[Federal Register Volume 69, Number 151 (Friday, August 6, 2004)]
[Notices]
[Pages 47962-47963]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18003]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50122; File No. SR-Amex-2004-32]


Self-Regulatory Organizations; Order Granting Approval to 
Proposed Rule Change by the American Stock Exchange LLC to Amend 
Article II, Section 3 of the Exchange Constitution

July 29, 2004.

I. Introduction

    On May 12, 2004, the American Stock Exchange LLC (``Amex'' 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 amend Article II, Section 3 of the Exchange 
Constitution to provide the Amex the ability to contract with another 
self-regulatory organization for regulatory services. The proposed rule 
change was published for comment in the Federal Register on June 3, 
2004.\3\ The Commission received no comments on the proposed rule 
change. On June 24, 2004, Amex filed Amendment No. 1 to the 
proposal.\4\ This order approves the proposed rule change.
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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. 49775 (May 26, 
2004), 69 FR 31437.
    \4\ See letter from William Floyd-Jones, Jr., Associate General 
Counsel, Amex, to Nancy J. Sanow, Assistant Director, Division of 
Market Regulation, (``Division''), Commission, dated June 23, 2004 
(``Amendment No. 1''). In Amendment No. 1 the Exchange advised that 
on June 22, 2004, the proposed rule change was approved by New NASD 
Holdings, Inc., the holder of the Class B interest in the Exchange, 
and as a result, the Exchange's internal procedures with respect to 
the proposed rule change were complete. Amendment No. 1 is a 
technical amendment, and, therefore, not subject to notice and 
comment.
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II. Description of Proposal

    The Exchange proposes to amend Article II, Section 3 of the 
Exchange Constitution to create a mechanism to allow the Exchange to 
contract with another self-regulatory organization for the performance 
of certain of Amex's regulatory functions. The amendment would 
authorize an officer of the Exchange, on behalf of the Exchange, 
subject to approval by the Amex Board, to enter into one or more 
agreements with another self-regulatory organization to provide 
regulatory services to the Exchange to assist the Exchange in 
discharging its obligations under Section 6 and Section 19(g) of the 
Act.\5\ Under the proposal, any action taken by another self-regulatory 
organization, or its employees or authorized agents, acting on behalf 
of Amex pursuant to a regulatory services agreement will be deemed to 
be an action taken by the Exchange. However, the amended Constitution 
states that nothing in Article II, Section 3 shall affect the oversight 
of such other self-regulatory organization by the Commission. The 
amended Constitution also provides that Amex will retain ultimate legal 
responsibility for, and control of, its self-regulatory 
responsibilities, and that any such regulatory services agreement shall 
so provide.
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    \5\ 15 U.S.C. 78f and 15 U.S.C. 78s(g).
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    In the proposal, the Exchange noted that this rule change would 
have immediate applicability with respect to a Regulatory Services 
Agreement (``RSA'') dated as of April 30, 2004, between the National 
Association of Securities Dealers, Inc. (``NASD'') and the Amex.\6\ 
Amex determined that, to best discharge its self-regulatory 
responsibilities, it would contract with the NASD, which is subject to 
Commission oversight pursuant Sections 15A and 19 of the Act,\7\ to 
provide certain regulatory services to the Amex. Under the RSA, NASD, 
through its wholly owned subsidiaries NASD Regulation, Inc. (``NASDR'') 
and NASD Dispute Resolution, Inc. (``NASDDR''), performs certain

[[Page 47963]]

regulatory functions as an agent on behalf of Amex. The RSA provides a 
framework for oversight of Amex members and enforcement of Amex rules 
and federal securities laws, and describes the services that NASD will 
perform so as to ensure a regulatory program that will satisfy 
applicable statutory requirements. Specifically, pursuant to the RSA, 
NASDR and NASDDR will provide market and trade practice surveillance 
and analysis; financial and operational regulation; options sales 
practice regulation; disciplinary and enforcement functions; and 
dispute resolution services.
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    \6\ Pursuant to applicable provisions of the Freedom of 
Information Act, 18 U.S.C. 1905, and Commission regulations 
thereunder, 17 CFR 200.83, Amex has requested confidential treatment 
for the RSA.
    \7\ 15 U.S.C. 78o-3 and 15 U.S.C. 78s.
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    The Amex stated that in performing services under the RSA, the NASD 
will be operating pursuant to the statutory self-regulatory 
responsibilities of the Amex under Section 6 and Section 19 of the Act 
\8\ and will apply Amex's rules. The Exchange also stated that any 
action taken by NASD or its employees or authorized agents pursuant to 
the RSA (or any other SRO with which the Exchange contracts) will be 
deemed an action taken by the Amex (without, however, affecting the 
Commission's oversight of such other self-regulatory organization). The 
Amex noted, however, that it retains ultimate responsibility for 
performance of its self-regulatory duties under the RSA.
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    \8\ 15 U.S.C. 78f and 15 U.S.C. 78s.
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III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange and, in 
particular, the requirements of Section 6 of the Act.\9\ Specifically, 
the Commission finds that the proposed rule change is consistent with 
and furthers the objectives of Sections 6(b)(1),\10\ 6(b)(6),\11\ and 
6(b)(7) \12\ of the Act, which require that the Exchange enforce 
compliance by its members and persons associated with its members with 
the provisions of the Act, the rules and regulations thereunder, and 
the rules of the Exchange; that the rules of the Exchange provide that 
its members and persons associated with its members shall be 
appropriately disciplined for violations of the Act, the rules and 
regulations thereunder, and the rules of the Exchange; and that the 
rules of the Exchange provide a fair procedure for the disciplining of 
members and persons associated with members.
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(1).
    \11\ 15 U.S.C. 78f(b)(6).
    \12\ 15 U.S.C. 78f(b)(7).
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    The Commission has previously stated and continues to believe that 
contractual regulatory agreements between self-regulatory organizations 
may be permissible in instances where it is consistent with the public 
interest.\13\ The Commission believes that it is reasonable and 
consistent with the public interest to allow a self-regulatory 
organization to contract with another self-regulatory organization to 
perform disciplinary and enforcement functions.\14\ The Commission also 
believes NASD has the expertise and experience to perform these 
functions, and thus will be able to assist Amex in fulfilling its self-
regulatory responsibilities as set forth under the Act.
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    \13\ See Exchange Act Release No. 42455 (February 24, 2000), 65 
FR 11388 (March 2, 2000) at Section III(D)(2) (``ISE Approval 
Order'') (approving the application for registration of the 
International Securities Exchange, Inc., including authority to 
contract with another self-regulatory organization to perform 
regulatory functions).
    \14\ Id. In the ISE Approval Order, the Commission also stated 
that ``[d]iscipline and enforcement are fundamental elements to a 
regulatory program, and constitute core self-regulatory functions. 
It is essential to the public interest and the protection of 
investors that these functions are carried out in an exemplary 
manner, and the Commission believes that NASD Regulation has the 
expertise and experience to perform these functions.''
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    The Commission continues to believe, however, that it is important, 
and required by the Act, for ultimate responsibility and primary 
liability for self-regulatory failures to rest with the Exchange itself 
rather than the contracted self-regulatory organization.\15\ Consistent 
with this approach, Amex will bear ultimate legal responsibility for 
the performance of its self-regulatory functions, despite the fact that 
NASD's subsidiaries will be carrying out the regulation of Amex's 
market pursuant to the RSA. Nevertheless, the Commission has stated and 
again reiterates that the self-regulatory organization providing 
regulatory services may bear liability for causing, or, in appropriate 
circumstances, aiding and abetting, regulatory failures by the 
Exchange.\16\ Thus, NASD may bear secondary liability if the Commission 
finds that the contracted regulatory functions are being performed so 
inadequately as to cause a violation of the federal securities laws by 
Amex.
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    \15\ See ISE Approval Order at Section III(D)(2), and Sections 
6(b), 19(g) and 19(h) of the Act. 15 U.S.C. 78f(b), 78s(g) and 
78s(h).
    \16\ See ISE Approval Order at footnote 68 and accompanying 
text.
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    The Commission also notes that Amex has represented that any NASD 
employee acting pursuant to the RSA will be deemed to be an Amex 
employee for purposes of Amex's rules. In particular, Amex represents 
that for purposes of any rule that requires an employee or personnel of 
Amex to perform a specific regulatory oversight, disciplinary or 
enforcement function, any NASD employee that is performing such 
function pursuant to the RSA will be deemed to be an Amex employee for 
purposes of Amex's rules as a result of this rule change. Thus, no 
changes to Amex's rules are required as a result of this filing.\17\
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    \17\ Telephone call between William Floyd-Jones, Jr., Associate 
General Counsel, Amex, and Heather Seidel, Attorney-Fellow, 
Division, Commission, on July 29, 2004.
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IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-Amex-2004-32) be, and hereby 
is, approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-18003 Filed 8-5-04; 8:45 am]
BILLING CODE 8010-01-P