[Federal Register Volume 70, Number 56 (Thursday, March 24, 2005)]
[Notices]
[Pages 15132-15134]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1292]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51391; File No. SR-CTA/CQ-2004-01]


Consolidated Tape Association; Order Approving the Seventh 
Substantive Amendment to the Second Restatement of the Consolidated 
Tape Association Plan and the Fifth Substantive Amendment to the 
Restated Consolidated Quotation Plan

March 17, 2005.

I. Introduction

    On December 3, 2004, the Consolidated Tape Association (``CTA'') 
Plan and Consolidated Quotation (``CQ'') Plan participants 
(``Participants'') \1\ submitted to the Securities and Exchange 
Commission

[[Page 15133]]

(``Commission'') a proposal to amend the CTA and CQ Plans 
(collectively, the ``Plans''),\2\ pursuant to Rule 11Aa3-2 under the 
Act.\3\ The proposal represents the 7th substantive amendment made to 
the Second Restatement of the CTA Plan (``7th Amendment'') and the 5th 
substantive amendment to the Restated CQ Plan (``5th Amendment''), and 
reflects changes unanimously adopted by the Participants. The proposed 
amendments would modify the procedures for joining the Plans as a new 
Participant. In addition, the proposed amendments would perform a 
``housekeeping'' function of incorporating into the text of the Plans 
changes to the corporate names and addresses of some Participants. 
Notice of the proposed amendments was published in the Federal Register 
on January 19, 2005.\4\
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    \1\ Each Participant executed the proposed amendments. The 
current Participants are the American Stock Exchange LLC (``Amex''); 
Boston Stock Exchange, Inc. (``BSE''); Chicago Board Options 
Exchange, Inc. (``CBOE''); Chicago Stock Exchange, Inc. (``CHX''); 
Cincinnati Stock Exchange, Inc. (now known as the National Stock 
Exchange) (``NSX''); National Association of Securities Dealers, 
Inc. (``NASD''); New York Stock Exchange, Inc. (``NYSE''); Pacific 
Exchange, Inc. (``PCX''); and Philadelphia Stock Exchange, Inc. 
(``Phlx'').
    \2\ See Securities Exchange Act Release Nos. 10787 (May 10, 
1974), 39 FR 17799 (order approving CTA Plan); 15009 (July 28, 
1978), 43 FR 34851 (August 7, 1978) (order temporarily approving CQ 
Plan); and 16518 (January 22, 1980), 45 FR 6521 (order permanently 
approving CQ Plan). The most recent restatement of both Plans was in 
1995. The CTA Plan, pursuant to which markets collect and 
disseminate last sale price information for listed securities, is a 
``transaction reporting plan'' under Rule 11Aa3-1 of the Securities 
Exchange Act of 1934 (``Act''), 17 CFR 240.11Aa3-1 and a ``national 
market system plan'' under Rule 11Aa3-2 of the Act, 17 CFR 
240.11Aa3-2. The CQ Plan, pursuant to which markets collect and 
disseminate bid/ask quotation information for listed securities, is 
also a ``national market system plan'' under Rule 11Aa3-2 of the 
Act, 17 CFR 240.11Aa3-2.
    \3\ 17 CFR 240.11Aa3-2.
    \4\ See Securities Exchange Act Release No. 51012 (January 10, 
2005), 70 FR 3075 (``Notice'').
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    The Commission received no comments on the proposed amendments. 
This order approves the 7th Amendment to the CTA Plan and the 5th 
Amendment to the CQ Plan.

II. Description of the Proposed Amendments

    The proposed amendments would modify the procedures pursuant to 
which a national securities exchange or a national securities 
association may join the Plans as a new Participant. More specifically, 
the proposed amendments would modify the process for determining the 
fee that a national securities exchange or a national securities 
association must pay in order to join the Plans.
    Currently, both Plans require a new entrant to pay the current 
Participants an amount that ``attributes an appropriate value to the 
assets, both tangible and intangible, that CTA has created and will 
make available to such new Participant.'' \5\ The Plans allow for the 
Participants to consider one or more of six factors in assessing the 
appropriate value.\6\ The Commission approved the addition of these 
entry-fee criteria to both Plans in 1993.\7\ However, since the 
criteria were adopted, no entity has joined the Plans. CBOE was the 
last Participant to join the Plans, having done so in 1991.
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    \5\ Section III(c) of the Plans.
    \6\ See id.
    \7\ See Securities Exchange Act Release No. 33319 (December 10, 
1993), 58 FR 66040 (December 17, 1993) (File No. S7-27-93).
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    In 1999, the Options Price Reporting Authority (``OPRA'') Plan 
participants sought to adopt the same criteria adopted by the CTA to 
determine the appropriate entrance fee to join the OPRA Plan.\8\ The 
Commission received negative comments regarding the previously approved 
factors OPRA proposed to consider in determining the amount of its 
participation fee. The commenters asserted that the proposed OPRA Plan 
criteria could create a barrier to entry into the options industry that 
could harm competition. In response, OPRA modified and adopted new, 
more objective factors to be considered in determining the appropriate 
new entrant participation fee.\9\ Consequently, in light of the 
comments received on the current CTA Plan and CQ Plan criteria that 
OPRA was proposing to adopt, at the October 2001 CTA meeting, a 
representative of the Division of Market Regulation (``Division'') 
suggested that the CTA consider amending its Plan criteria for 
determining new entrant fees to conform to the criteria that had been 
adopted by OPRA.
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    \8\ See Securities Exchange Act Release No. 42002 (October 13, 
1999), 64 FR 56543 (October 20, 1999) (notice of File No. SR-OPRA-
99-01).
    \9\ See Securities Exchange Act Release No. 43697 (December 8, 
2000), 65 FR 78518 (December 15, 2000) (order approving File No. SR-
OPRA-00-08); see also Securities Exchange Act Release Nos. 43347 
(September 26, 2000), 65 FR 59035 (October 3, 2000) (notice of File 
No. SR-OPRA-00-08); and 42817 (May 24, 2000), 65 FR 35147 (June 1, 
2000) (notice of filing and order granting accelerated effectiveness 
to File No. SR-OPRA-99-01).
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    In 2002, The Nasdaq Stock Market, Inc. (``Nasdaq'') and Island ECN 
expressed interest in joining the Plans and inquired as to the amount 
of the entry fee. In response, the Participants engaged Deloitte & 
Touche, asking it to assign a value to each of the six current Plan 
criteria for determining a new entrant's fee. The Division expressed 
concerns to the Participants regarding the methodology contemplated by 
the CTA because it believed that the methodology contained factors that 
should not be considered in determining a proper entrance fee for new 
entrants.\10\ The Division further noted that the entrance fee amount 
the Participants were considering at the time might have an anti-
competitive effect on potential new entrants.\11\
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    \10\ See letters to William J. Brodsky, Chairman and Chief 
Executive Officer, CBOE; David Colker, President and Chief Executive 
Officer, NSX; Philip D. DeFeo, Chairman and Chief Executive Officer, 
PCX; Meyer S. Frucher, Chairman and Chief Executive Officer, Phlx; 
Richard Grasso, Chairman and Chief Executive Officer, NYSE; David A. 
Herron, Chief Executive Officer, CHX; Richard Ketchum, President and 
Deputy Chairman, Nasdaq; Kenneth L. Leibler, Chairman and Chief 
Executive Officer, BSE; and Salvatore F. Sadano, Chairman and Chief 
Executive Officer, Amex, from Annette L. Nazareth, Director, dated 
March 13, 2003.
    \11\ See id.
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    In light of the Division's concerns that the current Plan standards 
do not provide an objective basis for determining entrance fees for new 
Participants and that the fees should be based solely on objective 
criteria and costs that could be easily calculated and readily 
discernable (similar to the methodology currently used for determining 
such fees in the OPRA Plan),\12\ the Participants proposed new 
standards for determining a new Participant's entry fee based on the 
OPRA Plan criteria. The proposed amendments would allow the 
Participants to consider one or both of the following in determining a 
new entrant's fee: (1) The portion of costs previously paid by the CTA 
for the development, expansion and maintenance of CTA's facilities 
which, under generally accepted accounting principles (``GAAP''), could 
have been treated as capital expenditures and, if so treated, would 
have been amortized over the five years preceding the admission of the 
new Participant (and for this purpose all such capital expenditures 
shall be deemed to have a five-year amortizable life); and (2) previous 
amounts paid by other Participants when they joined the Plans. In 
addition, the proposed amendments would require the new Participant to 
reimburse the Plan Processor for the costs that the Processor incurs in 
modifying CTS and CQS systems to accommodate the new Participant and 
for any additional capacity costs. Any disagreement regarding the fee 
calculation would be subject to Commission review pursuant to Section 
11A(b)(5) of the Act.\13\
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    \12\ See letters to Thomas E. Haley, Chairman, CTA, from Annette 
L. Nazareth, Director, Division, Commission, dated August 3, and 
November 3, 2004.
    \13\ 15 U.S.C. 78k-1(b)(5).
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    Finally, the proposed amendments would perform the ``housekeeping'' 
function of updating the names and addresses of the Plans' 
Participants. In the last few years, the ``Pacific Stock Exchange, 
Inc.'' has become the ``Pacific Exchange, Inc.,'' the ``American Stock

[[Page 15134]]

Exchange, Inc.'' has become the ``American Stock Exchange LLC,'' and 
the Cincinnati Stock Exchange, Inc.'' has become the ``National Stock 
Exchange.''

III. Discussion

    After careful review, the Commission finds that the proposed 
amendments to the Plans are consistent with the requirements of the Act 
and the rules and regulations thereunder,\14\ and, in particular, 
Section 11A(a)(1) of the Act \15\ and Rule 11Aa3-2 thereunder.\16\
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    \14\ In approving the proposed Plan amendments, the Commission 
has considered the proposed amendments' impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78k-1(a)(1).
    \16\ 17 CFR 240.11Aa3-2.
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    The Commission notes that the Plans currently provide procedures 
pursuant to which a national securities exchange or a national 
securities association may join the Plans as a new Participant, 
including payment of a participation/new entrant fee. The Commission 
further notes that the current six criteria in the Plans that may be 
considered by Participants in determining a new Participant's entrance 
fee were questioned when OPRA participants sought to incorporate them 
into the OPRA Plan in 1999.\17\ The Commission believes that some of 
these current criteria are inappropriate, overly broad, and subjective, 
and believes that they could potentially have an anti-competitive 
impact on and/or pose a barrier to entry for an entity that wants to 
join the Plans.\18\ In fact, over the last few years, the Commission 
has repeatedly urged the Participants to amend the Plans to adopt more 
objective standards for ascertaining a new party's entrant fee, similar 
to the more recently approved standards in the OPRA Plan.\19\ The 
Commission believes that a more transparent process for determining a 
proper new entrant fee should help to ensure fairness to new parties 
and address any potential anti-competitive concerns.
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    \17\ See supra notes 8-11 and accompanying text.
    \18\ The Commission notes that while the current standards in 
the Plans were approved in 1993, they were never employed by the 
Participants. The last Participant to join the Plans was CBOE in 
1991.
    \19\ See supra notes 8-12 and accompanying text.
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    The Commission believes that the main purpose of a participation 
fee is to require each new party to the Plans to pay a fair share of 
the costs previously paid by the CTA for the development, expansion, 
and maintenance of CTA's facilities. Consistent with this purpose, the 
standards now proposed to be embodied in the Plans for the 
determination of the participation fee are concerned with these 
categories of costs. In particular, the Commission notes that the 
Participants should only consider the costs of tangible assets that 
could have been treated as capital expenditures under GAAP in the fee 
calculation,\20\ and if so treated, would have been amortized for a 
five-year period preceding the new party's admission to the Plans.\21\ 
In addition, the Commission notes that the Participants must not 
consider any historical costs of operating the systems prior to the 
time a new party joins the Plans, or any subjective or intangible costs 
such as ``good will'' or any future benefits to the new party.
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    \20\ The Commission understands from the Participants and the 
Plan Processor that, based on how the Processor bills the CTA and 
because the Processor does its accounting based on leases rather 
than ownership of CTA facilities, unless such costs were deemed to 
be capitalized costs under GAAP, they could not otherwise be 
considered in calculating the participation fee. Footnote 12 of the 
Notice provided, in part, that the Participants should only consider 
tangible assets that ``are capital expenditures under GAAP'' in the 
participation fee calculation. The footnote should have instead 
provided that the costs to be included in the calculation should be 
those that ``could have been treated as capital expenses under 
GAAP.''
    \21\ For this purpose, all such capital expenditures would be 
deemed to have a five-year amortizable life.
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    Another factor proposed to be considered in determining a new 
Participant's entrance fee is any previous fees paid by other 
Participants when they joined the Plans. The Commission notes that in 
considering the amounts that have been paid by other Participants who 
joined the Plans, the Participants should only consider such fees on a 
``going forward'' basis, i.e., only fees that have been determined by 
the proposed methodology.\22\ The Commission believes that, in the 
interest of fairness and consistency, the closer in time that any such 
prior fees were paid in relation to when the new party wants to join 
the Plans, the greater should be the weight given to this factor.
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    \22\ The Commission further notes that the fee that CBOE paid to 
join the Plans in 1991 should not be considered because it was not 
based on the proposed new factors and therefore does not constitute 
a relevant fee for comparison purposes.
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    Finally, the Commission notes that the Participants propose that a 
new Participant would be required to reimburse the Plan Processor for 
the costs that the Processor incurs in connection with any 
modifications to the CTS and CQS systems necessary to accommodate the 
new Participant, unless these costs have otherwise been paid or 
reimbursed by the new Participant. The Commission stresses that when 
utilizing the proposed new standards, the Participants should not 
consider any costs that would result in a ``double counting'' of costs 
because the new entrant and other Participants are required to 
individually pay the Processor for their own costs (e.g., capacity 
needs).
    In sum, the Commission believes that it is reasonable for the Plans 
to provide for an initial participation fee to be paid by new parties 
to the Plans. The Commission further believes that the proposed 
amendments to the Plans would establish specific, objective factors for 
determining the amount of the fee payable by new Participants based on 
costs that could easily be calculated and that are readily discernable. 
The Commission also believes that the proposed new standards, if 
appropriately employed by the Participants, should foster a fair and 
reasonable method for determining the amount of a new Participant's 
entrance fee to be paid to the Plans.\23\ Accordingly, the Commission 
finds the proposed standards for determining the amount of the 
participation fee to be appropriate and consistent with the Act.
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    \23\ The Commission notes that amount of the new entrant fee 
would be determined in discussions between the Participants and each 
new party in light of the standards embodied in the Plans, and under 
the general oversight of the Commission. Discussions between the 
Participants and any new party should not take place without 
Commission staff present. The Commission further notes that any 
disagreement among the Participants and a new party regarding the 
fee calculation would be subject to Commission review pursuant to 
Section 11A(b)(5) of the Act. See 15 U.S.C. 78k-1(b)(5).
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    Furthermore, the Commission believes that updating the names and 
addresses of the Plans' Participants is important with respect to the 
accuracy of the Plans, and therefore finds such changes to be 
consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 11A of the Act \24\ 
and paragraph (c)(2) of Rule 11Aa3-2 thereunder,\25\ that the proposed 
7th Amendment to the CTA Plan and the proposed 5th Amendment to the CQ 
Plan are approved.
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    \24\ 15 U.S.C. 78k-1.
    \25\ 17 CFR 240.11Aa3-2(c)(2).
    \26\ 17 CFR 200.30-3(a)(27).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\26\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-1292 Filed 3-23-05; 8:45 am]
BILLING CODE 8010-01-P