[Federal Register Volume 67, Number 223 (Tuesday, November 19, 2002)]
[Notices]
[Pages 69774-69775]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-29246]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46800; File No. S7-966]


Program for Allocation of Regulatory Responsibilities Pursuant to 
Rule 17d-2; Order Approving Amendment to the Plan Allocating Regulatory 
Responsibility Among the American Stock Exchange LLC, the Chicago Board 
Options Exchange, Inc., the International Securities Exchange, Inc., 
the National Association of Securities Dealers, Inc., the New York 
Stock Exchange, Inc., the Pacific Exchange, Inc., and the Philadelphia 
Stock Exchange, Inc.

November 8, 2002.
    Notice is hereby given that the Securities and Exchange Commission 
(``SEC or ``Commission'') has issued an Order, pursuant to sections 
17(d) \1\ and 11A(a)(3)(B) \2\ of the Securities Exchange Act of 1934 
(``Act''), approving an amendment to the plan for allocating regulatory 
responsibility filed pursuant to Rule 17d-2 of the Act,\3\ by the 
American Stock Exchange LLC (``Amex''), the Chicago Board Options 
Exchange, Inc. (``CBOE''), the International Securities Exchange, Inc. 
(``ISE''), the National Association of Securities Dealers, Inc. 
(``NASD''), the New York Stock Exchange, Inc. (``NYSE''), the Pacific 
Exchange, Inc. (``PCX''), and the Philadelphia Stock Exchange, Inc. 
(``Phlx'') (collectively the ``SRO participants'').
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    \1\ 15 U.S.C. 78q(d).
    \2\ 15 U.S.C. 78k-1(a)(3)(B).
    \3\ 17 CFR 240.17d-2.
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I. Introduction

    Section 19(g)(1) of the Act \4\ requires, among other things, every 
national securities exchange and registered securities association 
(``SRO'') 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) \5\ or 
19(g)(2) \6\ of the Act. 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''). This regulatory duplication would add 
unnecessary expenses for common members and their SROs.
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    \4\ 15 U.S.C. 78s(g)(1).
    \5\ 15 U.S.C. 78q(d).
    \6\ 15 U.S.C. 78s(g)(2).
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    Section 17(d)(1) of the Act 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.
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    \7\ Securities Acts 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 \8\ and Rule 17d-2 \9\ under the Act. Rule 17d-1, adopted on 
April 20, 1976,\10\ 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. 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 applicable financial responsibility rules.
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    \8\ 17 CFR 240.17d-1.
    \9\ 17 CFR 240.17d-2.
    \10\ Securities Exchange Act Release No. 12352, 41 FR 18809 (May 
3, 1976).
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    On its face, Rule 17d-1 deals only with an SRO's obligations to 
enforce broker-dealers' compliance with the 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 other areas, on October 
28, 1976, the Commission adopted Rule 17d-2 under the Act.\11\ This 
rule permits SROs to propose joint plans allocating regulatory 
responsibilities with respect to common members. Under paragraph (c) of 
Rule 17d-2, the Commission may declare such a plan effective if, after 
providing for 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 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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    \11\ Securities Exchange Act Release No. 12935, 41 FR 49093 
(November 8, 1976).
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    On October 11, 2002, the Commission published notice of the SRO 
participants' amended plan for allocating regulatory responsibilities 
pursuant to Rule 17d-2.\12\ No comments were received. The primary 
purpose of the amendment is to allocate regulatory responsibilities 
among all of the SRO participants.\13\ In addition, the amended

[[Page 69775]]

plan allows an SRO participant that has been allocated regulatory 
responsibilities under the plan (i.e., a DOEA) to contract with The 
Options Clearing Corporation, a national securities exchange registered 
under section 6(a) of the Act,\14\ or a national securities association 
registered under section 15A of the Act \15\ to perform the DOEA's 
responsibilities under the plan.
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    \12\ Securities Exchange Act Release No. 46590 (October 2, 
2002), 67 FR 63474.
    \13\ Under the previous agreement, only the Amex, the CBOE, the 
NASD, and the NYSE were designated options examining authorities 
(``DOEAs''). See Securities Exchange Act Release No. 42816 (May 23, 
2000), 65 FR 34759 (May 31, 2000).
    \14\ 15 U.S.C. 78f(a).
    \15\ 15 U.S.C. 78o-3.
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II. Discussion

    The Commission continues to believe that the proposed plan, as 
amended, is an achievement in cooperation among the SRO participants 
and will reduce unnecessary regulatory duplication by allocating to the 
designated SRO the responsibility for certain options-related sales 
practice matters that would otherwise be performed by multiple SROs. 
The plan promotes efficiency by reducing costs to firms that are 
members of more than one of the SRO participants. In addition, because 
the SRO participants coordinate their regulatory functions in 
accordance with the plan, the plan promotes, and will continue to 
promote, investor protection.
    With respect to the DOEA's ability to contract with another SRO to 
perform the DOEA's regulatory responsibilities under the plan, the 
Commission has previously recognized that contractual regulatory 
agreements between SROs outside of the Rule 17d-2 context may be 
permissible in instances where it is consistent with the public 
interest.\16\ The Commission believes that it is reasonable and 
consistent with the public interest to allow an SRO to contract with 
another SRO to perform regulatory functions and services. At the same 
time, the Commission believes that it is important for, and that the 
Act requires, the ultimate responsibility and primary liability for 
self-regulatory failures to rest with the DOEA itself, rather than the 
SRO retained to perform the regulatory responsibilities. Thus, the DOEA 
will bear ultimate legal responsibility for the performance of the 
regulatory responsibilities allocated to it under the 17d-2 plan. The 
SRO contracting to carry out the responsibilities, however, may 
nonetheless bear liability for causing or, in appropriate 
circumstances, aiding and abetting the DOEA's violations.
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    \16\ See Securities Exchange Act Release No. 42455 (February 24, 
2000), 65 FR 11401 (March 2, 2000).
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    This order gives effect to the amended plan submitted to the 
Commission that is contained in File No. S7-966. The SRO participants 
shall notify all members affected by the amended plan of their rights 
and obligations under the amended plan.
    It is therefore ordered, pursuant to sections 17(d) and 
11A(a)(3)(B) of the Act, that the amended plan of the Amex, the CBOE, 
the ISE, the NASD, the NYSE, the PCX, and the Phlx filed pursuant to 
Rule 17d-2 is approved.
    It is further ordered that those SRO participants that are not the 
DOEA as to a particular member are relieved of those responsibilities 
allocated to the member's DOEA under the amended plan.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(34).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-29246 Filed 11-18-02; 8:45 am]
BILLING CODE 8010-01-P