[Federal Register Volume 73, Number 208 (Monday, October 27, 2008)]
[Notices]
[Pages 63752-63754]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-25503]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58818; File No. 4-569]


Program for Allocation of Regulatory Responsibilities Pursuant to 
Rule 17d-2; Order Approving and Declaring Effective a Plan for the 
Allocation of Regulatory Responsibilities Between the Financial 
Industry Regulatory Authority, Inc. and BATS Exchange, Inc.

October 20, 2008.
    On August 27, 2008, BATS Exchange, Inc. (``BATS'') and the 
Financial Industry Regulatory Authority, Inc. (``FINRA'') (together 
with BATS, the ``Parties'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to section 17(d) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 17d-2 
thereunder,\2\ a plan for the allocation of regulatory 
responsibilities, dated August 25, 2008 (``17d-2 Plan'' or the 
``Plan''). The Plan was published for comment on September 24, 2008.\3\ 
The Commission received no comments on the Plan. This order approves 
and declares effective the Plan.
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    \1\ 15 U.S.C. 78q(d).
    \2\ 17 CFR 240.17d-2.
    \3\ See Securities Exchange Act Release No. 58563 (September 17, 
2008), 73 FR 55180.
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I. Introduction

    Section 19(g)(1) of the Act,\4\ among other things, requires every 
self-regulatory organization (``SRO'') registered as either a national 
securities exchange or national securities association 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 section 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''). Such 
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), respectively.
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    Section 17(d)(1) of the Act \6\ 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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    \6\ 15 U.S.C. 78q(d)(1).
    \7\ See Securities Act 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.\8\ Rule 17d-1 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.\9\ 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 the applicable 
financial responsibility rules. On its face, Rule 17d-1 deals only with 
an SRO's obligations to enforce member compliance with 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.
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    \8\ 17 CFR 240.17d-1 and 17 CFR 240.17d-2, respectively.
    \9\ See Securities Exchange Act Release No. 12352 (April 20, 
1976), 41 FR 18808 (May 7, 1976).
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    To address regulatory duplication in these and other areas, the 
Commission adopted Rule 17d-2 under the Act.\10\ Rule 17d-2 permits 
SROs to propose joint plans for the allocation of regulatory 
responsibilities with respect to their common members. Under paragraph 
(c) of Rule 17d-2, the Commission may declare such a plan effective if, 
after providing for appropriate notice and comment, it

[[Page 63753]]

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 is 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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    \10\ See Securities Exchange Act Release No. 12935 (October 28, 
1976), 41 FR 49091 (November 8, 1976).
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II. Proposed Plan

    The proposed 17d-2 Plan is intended to reduce regulatory 
duplication for firms that are common members of both BATS and FINRA. 
Pursuant to the proposed 17d-2 Plan, FINRA would assume certain 
examination and enforcement responsibilities for those BATS members 
that are also members of FINRA and the associated persons therewith 
(``Dual Members'') with respect to certain applicable laws, rules, and 
regulations.\11\
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    \11\ See Paragraph 1(c) of the proposed 17d-2 Plan (defining 
``Dual Members'').
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    The text of the Plan delineates the proposed regulatory 
responsibilities with respect to the Parties. Included in the proposed 
Plan is an exhibit (the ``BATS Exchange Rules Certification for 17d-2 
Agreement with FINFA,'' referred to herein as the ``Certification'') 
that lists every BATS rule, and select federal securities laws, rules, 
and regulations, for which FINRA would bear responsibility under the 
Plan for overseeing and enforcing with respect to Dual Members.
    Specifically, under the 17d-2 Plan, FINRA would assume examination 
and enforcement responsibility relating to compliance by Dual Members 
with the rules of BATS that are substantially similar to the applicable 
rules of FINRA, as well as any provisions of the federal securities 
laws and the rules and regulations thereunder delineated in the 
Certification (``Common Rules''). Common Rules would not include the 
application of any BATS rule or FINRA rule, or any rule or regulation 
under the Act, to the extent that it pertains to violations of insider 
trading activities, because such matters are covered by a separate 
multiparty agreement under Rule 17d-2.\12\ In the event that a Dual 
Member is the subject of an investigation relating to a transaction on 
BATS, the plan acknowledges that BATS may, in its discretion, exercise 
concurrent jurisdiction and responsibility for such matter.\13\
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    \12\ See paragraph 1(b) of the proposed 17d-2 Plan. See also 
Securities Exchange Act Release Nos. 58350 (August 13, 2008), 73 FR 
48247 (August 18, 2008) (File No. 4-566) (notice of filing of 
proposed plan); and 58536 (September 12, 2008) 73 FR 54646 
(September 22, 2008) (File No. 4-566) (order approving and declaring 
effective the plan). The Certification identifies several Common 
Rules that may also be addressed in the context of regulating 
insider trading activities pursuant to the proposed separate 
multiparty agreement.
    \13\ See paragraph 6 of the proposed 17d-2 Plan.
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    Under the Plan, BATS would retain full responsibility for 
surveillance and enforcement with respect to trading activities or 
practices involving BATS' own marketplace, including, without 
limitation, registration pursuant to its applicable rules of associated 
persons (i.e., registration rules that are not Common Rules); its 
duties as a DEA pursuant to Rule 17d-1 under the Act; and any BATS 
rules that are not Common Rules, except for BATS rules for any broker-
dealer subsidiary of BATS Holding, Inc.\14\ Apparent violations of any 
BATS rules by any broker-dealer subsidiary of BATS Holdings, Inc. will 
be processed by, and enforcement proceedings in respect thereto will be 
conducted by, FINRA.\15\
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    \14\ See paragraph 2 of the proposed 17d-2 Plan.
    \15\ See paragraph 6 of the proposed 17d-2 Plan.
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III. Discussion

    The Commission finds that the proposed Plan is consistent with the 
factors set forth in section 17(d) of the Act \16\ and Rule 17d-2(c) 
thereunder \17\ in that the proposed Plan is necessary or appropriate 
in the public interest and for the protection of investors, fosters 
cooperation and coordination among SROs, and removes impediments to and 
fosters the development of the national market system. In particular, 
the Commission believes that the proposed Plan should reduce 
unnecessary regulatory duplication by allocating to FINRA certain 
examination and enforcement responsibilities for Dual Members that 
would otherwise be performed by both BATS and FINRA. Accordingly, the 
proposed Plan promotes efficiency by reducing costs to Dual Members. 
Furthermore, because BATS and FINRA will coordinate their regulatory 
functions in accordance with the Plan, the Plan should promote investor 
protection.
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    \16\ 15 U.S.C. 78q(d).
    \17\ 17 CFR 240.17d-2(c).
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    The Commission notes that when it granted the application of BATS 
for registration as a national securities exchange, the Commission 
conditioned the operation of the BATS exchange on the satisfaction of 
several requirements.\18\ One of those requirements was the 
effectiveness of an agreement pursuant to Rule 17d-2 between FINRA and 
BATS that allocates to FINRA regulatory responsibility for certain 
specified matters, or, alternatively, the demonstration by BATS that it 
independently has the ability to fulfill all of its regulatory 
obligations.\19\ The proposed 17d-2 Plan represents BATS' effort to 
satisfy that prerequisite.
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    \18\ See Securities Exchange Act Release No. 58375 (August 18, 
2008), 73 FR 49498 (August 21, 2008) (File No. 10-182).
    \19\ See Securities Exchange Act Release No. 58375 (August 18, 
2008), 73 FR 49498, 49507 (August 21, 2008) (File No. 10-182).
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    The Commission notes that, under the Plan, BATS and FINRA have 
allocated regulatory responsibility for those BATS rules, set forth on 
the Certification, that are substantially similar to the applicable 
FINRA rules in that examination for compliance with such provisions and 
rules would not require FINRA to develop one or more new examination 
standards, modules, procedures, or criteria in order to analyze the 
application of the rule, or a Dual Member's activity, conduct, or 
output in relation to such rule. In addition, under the Plan, FINRA 
would assume regulatory responsibility for certain provisions of the 
federal securities laws and the rules and regulations thereunder that 
are set forth in the Certification. The Common Rules covered by the 
Plan are specifically listed in the Certification, as may be amended by 
the Parties from time to time.
    Under the Plan, BATS would retain full responsibility for 
surveillance and enforcement with respect to trading activities or 
practices involving BATS' own marketplace, including, without 
limitation, registration pursuant to its applicable rules of associated 
persons (i.e., registration rules that are not Common Rules); its 
duties as a DEA pursuant to Rule 17d-1 under the Act; and any BATS 
rules that are not Common Rules, except for BATS rules for any broker-
dealer subsidiary of BATS Holding, Inc.\20\ Apparent violations of any 
BATS rules by any broker-dealer subsidiary of BATS Holdings, Inc. will 
be processed by, and enforcement proceedings in respect thereto will be 
conducted by, FINRA.\21\ The effect of these provisions is that 
regulatory oversight and enforcement responsibilities for any broker-
dealer subsidiary of BATS Holdings, Inc., which is the parent company 
of BATS, will be vested with FINRA. These provisions should help avoid 
any potential conflicts of interest that could arise if BATS was 
primarily responsible

[[Page 63754]]

for regulating its affiliated broker-dealers.
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    \20\ See paragraph 2 of the proposed 17d-2 Plan.
    \21\ See paragraph 6 of the proposed 17d-2 Plan.
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    According to the Plan, BATS will review the Certification, at least 
annually, or more frequently if required by changes in either the rules 
of BATS or FINRA, and, if necessary, submit to FINRA an updated list of 
Common Rules to add BATS rules not included on the then-current list of 
Common Rules that are substantially similar to FINRA rules; delete BATS 
rules included in the then-current list of Common Rules that are no 
longer substantially similar to FINRA rules; and confirm that the 
remaining rules on the list of Common Rules continue to be BATS rules 
that are substantially similar to FINRA rules.\22\ FINRA will then 
confirm in writing whether the rules listed in any updated list are 
Common Rules as defined in the Plan. Under the Plan, BATS will also 
provide FINRA with a current list of Dual Members and shall update the 
list no less frequently than once each quarter.\23\
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    \22\ See paragraph 2 of the proposed 17d-2 Plan.
    \23\ See paragraph 3 of the proposed 17d-2 Plan.
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    The Commission is hereby declaring effective a plan that, among 
other things, allocates regulatory responsibility to FINRA for the 
oversight and enforcement of all BATS rules that are substantially 
similar to the rules of FINRA for Dual Members of BATS and FINRA. 
Therefore, modifications to the Certification need not be filed with 
the Commission as an amendment to the Plan, provided that the Parties 
are only adding to, deleting from, or confirming changes to BATS rules 
in the Certification in conformance with the definition of Common Rules 
provided in the Plan. However, should the Parties decide to add a BATS 
rule to the Certification that is not substantially similar to a FINRA 
rule; delete a BATS rule from the Certification that is substantially 
similar to a FINRA rule; or leave on the Certification a BATS rule that 
is no longer substantially similar to a FINRA rule, then such a change 
would constitute an amendment to the Plan, which must be filed with the 
Commission pursuant to Rule 17d-2 under the Act and noticed for public 
comment.\24\
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    \24\ The Commission also notes that the addition to or deletion 
from the Certification of any federal securities laws, rules, and 
regulations for which FINRA would bear responsibility under the Plan 
for examining, and enforcing compliance by, Dual Members, also would 
constitute an amendment to the Plan.
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    The Plan also permits BATS and FINRA to terminate the Plan, subject 
to notice.\25\ The Commission notes, however, that while the Plan 
permits the Parties to terminate the Plan, the Parties cannot by 
themselves reallocate the regulatory responsibilities set forth in the 
Plan, since Rule 17d-2 under the Act requires that any allocation or 
re-allocation of regulatory responsibilities be filed with the 
Commission.\26\
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    \25\ See paragraph 12 of the proposed 17d-2 Plan.
    \26\ The Commission notes that paragraph 12 of the Plan reflects 
the fact that FINRA's responsibilities under the Plan will continue 
in effect until the Commission approves any termination of the Plan.
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IV. Conclusion

    This Order gives effect to the Plan filed with the Commission in 
File No. 4-569. The Parties shall notify all members affected by the 
Plan of their rights and obligations under the Plan.
    It is therefore ordered, pursuant to section 17(d) of the Act, that 
the Plan in File No. 4-569, between FINRA and BATS, filed pursuant to 
Rule 17d-2 under the Act, is approved and declared effective.
    It is therefore ordered, that BATS is relieved of those 
responsibilities allocated to FINRA under the Plan in File No. 4-569.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(34).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-25503 Filed 10-24-08; 8:45 am]
BILLING CODE 8011-01-P