Skip to Content

Notice

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 Chicago Stock Exchange, Inc.

Document Details

Information about this document as published in the Federal Register.

Published Document

This document has been published in the Federal Register. Use the PDF linked in the document sidebar for the official electronic format.

Start Preamble September 8, 2010.

On July 21, 2010, the Financial Industry Regulatory Authority, Inc. (“FINRA”) and the Chicago Stock Exchange, Inc. (“CHX”) (together with FINRA, the “Parties”) filed with the Securities and Exchange Commission (“Commission” or “SEC”), pursuant to Section 17(d) of the Securities Exchange Act of 1934 (“Act”),[1] and Rule 17d-2 thereunder,[2] an amendment to their September 16, 1977 Agreement Between the National Association of Securities Dealers, Inc. (n/k/a FINRA) and the Midwest Stock Exchange Incorporated (n/k/a CHX) (“17d-2 Plan” or the “Plan”) for the allocation of regulatory responsibilities. The proposed amended Plan was published for comment on August 12, 2010.[3] The Commission received no comments on the amended Plan. This order approves and declares effective the amended Plan.

I. Introduction

Section 19(g)(1) of the Act,[4] 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.[5] 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.

Section 17(d)(1) of the Act [6] was intended, in part, to eliminate unnecessary multiple examinations and regulatory duplication.[7] 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.

To implement Section 17(d)(1), the Commission adopted two rules: Rule Start Printed Page 5583417d-1 and Rule 17d-2 under the Act.[8] 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.[9] 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.

To address regulatory duplication in these and other areas, the Commission adopted Rule 17d-2 under the Act.[10] 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.

II. The Plan

On September 26, 1978, the Commission approved the Plan allocating regulatory responsibilities pursuant to Rule 17d-2 on a provisional basis.[11] Under the Plan, FINRA was responsible, in part, for conducting on-site examinations of each dual member for which it was the DEA. On February 20, 1980, the Commission noticed for comment an amendment to the Plan, which provided, in part, for the handling of customer complaints, the review of dual members' advertising, and the arbitration of disputes under the Plan.[12] On May 30, 1980, the Commission approved the Plan, as amended.[13]

III. Proposed Amendment to the Plan

The proposed 17d-2 Plan is intended to reduce regulatory duplication for firms that are common members [14] of both CHX and FINRA. 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. The amended agreement would replace the previous Plan in its entirety.

The text of the proposed Plan delineates the proposed regulatory responsibilities with respect to the Parties. Included in the proposed Plan is an exhibit (the “CHX Certification of Common Rules” referred to herein as the “Certification”) that lists every CHX rule, and select federal securities laws, rules, and regulations, for which FINRA would bear responsibility under the proposed Plan for examining and enforcing with respect to CHX members that are also members of FINRA and the associated persons therewith (“Dual Members”).

Specifically, under the proposed 17d-2 Plan, FINRA would assume examination and enforcement responsibility relating to compliance by Dual Members with the rules of CHX that are substantially similar to the applicable rules of FINRA, as well as certain provisions of the federal securities laws and the rules and regulations thereunder delineated in the Certification (“Common Rules”).[15] Common Rules would not include the application of any CHX 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 pursuant to Rule 17d-2.[16] In the event that a Dual Member is the subject of an investigation relating to a transaction on CHX, the plan acknowledges that CHX may, in its discretion, exercise concurrent jurisdiction and responsibility for such matter.[17]

Under the proposed Plan, CHX would retain full responsibility for surveillance, examination, investigation, and enforcement with respect to trading activities or practices involving CHX'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 CHX rules that are not Common Rules.[18]

IV. Discussion

The Commission finds that the proposed Plan is consistent with the factors set forth in Section 17(d) of the Act [19] and Rule 17d-2(c) thereunder [20] 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 CHX and FINRA. Accordingly, the proposed Plan promotes efficiency by reducing costs to Dual Members. Furthermore, because CHX and FINRA will coordinate their regulatory functions in accordance with the proposed Plan, the Plan should promote investor protection.

The Commission notes that, under the proposed Plan, CHX and FINRA have allocated regulatory responsibility for those CHX 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 proposed Plan, Start Printed Page 55835FINRA 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 proposed Plan are specifically listed in the Certification, as may be amended by the Parties from time to time pursuant to the terms and conditions specified in the Plan.

According to the proposed Plan, CHX will review the Certification, at least annually, or more frequently if required by changes in either the rules of CHX or FINRA, and, if necessary, submit to FINRA an updated list of Common Rules to add CHX rules not included on the then-current list of Common Rules that are substantially similar to FINRA rules; delete CHX 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 CHX rules that are substantially similar to FINRA rules.[21] FINRA will then confirm in writing whether the rules listed in any updated list are Common Rules as defined in the proposed Plan. Under the proposed Plan, CHX will also provide FINRA with a current list of Dual Members and shall update the list no less frequently than once each quarter.[22]

Under the proposed Plan, CHX would retain full responsibility for surveillance, examination, investigation, and enforcement with respect to trading activities or practices involving CHX's own marketplace; registration pursuant to its applicable rules of associated persons (i.e., registration rules that are not Common Rules); its duties as a DEA pursuant to Rule 17d-1 under the Act; and any CHX rules that are not Common Rules.

The Commission is hereby declaring effective a plan that, among other things, allocates regulatory responsibility to FINRA for the oversight and enforcement of CHX rules that are substantially similar to the rules of FINRA for Dual Members of CHX 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 CHX rules in the Certification in conformance with the definition of Common Rules provided in the Plan. However, should the Parties decide to add a CHX rule to the Certification that is not substantially similar to a FINRA rule; delete a CHX rule from the Certification that is substantially similar to a FINRA rule; or leave on the Certification a CHX 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.[23]

The Plan also permits CHX and FINRA to terminate the Plan, subject to notice.[24] 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.[25]

IV. Conclusion

This Order gives effect to the Plan filed with the Commission in File No. 4-274. 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. 4-274, between FINRA and CHX, filed pursuant to Rule 17d-2 under the Act, is approved and declared effective.

It is therefore ordered that CHX is relieved of those responsibilities allocated to FINRA under the Plan in File No. 4-274.

Start Signature

For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.[26]

Elizabeth M. Murphy,

Secretary.

End Signature End Preamble

Footnotes

3.  See Securities Exchange Act Release No. 62657 (August 5, 2010), 75 FR 49005 (August 12, 2010).

Back to Citation

5.  15 U.S.C. 78q(d) and 15 U.S.C. 78s(g)(2), respectively.

Back to Citation

7.  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).

Back to Citation

8.  17 CFR 240.17d-1 and 17 CFR 240.17d-2, respectively.

Back to Citation

9.  See Securities Exchange Act Release No. 12352 (April 20, 1976), 41 FR 18808 (May 7, 1976).

Back to Citation

10.  See Securities Exchange Act Release No. 12935 (October 28, 1976), 41 FR 49091 (November 8, 1976).

Back to Citation

11.  See Securities Exchange Act Release No. 15191 (September 26, 1978), 43 FR 46093 (October 5, 1978).

Back to Citation

12.  See Securities Exchange Act Release No. 16591 (February 20, 1980), 45 FR 12573 (February 26, 1980).

Back to Citation

13.  See Securities Exchange Act Release No. 16858 (May 30, 1980), 45 FR 37927 (June 5, 1980).

Back to Citation

14.  The proposed 17d-2 Plan refers to these members as “Dual Members.” See Paragraph 1(c) of the proposed 17d-2 Plan.

Back to Citation

15.  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).

Back to Citation

16.  See Securities Exchange Act Release No. 61919 (April 15, 2010), 75 FR 21051 (April 22, 2010) (File No. 4-566) (notice of filing and order approving and declaring effective the plan).

Back to Citation

17.  See paragraph 6 of the proposed 17d-2 Plan.

Back to Citation

18.  See paragraph 2 of the proposed 17d-2 Plan.

Back to Citation

21.  See paragraph 2 of the proposed 17d-2 Plan.

Back to Citation

22.  See paragraph 3 of the proposed 17d-2 Plan.

Back to Citation

23.  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.

Back to Citation

24.  See paragraph 12 of the proposed 17d-2 Plan.

Back to Citation

25.  The Commission notes that paragraph 12 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.

Back to Citation

[FR Doc. 2010-22837 Filed 9-13-10; 8:45 am]

BILLING CODE 8010-01-P