[Federal Register Volume 68, Number 98 (Wednesday, May 21, 2003)]
[Notices]
[Pages 27869-27872]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-12730]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-4781; File No. S7-966]


Program for Allocation of Regulatory Responsibilities Pursuant to 
Rule 17d-2; Notice of Filing of the Plan for Allocation of Regulatory 
Responsibilities Between the National Association of Securities 
Dealers, Inc. and the International Securities Exchange, Inc.

May 14, 2003.
    Pursuant to section 17(d) of the Securities Exchange of 1934 
(``Act'') \1\ and Rule 17d-2 thereunder,\2\ notice is hereby given that 
on January 7, 2003, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association'') and the International Securities 
Exchange, Inc. (``ISE'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') a plan for

[[Page 27870]]

allocation of regulatory responsibilities relating to options-related 
sales practices (``ISE/NASD Options-related Sales Practice 17d-2 
Plan''). On May 1, 2003, NASD and ISE filed Amendment No. 1 to the ISE/
NASD Options-related Sales Practice 17d-2 Plan.\3\
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    \1\ 15 U.S.C. 78q(d).
    \2\ 17 CFR 240.17d-2.
    \3\ See letter from Michael Simon, Senior Vice President and 
General Counsel, ISE, to Nancy Sanow, Assistant Director, Division 
of Market Regulation, SEC, dated April 30, 2003. Amendment No. 1 
deleted paragraphs 5.1 and 5.2 of the ISE/NASD Options-related Sale 
Practice 17d-2 Plan filed on January 7, 2003.
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I. Introduction

    Section 19(g)(1) of the Act,\4\ among other things, requires 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) or 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''). 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) and 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.\6\ 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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    \6\ 15 U.S.C. 78q(d). See also 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 and Rule 17d-2 under the Act.\7\ Rule 17d-1, adopted on 
April 20, 1976,\8\ authorizes the Commission to name a single SRO as 
the designated examining authority (``DEA'') to examine common members 
for compliance with 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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    \7\ 17 CFR 240.17d-1 and 17 CFR 240.17d-2.
    \8\ 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.\9\ 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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    \9\ Securities Exchange Act Release No. 12935, 41 FR 49093 
(November 8, 1976).
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II. The Plan

    On September 8, 1983, the Commission approved a plan for allocating 
regulatory responsibility pursuant to Rule 17d-2 for certain options-
related sale practice matters (``Options-related Sales Practice 17d-2 
Plan'').\10\ Under this plan, the SRO to whom a firm was designated was 
responsible for conducting options-related sales practice examinations 
and investigating options-related customer complaints and terminations 
for cause of associated persons; the designated SRO was also known as 
the firm's ``Designated Options Examining Authority'' or ``DOEA.'' 
Under the Options-related Sales Practice Plan, only the AMEX, CBOE, 
NASD and NYSE were DOEAs. On May 23, 2000, the Commission approved an 
Amendment to the Options-related Sales Practice Plan that added ISE as 
a participant.\11\ On November 8, 2002, the Commission approved another 
Amendment that replaced the Options-related Sale Practice Plan in its 
entirety and, among other things, allocated regulatory responsibilities 
among all the participants in a more equitable manner (``Revised 
Options-related Sales Practice 17d-2 Plan'').\12\ The current proposed 
plan between ISE and NASD transfers to the NASD all the regulatory 
responsibilities for each common member allocated to the ISE under the 
Revised Options-related Sales Practice 17d-2 Plan.
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    \10\ Securities Exchange Act Release No. 20158, 48 FR 41256 
(September 14, 1983). The participation in this plan were the 
American Stock Exchange LLC (``AMEX'') the Chicago Board Options 
Exchange, Inc. (``CBOE''), the Midwest Stock Exchange, Inc., NASD, 
the New York Stock Exchange, Inc. (``NYSE''), the Pacific Stock 
Exchange, Inc. and the Philadelphia Stock Exchange, Inc.
    \11\ Securities Exchange Act Release No. 42816 (May 23, 2000); 
65 FR 34759 (May 31, 2000). This Amendment also updated the 
corporate names of the AMEX, the Midwest Stock Exchange (now known 
as the Chicago Stock Exchange, Inc.), and the Pacific Stock Exchange 
Incorporated (now known as the Pacific Exchange, Inc.).
    \12\ Securities Exchange Act Release No. 46800, 67 FR 69774 
(November 19, 2002).
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    The text of the proposed ISE/NASD Options-related Sales Practice 
17d-2 Plan is as follows:

Agreement Between the National Association of Securities Dealers, Inc., 
and the International Securities Exchange, Pursuant to Section 17(d) 
and Rule 17d-2

    This agreement (Agreement) pursuant to section 17(d) of the 
Securities Exchange Act of 1934 (Act) and Rule 17d-2 thereunder is by 
and between the National Association of Securities Dealers, Inc. 
(NASD), a Delaware Corporation registered as a national securities 
association subject to regulation by the Securities and Exchange 
Commission under the Act, whose principal offices are located at 1735 K 
Street, NW., Washington, DC 20006, and the International Securities 
Exchange, Inc. (ISE), a New York corporation whose principal place of 
business is located at 60 Broad Street, New York, NY 10004 (NASD and 
ISE are collectively referred to as Parties).
    In consideration of the mutual covenants contained hereafter, and 
in consideration of other valuable consideration, NASD and ISE hereby 
agree as follows:
    1. Term. This Agreement shall be effective on the date the SEC 
approves this Agreement under section 17(d) (Effective Date).
    2. Entities. ISE is a self-regulatory organization (SRO), as 
defined in section 3(a)(26) of the Act. NASD is a registered securities 
association, as defined in section 15A of the Act and an SRO, and is 
responsible for fulfilling

[[Page 27871]]

certain regulatory obligations and performing certain regulatory 
functions under the Act.
    3. Members. The Parties have brokers or dealers as their members, 
and some of the brokers or dealers are members of both Parties 
(hereinafter, members of both Parties and persons associated with such 
members are referred to collectively as Common Members). Each Party 
hereto has regulatory obligations under the Act and the rules of the 
Party for Common Members.
    4. Structure. The Parties are participants in a multiparty options 
17d-2 Agreement by and among the American Stock Exchange LLC, the 
Chicago Board Options Exchange, Inc., ISE, NASD, the New York Stock 
Exchange, the Pacific Exchange Inc., and the Philadelphia Stock 
Exchange (``Multiparty 17d-2 Agreement''). Under the Multiparty 17d-2 
Agreement, ISE is assigned as Designated Options Examining Authority 
(``DOEA'') for certain Common Members. Under the Multiparty 17d-2 
Agreement, a DOEA has examination and enforcement responsibilities 
(``Regulatory Responsibilities'') relating to compliance by a Common 
Member and persons associated with such Common Member for certain 
Common Rules (as defined in the Multiparty 17d-2 Agreement) insofar as 
they apply to the conduct of accounts for listed options and index 
options (the ``Covered Rules'').
    5. Services. NASD shall perform all the Regulatory Responsibilities 
(as set forth in the Multiparty 17d-2 Agreement, as amended (attached 
hereto as Exhibit 1-A)), for each Common Member that is allocated to 
ISE under the Multiparty 17d-2 Agreement as if NASD were the Designated 
Options Examining Authority (the ``Covered Member'').
    6. Fees. NASD will charge ISE and ISE shall pay NASD a fee for 
services performed under this Agreement. In the event that NASD raises 
its rates in excess of what has been agreed to by the parties, NASD 
will provide ISE with ninety (90) days advance written notice of its 
intent. ISE will then have thirty (30) days from the date of such 
notification to inform NASD that ISE will perform for itself the 
applicable regulatory responsibilities allocated NASD under the 
Agreement or enter into an agreement pursuant to applicable rules of 
the SEC with respect to the performance of such responsibilities. ISE's 
failure to pay for services performed is a material breach of this 
Agreement.
    7. Indemnification. Neither Party, including respective directors, 
governors, officers, employees and agents, will be liable to the other 
Party and its directors, governors, officers, employees and agents for 
liability, loss or damage resulting from any delays, inaccuracies, 
errors or omissions with respect to its performing or failing to 
perform regulatory responsibilities, obligations, or functions, except 
in instances of gross negligence, willful misconduct or reckless 
disregard, or breach of confidentially. Both Parties understand and 
agree with each other that the regulatory responsibilities are being 
performed on a good faith and best effort basis and no warranties, 
express or implied, are made by either Party to the other Party with 
respect to any of the responsibilities to be performed by either of 
these Parties hereunder.
    8. Arbitration. Any claim, dispute, controversy or other matter in 
question with regard to the Agreement that cannot be resolved by 
negotiation between the Parties shall be submitted to arbitration in 
accordance with the rules and regulations of the American Arbitration 
Association, provided, however, that (1) submission of any such claim, 
dispute, controversy or other matter in question to the American 
Arbitration Association shall not be required if the Parties agree upon 
another arbitration forum, (2) the foregoing shall not preclude either 
Party from pursuing all available administrative, judicial or other 
remedies for infringement of a registered patent, trademark, service 
mark or copyright, (3) the Parties shall not submit claims for punitive 
damages and do hereby waive any right to the same, and (4) the 
arbitrators shall not be authorized to award punitive damages.
    9. SEC Approval.
    (a) The Parties agree to promptly file this Agreement with the SEC 
for its review and approval.
    (b) If approved by the SEC, the Parties agree to send out a joint 
notice to Covered Members to announce this Agreement.
    10. Special or Cause Examinations. Nothing in this Agreement shall 
restrict or in any way encumber the right of a Party to conduct special 
or cause examinations of Covered Members as either Party, in its sole 
discretion, shall deem appropriate or necessary.
    11. Definitions. Unless otherwise defined in this Agreement, or 
unless the context otherwise requires, the terms used in this Agreement 
shall have the same meaning as they have under the Act and the rules 
and regulations thereunder.
    12. Subsequent Parties; Limited Relationship. This Agreement shall 
inure to the benefit of and shall be binding upon the Parties hereto 
and their respective legal representatives, successors, and assigns. 
Nothing in this Agreement, expressed or implied, is intended to or 
shall (i) confer on any person other than the Parties hereto, or their 
respective legal representatives, successors, and assigns, any rights, 
remedies, obligations or liabilities under or by reason of this 
Agreement, (ii) constitute the Parties hereto partners or participants 
in a joint venture, or (iii) appoint one Party the agent of the other.
    13. Assignment. Neither Party may assign the Agreement without the 
prior written consent of the other Party, which consent shall not be 
unreasonably withheld, conditioned or delayed, provided, however, that 
either Party may assign the Agreement to a corporation controlling, 
controlled by or under common control with the assigning Party without 
the prior written consent of the other Party.
    14. Severability. Any term or provision of this Agreement which is 
invalid or unenforceable in any jurisdiction shall, as to such 
jurisdiction, be ineffective to the extent of such invalidity or 
unenforceability without rendering invalid or unenforceable the 
remaining terms and provisions of this Agreement or affecting the 
validity or enforceability of any of the terms or provisions of this 
Agreement in any other jurisdiction.
    15. Termination.
    (a) Termination for Cause. Either Party may terminate the Agreement 
due to breach by the other Party. The Party aggrieved by the breach 
shall give written notice to the other Party that the Agreement shall 
be terminated not earlier than sixty (60) calendar days from receipt of 
the notice, and such notice shall state with specificity the grounds 
for termination. If the breach is curable, the Party in breach will 
have the right to cure such breach prior to the date stated for 
termination, and, should the breach be cured and written notice of such 
cure served on the aggrieved Party prior to the date stated for 
termination, such notice shall vacate the notice to terminate.
    (b) Termination for Convenience. Either Party may terminate the 
Agreement for any other reason by giving written notice to the other 
Party that the Agreement will terminate not less than ninety (90) days 
from receipt of the notice. The notice will specify the basis for 
termination. ISE will pay NASD the amount due for authorized work and 
expenses incurred in completion of such authorized work as of the 
effective date of termination.

[[Page 27872]]

    16. General obligations. The Parties agree to perform all acts and 
execute all supplementary instruments or documents that may be 
reasonably necessary or desirable to carry out the provisions of this 
Agreement.
    17. Liaison and Notices. All questions regarding the implementation 
of this Agreement shall be directed to the persons identified in 
subsections (a) and (b), as applicable, below. All notices and other 
communications required or permitted to be given under this Agreement 
shall be in writing and shall be deemed to have been duly given upon 
(i) actual receipt by the notified Party or (ii) constructive receipt 
(as of the date marked on the return receipt) if sent by certified or 
registered mail, return receipt requested, to the following addresses:

(a) If to NASD:
    NASD, 9509 Key West Avenue, Rockville, Maryland 20850, Attn: Jim 
Price.
With, if a notice of breach or default, a required copy to:
    National Association of Securities Dealers, Inc., 1735 K Street, 
NW., Washington, DC 20006, Attn: Office of General Counsel--Contracts 
Group.

(b) If to ISE:
    International Securities Exchange, Inc., 60 Broad Street, 26th 
Floor, New York, NY 10004, Attn: Legal Department.
With, if a notice of breach or default, a required copy to:
    Same address as above.

    18. Regulatory responsibility. Pursuant to section 17(d)(1)(A) of 
the Act, and Rule 17d-2 thereunder, NASD and ISE jointly request the 
SEC, upon its approval of this Agreement, to relieve ISE of any and all 
responsibilities with respect to the matters performed by NASD pursuant 
to this Agreement for purposes of sections 17(d) and 19(g) of the Act.
    19. Governing Law. This Agreement shall be deemed to have been made 
in the State of New York and shall be construed and enforced in 
accordance with the law of the state of New York, without reference to 
principles of conflicts of laws thereof. Each of NASD and ISE hereby 
consents to submit to the jurisdiction of the courts by or for the 
State of New York in connection with any action or proceeding relating 
to this Agreement.
    20. Survival of Provisions. Provisions intended by their terms or 
context to survive and continue notwithstanding delivery of the 
Services by NASD, the payment of the price by ISE, and any expiration 
of this Agreement shall survive and continue, including but not limited 
to, the items referred to in Sections 6, 8, and 9.

III. Solicitation of Comments

    In order to assist the Commission in determining whether to approve 
this plan and to relieve the ISE of those responsibilities designated 
to the NASD, interested persons are invited to submit written data, 
views, and arguments concerning the foregoing. Persons making written 
submission should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street NW., Washington, 
DC 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed plan that are filed 
with the Commission, and all written communications relating to the 
proposed plan 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 filing will also be 
available for inspection and copying at the principal office of ISE. 
All submissions should refer to File No. S7-966 and should be submitted 
by June 13, 2003.
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(34).

J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 03-12730 Filed 5-20-03; 8:45 am]
BILLING CODE 8010-01-M