[Federal Register Volume 69, Number 36 (Tuesday, February 24, 2004)]
[Notices]
[Pages 8500-8503]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-3883]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49260]


Order Granting Application for Exemptions Pursuant to Section 
36(a) of the Exchange Act by the American Stock Exchange LLC, the 
International Securities Exchange, Inc., the Municipal Securities 
Rulemaking Board, the Pacific Exchange, Inc., the Philadelphia Stock 
Exchange, Inc., and the Boston Stock Exchange, Inc.

February 17, 2004.

I. Introduction

    The American Stock Exchange LLC (``Amex''), the International 
Securities Exchange, Inc. (``ISE''), the Municipal Securities 
Rulemaking Board (``MSRB''), the Pacific Exchange, Inc. (``PCX''), the 
Philadelphia Stock Exchange, Inc. (``Phlx''), and the Boston Stock 
Exchange, Inc. (``BSE''), each have filed with the Securities and 
Exchange Commission (``Commission''), pursuant to Rule 0-12\1\ under 
the Securities Exchange Act of 1934 (``Exchange Act''), an application 
for an exemption under section 36(a)(1) of the Exchange Act \2\ from 
the rule filing requirements of section 19(b) of the Exchange Act \3\ 
with respect to certain rules of another self-regulatory organization 
(``SRO'') that each of the these SROs has either proposed to 
incorporate by reference or currently incorporates by reference.
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    \1\ See 17 CFR 240.0-12.
    \2\ 15 U.S.C. 78mm(a)(1).
    \3\ 15 U.S.C. 78s(b).
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II. Applications for Section 36 Exemption From Section 19(b) Rule 
Filing Requirements for SRO Rules Incorporated by Reference

    Several SROs currently incorporate by reference certain rules of 
other SROs. Specifically, the Amex, ISE, MSRB, and Phlx incorporate the 
NASD Code of

[[Page 8501]]

Arbitration Procedure, while the ISE and PCX incorporate by reference 
the margin rules of the New York Stock Exchange, Inc. (``NYSE'') and 
Chicago Board Options Exchange, Inc. (``CBOE''). The BSE recently filed 
a prospective request for incorporation by reference. In connection 
with the proposal by the BSE to establish the Boston Options Exchange 
(``BOX'') as a new exchange facility,\4\ BSE proposes to permit BOX 
members to choose to comply with the margin requirements of either the 
CBOE or the NYSE.
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    \4\ The Commission recently approved the BSE's proposal to 
create BOX as a new electronic options facility of the BSE, operated 
by Boston Options Exchange Group, LLC, the founding members of which 
are the BSE, the Bourse de Montreal, and Interactive Brokers Group. 
See Exchange Act Release No. 49068 (January 13, 2004), 69 FR 2775 
(January 20, 2004).
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    All of these SROs have asked the Commission for exemptive relief, 
subject to certain conditions, from the requirements to file proposed 
rule changes under Section 19(b) of the Exchange Act \5\ whenever the 
SRO whose rules are incorporated by reference changes those rules.\6\
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    \5\ 15 U.S.C. 78s(b).
    \6\ The Commission notes that at the time Amex, MSRB, and Phlx 
incorporated by reference the NASD Code of Arbitration Procedure and 
the ISE incorporated by reference the NYSE and CBOE margin rules, 
the Commission approved rule changes implementing these changes 
without requiring the SROs to seek an exemption pursuant to Section 
36 of the Exchange Act from Section 19(b) with respect to rules 
incorporated by reference. The Commission has subsequently 
determined and informed these SROs, however, that such an exemption 
is necessary for them to continue to operate under incorporated 
rules of another SRO.
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A. Amex

    In connection with the 1998 merger between NASD and Amex, Amex 
amended its Constitution to provide that any arbitration filed 
following the closing of the merger transaction would be conducted 
pursuant to the NASD Code of Arbitration Procedure using the 
arbitration facilities of NASD Regulation, Inc. (``NASDR'').\7\
    On May 2, 2002, Amex submitted a formal request, pursuant to Rule 
0-12 under the Exchange Act,\8\ seeking an exemption under Section 36 
of the Exchange Act from the rule filing procedures of Section 19(b) of 
the Exchange Act with respect to changes to the incorporated NASD 
rules.
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    \7\ See Exchange Act Release No. 40622 (October 30, 1998), 63 FR 
59819 (November 5, 1998).
    \8\ See 17 CFR 240.0-12.
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B. ISE

    On November 20, 2000, the ISE filed with the Commission a proposed 
rule change incorporating by reference the NASD Code of Arbitration 
Procedure.\9\ Specifically, the ISE proposed to repeal its Rules 1800 
through 1835 and create new Rule 1800, which would state: (1) that the 
NASD Code of Arbitration, as the same may be in effect from time to 
time, shall govern ISE arbitrations; and (2) that the ISE shall retain 
jurisdiction over its members for failure to honor arbitration awards 
and any right, action, or determination by the Exchange that it would 
otherwise be authorized to adopt, administer or enforce is in no way 
limited or precluded by incorporation of the NASD Code of Arbitration. 
The proposed rule change was published for comment in the Federal 
Register on July 26, 2001,\10\ and approved by the Commission on 
November 21, 2001.\11\
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    \9\ See Amendments No. 1 and No. 2 to the proposed rule change 
were filed on March 5, 2001 and July 16, 2001, respectively.
    \10\ See Exchange Act Release No. 44572 (July 18, 2001), 66 FR 
39069 (July 26, 2001).
    \11\ See Exchange Act Release No. 45094 (November 21, 2001), 66 
FR 39069 (December 3, 2001).
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    According to the ISE, the purpose of this incorporation by 
reference was to reflect the contractual relationship between ISE and 
NASDR whereby NASDR \12\ is obligated to perform arbitrations under 
ISE's rules for ISE members. On October 30, 2001, the ISE submitted a 
formal request, pursuant to Rule 0-12 under the Exchange Act,\13\ 
seeking an exemption under Section 36 of the Exchange Act from the rule 
filing procedures of section 19(b) of the Exchange Act with respect to 
changes to the incorporated NASD rules.\14\ In its approval order, the 
Commission noted that the ISE had submitted to the Commission such an 
exemption request.
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    \12\ NASD Dispute Resolution, a wholly owned subsidiary of the 
NASD, now performs arbitration services for ISE and other SROs. See 
Exchange Act Release No. 41971 (September 30, 1999), 64 FR 55793 
(October 14, 1999) (approving SR-NASD 99-21, as effective on July 9, 
2000).
    \13\ See 17 CFR 240.0-12.
    \14\ See Letter from Michael Simon, Senior Vice President and 
General Counsel, ISE, to Jonathan G. Katz, Secretary, Commission, 
dated October 29, 2001.
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    In the same letter, the ISE also requested a Section 36 exemption 
from section 19(b) of the Exchange Act with respect to changes to the 
margin rules of the CBOE and NYSE, both of which are incorporated by 
reference in ISE Rule 1202.

C. MSRB

    In December 1997, the Commission approved amendments to Rule G-35 
of the MSRB in which the MSRB effectively incorporated by reference the 
NASD Code of Arbitration Procedure as of January 1, 1998.\15\ The 
amendments provided that any new arbitration claims filed on or after 
that date shall be submitted to and administered by the NASD. The 
amendments provided that, as of January 1, 1998, every bank dealer (as 
defined in MSRB Rule D-8) shall be subject to the NASD's Code of 
Arbitration for every claim, dispute, or controversy arising out of or 
in connection with the municipal securities activities of the bank 
dealer acting in its capacity as such.\16\ The enforcement mechanism 
for bank dealers was not altered by the amendments; the bank regulatory 
agencies continue to be responsible for the inspection and enforcement 
of bank dealers' municipal securities activities, including 
arbitration.\17\
    On April 12, 2002, the MSRB submitted a formal request, pursuant to 
Rule 0-12 under the Exchange Act,\18\ seeking an exemption under 
section 36 of the Exchange Act from the rule filing procedures of 
section 19(b) of the Exchange Act with respect to changes to the 
incorporated NASD Code of Arbitration Procedure.\19\
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    \15\ See Exchange Act Release No. 39378 (December 1, 1997), 62 
FR 64417 (December 5, 1997). In its filing, the MSRB stated that it 
would continue to operate its arbitration program in order to 
administer its current, open cases and any new claims received prior 
to January 1, 1998, but would discontinue its program when all such 
cases have been closed. At such time, the MSRB will submit a filing 
to the Commission to delete Sections 1 through 37 of Rule G-35, and 
rescind Rule A-16 on arbitrations fees and deposits. See File No. 
SR-MSRB-97-4. The MSRB expects to submit such a filing in the near 
future.
    \16\ Section 38 of Rule G-35 states as follows:
    As of January 1, 1998, every bank dealer (as defined in rule D-
8) shall be subject to the Code of Arbitration Procedure of the 
National Association of Securities Dealers, Inc. (``NASD'') for 
every claim, dispute or controversy arising out of or in connection 
with the municipal securities activities of the bank dealer acting 
in its capacity as such. For purposes of this rule, every bank 
dealer shall be subject to, and shall abide by, the NASD's Code of 
Arbitration Procedure as if the bank dealer were a ``member'' of the 
NASD.
    \17\ Thus, for example, a bank dealer's refusal to submit to 
arbitration pursuant to the NASD's Code of Arbitration Procedure, or 
a bank dealer's failure to pay an arbitration award rendered 
pursuant to that Code, would constitute a violation of MSRB Rule G-
35 since it is this rule that subjects bank dealers to the NASD's 
Code.
    \18\ See 17 CFR 240.0-12.
    \19\ See Letter from Diane G. Klinke, General Counsel, MSRB, to 
Jonathan G. Katz, Secretary, Commission, dated April 4, 2002.
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D. PCX

    On August 15, 2003, PCX filed with the Commission a proposed rule 
change to amend PCX Rule 6.47 (Crossing Orders and Stock/Option, SSF/
Option Orders) that governs the execution of complex orders involving 
options and single stock futures. The proposed rule

[[Page 8502]]

change, which was effective upon filing pursuant to Section 19(b)(3)(A) 
of the Exchange Act,\20\ allows a PCX member to elect to be bound by 
the initial and maintenance margin requirements of either the CBOE or 
NYSE.\21\
    On December 2, 2003, the ISE submitted a formal request, pursuant 
to Rule 0-12 under the Exchange Act,\22\ seeking an exemption under 
Section 36 of the Exchange Act from the rule filing procedures of 
Section 19(b) of the Exchange Act with respect to changes to the 
incorporated CBOE and NYSE rules.\23\
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ See Exchange Act Release No. 48894 (December 8, 2003), 68 
FR 70328 (December 17, 2003) (File No. SR-PCX-2003-42).
    \22\ See 17 CFR 240.0-12.
    \23\ See Letter from Mai Sharif Shiver, Senior Attorney, 
Regulatory Policy, PCX, to Jonathan G. Katz, Secretary, Commission, 
dated December 2, 2003.
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E. Phlx

    On October 1, 1998, the Commission granted accelerated approval to 
a proposal by the Phlx to amend its arbitration rules to incorporate by 
reference the NASD Code of Arbitration Procedure. Specifically, Phlx 
amended Phlx Rule 950 to state, in relevant part, that ``[e]very 
member, member organization, member corporation, participant and 
participant organization . . . shall be subject to the Code for every 
claim, dispute, or controversy arising out of or in connection with the 
securities business of any such member of the Exchange. . . . For 
purposes of Rule 950, each member will be subject to and required to 
abide by the Code as if such member were a ``member'' of the 
NASD.''\24\
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    \24\ See Exchange Act Release No. 40517 (October 1, 1998), 63 FR 
54177 (October 8, 1998).
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    On December 15, 2003, Phlx submitted a formal request, pursuant to 
Rule 0-12 under the Exchange Act,\25\ seeking an exemption under 
Section 36 of the Exchange Act from the rule filing procedures of 
Section 19(b) of the Exchange Act with respect to changes to the 
incorporated NASD Code of Arbitration Procedure.\26\
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    \25\ See 17 CFR 240.0-12.
    \26\ See Letter from Lanny Schwartz, Executive Vice President 
and General Counsel, Phlx, to Jonathan G. Katz, Secretary, 
Commission, dated December 12, 2003.
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F. BSE

    On January 13, 2004, the Commission approved BSE's proposal to 
establish BOX as a new exchange facility.\27\ BSE proposed, among other 
things, rules to govern members of BOX, including BOX Rule Chapter 13, 
Section 3, which permits BOX members to elect to be bound by the margin 
rules of either the CBOE or NYSE.
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    \27\ See supra Note 4.
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    On December 10, 2003, BSE submitted a formal request, pursuant to 
Rule 0-12 under the Exchange Act,\28\ seeking an exemption under 
Section 36 of the Exchange Act from the rule filing procedures of 
Section 19(b) of the Exchange Act with respect to changes to the 
incorporated CBOE and NYSE rules.\29\
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    \28\ See 17 CFR 240.0-12.
    \29\ See Letter from George W. Mann, Jr., Executive Vice 
President and General Counsel, BSE, to Jonathan G. Katz, Secretary, 
Commission, dated December 9, 2003.
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III. Order Granting Section 36 Exemption

    Section 36 of the Exchange Act \30\ authorizes the Commission to 
conditionally or unconditionally exempt any person, security, or 
transaction, or any class thereof, from any provision of the Exchange 
Act or rule thereunder, if necessary or appropriate in the public 
interest and consistent with the protection of investors. The 
Commission believes that it is appropriate to issue exemptions, subject 
to the conditions described below, to allow SROs to incorporate by 
reference the rules of other SROs without being subject to the rule 
filing requirements of Section 19(b) of the Exchange Act whenever the 
SROs' rules that are incorporated by reference change. Such exemptions 
will promote more efficient use of Commission and SRO resources by 
avoiding duplicative rule filings based on simultaneous changes to 
identical rule text sought by more than one SRO. Where such an 
exemption is granted, an SRO that incorporates by reference another 
SRO's rules would agree to be governed by the incorporated rules, as 
amended from time to time, but not be required to file a separate 
proposed rule change with the Commission each time the SRO whose rules 
are incorporated by reference seeks to modify its rules.
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    \30\ 15 U.S.C. 78mm. For example, the Commission issued an order 
pursuant to Section 36 of the Exchange Act, granting to the NASD a 
temporary exemption from Section 19(b), relating to the acquisition 
and operation by Nasdaq of a software development company. See 
Exchange Act Release No. 42713 (April 24, 2000), 65 FR 25401 (May 1, 
2000).
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    Any such exemption would be subject to certain conditions. 
Specifically, the SRO requesting the exemption would be required to 
incorporate by reference only regulatory rules (i.e., margin, 
suitability, arbitration), not trading rules, and to incorporate by 
reference whole categories of rules (rather than ``cherry-pick'' 
certain individual rules within a category). The SRO could, however, 
impose specific additional rules within the incorporated categories, if 
approved by the Commission pursuant to Section 19(b)(2) of the Exchange 
Act. In addition, the SRO seeking to incorporate another SRO's rules 
would be required to have reasonable procedures in place to provide 
written notice to its members each time a change is proposed to the 
incorporated rules of another SRO in order to provide its members with 
notice of a proposed rule change that affects their interests, so that 
they would have an opportunity to comment on it.
    Therefore, the Commission is granting the requests for exemption, 
pursuant to Section 36 of the Exchange Act, from the rule filing 
requirements imposed by Section 19(b) of the Exchange Act as set forth 
above by Amex, ISE, MSRB, PCX, Phlx and BSE, and will consider similar 
future exemption requests from other SROs, provided that:
    (1) An SRO wishing to incorporate rules of another SRO by reference 
has submitted a written request for an order exempting it from the 
requirement in section 19(b) of the Exchange Act to file proposed rule 
changes relating to the rules incorporated by reference, has identified 
the applicable originating SRO(s), together with the rules it wants to 
incorporate by reference, and otherwise has complied with the 
procedural requirements set forth in the Commission's release governing 
procedures for requesting exemptive orders pursuant to Rule 0-12 under 
the Exchange Act;\31\
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    \31\ See 17 CFR 240.0-12; Exchange Act Release No. 39624 
(February 5, 1998), 63 FR 8101 (February 18, 1998).
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    (2) An incorporating SRO has requested incorporation of categories 
of rules (rather than individual rules within a category) that are not 
trading rules (e.g., the SRO has requested incorporation of rules such 
as margin, suitability, arbitration); and
    (3) The incorporating SRO has reasonable procedures in place to 
provide written notice to its members each time a change is proposed to 
the incorporated rules of another SRO.
    Accordingly, it is ordered, pursuant to section 36 of the Exchange 
Act,\32\ that the Amex, ISE, MSRB, PCX, Phlx, and BSE, with respect to 
incorporation by reference of other SROs' rules as specified above, and 
subject to the conditions described above, shall be exempt from rule 
filing requirements specified by section 19(b) of the Exchange Act to 
the extent that this section would otherwise require

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submission of a filing with the Commission regarding proposed rule 
changes.
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    \32\ 15 U.S.C. 78mm.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-3883 Filed 2-23-04; 8:45 am]
BILLING CODE 8010-01-P