so organized and have the
capacity to be able to carry out the purposes of the Act and to comply,
and to enforce compliance by its members, with the Act and the rules of
the Exchange. In addition, the Commission finds that the proposed rule
change, as amended, is consistent with Section 6(b)(5) of the Act,\18\
which requires, among other things, that the rules of a national
securities exchange be designed to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system, and, in
general, to protect investors and the public interest.
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\16\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\17\ 15 U.S.C. 78f(b)(1).
\18\ 15 U.S.C. 78f(b)(5).
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An exchange's governance structure should be designed to assure
that its regulatory function is strong, vigorous, and sufficiently
independent and insulated from improper influence from management or
any regulated entity. In the Commission's view, the proposal is
designed to advance this goal. The proposed amendments provide for a
ROC which will be composed of members that shall not be, nor have been
during the preceding three years, employees of NSX or any NSX member
firm. The ROC will be responsible for oversight of all of NSX's
regulatory functions and responsibilities, including, among other
things, approving new NSX rules and adopting policies and procedures to
ensure the independence of the NSX's CRO. Also, the ROC will review, on
at least an annual basis, the structural protections that separate
NSX's regulatory function from its commercial interests by reviewing
the supervisory responsibilities of NSX's CEO and CRO.\19\ The
Commission believes that these proposed amendments to the NSX's
governance structure will add a degree of independence that should
serve to insulate NSX's regulatory activity from its economic
interests. As noted above, the Commission notes that NSX filed the
proposed rule change in accordance with its undertakings as set forth
in the Administrative Order, and represented that the proposed rule
change includes provisions that mirror the terms of the undertaking.
The Commission believes that in this context, the Exchange's proposal
is consistent with the statutory requirements under Section 6(b)(1) of
the Act.\20\ The Commission notes that it is in the process of
reviewing a range of governance issues relating to self-regulatory
organizations (``SROs''), including possible steps to strengthen the
framework for the governance of SROs and ways to improve the
transparency of the governance procedures for all SROs, and has
proposed rules in furtherance of this goal, including proposed rules
relating to an exchange's ROC.\21\ Depending on the results of the
proposed rules, NSX may be required to make further changes to
strengthen its governance structure and ensure that its ROC continues
to comply with federal securities laws.
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\19\ See supra note 14 and accompanying text.
\20\ 15 U.S.C. 78f(b)(1).
\21\ See Securities Exchange Act Release No. 50699 (November 18,
2004), 69 FR 71126 (December 8, 2004).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\22\ that the proposed rule change (File No. SR-NSX-2005-07) and
Amendment Nos. 1, 2, and 3, thereto be, and hereby are, approved.
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\22\ 15 U.S.C. 78s(b)(2).
[[Page 70650]]
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-6409 Filed 11-21-05; 8:45 am]
BILLING CODE 8010-01-P