[Federal Register Volume 78, Number 164 (Friday, August 23, 2013)]
[Notices]
[Pages 52587-52589]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-20568]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70228; File No. 4-663]


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 the Topaz Exchange, LLC

August 19, 2013.
    On July 2, 2013, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') and the Topaz Exchange, LLC (``Topaz'') (together with 
FINRA, the ``Parties'') filed with the Securities and Exchange 
Commission (``Commission'') a plan for the allocation of regulatory 
responsibilities, dated June 21, 2013 (``17d-2 Plan'' or the ``Plan''). 
The Plan was published for comment on August 1, 2013.\1\ The Commission 
received no comments on the Plan. This order approves and declares 
effective the Plan.
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    \1\ See Securities Exchange Act Release No. 70053 (July 26, 
2013), 78 FR 46656.
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I. Introduction

    Section 19(g)(1) of the Securities Exchange Act of 1934 
(``Act''),\2\ 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.\3\ 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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    \2\ 15 U.S.C. 78s(g)(1).
    \3\ 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 \4\ was intended, in part, to eliminate 
unnecessary multiple examinations and regulatory duplication.\5\ 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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    \4\ 15 U.S.C. 78q(d)(1).
    \5\ 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.\6\ 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.\7\ 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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    \6\ 17 CFR 240.17d-1 and 17 CFR 240.17d-2, respectively.
    \7\ 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.\8\ 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 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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    \8\ See Securities Exchange Act Release No. 12935 (October 28, 
1976), 41 FR 49091 (November 8, 1976).
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II. Proposed Plan

    On July 26, 2013, the Commission granted Topaz's application for 
registration as a national securities exchange.\9\ The proposed 17d-2 
Plan is intended to reduce regulatory duplication for firms that are 
common members of both Topaz and FINRA.\10\ Pursuant to the proposed 
17d-2 Plan, FINRA would assume certain examination and enforcement 
responsibilities for common members with respect to certain applicable 
laws, rules, and regulations.
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    \9\ See Securities Exchange Act Release No. 70050 (July 26, 
2013), 78 FR 46622 (August 1, 2013) (File No. 10-209).
    \10\ The proposed 17d-2 Plan refers to these common members as 
``Dual Members.'' See Paragraph 1(c) of the proposed 17d-2 Plan.

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[[Page 52588]]

    The text of the Plan delineates the proposed regulatory 
responsibilities with respect to the Parties. Included in the proposed 
Plan is an exhibit (the ``Topaz Certification of Common Rules,'' 
referred to herein as the ``Certification'') that lists every Topaz 
rule for which FINRA would bear responsibility under the Plan for 
overseeing and enforcing with respect to Topaz members that are also 
members of FINRA and the associated persons therewith (``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 Topaz that are substantially similar to the 
applicable rules of FINRA,\11\ as well as any provisions of the federal 
securities laws and the rules and regulations thereunder delineated in 
the Certification (``Common Rules''). In the event that a Dual Member 
is the subject of an investigation relating to a transaction on Topaz, 
the plan acknowledges that Topaz may, in its discretion, exercise 
concurrent jurisdiction and responsibility for such matter.\12\
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    \11\ See paragraph 1(b) of the proposed 17d-2 Plan (defining 
Common Rules). See also paragraph 1(f) of the proposed 17d-2 Plan 
(defining Regulatory Responsibilities). Paragraph 2 of the Plan 
provides that annually, or more frequently as required by changes in 
either Topaz rules or FINRA rules, the parties shall review and 
update, if necessary, the list of Common Rules. Further, paragraph 3 
of the Plan provides that Topaz shall furnish FINRA with a list of 
Dual Members, and shall update the list no less frequently than once 
each calendar quarter.
    \12\ See paragraph 6 of the proposed 17d-2 Plan.
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    Under the Plan, Topaz would retain full responsibility for 
surveillance and enforcement with respect to trading activities or 
practices involving Topaz's 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 Topaz 
rules that are not Common Rules.\13\
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    \13\ See paragraph 2 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 \14\ and Rule 17d-2(c) 
thereunder \15\ 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 Topaz and FINRA. Accordingly, the 
proposed Plan promotes efficiency by reducing costs to Dual Members. 
Furthermore, because Topaz and FINRA will coordinate their regulatory 
functions in accordance with the Plan, the Plan should promote investor 
protection. The Commission notes that the proposed Plan would allocate 
regulatory responsibility between Topaz and FINRA in a manner similar 
to the allocation of regulatory responsibility that currently exists 
between the International Securities Exchange, LLC (``ISE'') and 
FINRA.\16\
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    \14\ 15 U.S.C. 78q(d).
    \15\ 17 CFR 240.17d-2(c).
    \16\ The proposed new Topaz rules are based to a substantial 
extent on the rules of the ISE. The ISE currently is party to a 17d-
2 plan with FINRA. See Securities Exchange Act Release No. 55367 
(February 27, 2007), 72 FR 9983 (March 6, 2007) (File No. 4-529) 
(order approving and declaring effective the plan between the ISE 
and NASD (n/k/a FINRA)).
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    The Commission notes that, under the Plan, Topaz and FINRA have 
allocated regulatory responsibility for those Topaz 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.
    According to the Plan, Topaz will review the Certification, at 
least annually, or more frequently if required by changes in either the 
rules of Topaz or FINRA, and, if necessary, submit to FINRA an updated 
list of Common Rules to add Topaz rules not included on the then-
current list of Common Rules that are substantially similar to FINRA 
rules; delete Topaz 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 Topaz rules that are substantially similar to FINRA rules.\17\ 
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, 
Topaz will also provide FINRA with a current list of Dual Members and 
shall update the list no less frequently than once each quarter.\18\ 
The Commission believes that these provisions are designed to provide 
for continuing communication between the Parties to ensure the 
continued accuracy of the scope of the proposed allocation of 
regulatory responsibility.
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    \17\ See paragraph 2 of the proposed 17d-2 Plan.
    \18\ 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 Topaz rules that are substantially 
similar to the rules of FINRA for Dual Members of Topaz 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 Topaz rules 
in the Certification in conformance with the definition of Common Rules 
provided in the Plan. However, should the Parties decide to add a Topaz 
rule to the Certification that is not substantially similar to a FINRA 
rule; delete a Topaz rule from the Certification that is substantially 
similar to a FINRA rule; or leave on the Certification a Topaz 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.\19\
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    \19\ 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 Topaz and FINRA to terminate the Plan, 
subject to notice.\20\ 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.\21\
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    \20\ See paragraph 12 of the proposed 17d-2 Plan.
    \21\ 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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[[Page 52589]]

IV. Conclusion

    This Order gives effect to the Plan filed with the Commission in 
File No. 4-663. 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. 4-663, between FINRA and Topaz, filed pursuant to 
Rule 17d-2 under the Act, is approved and declared effective.
    It is further ordered that Topaz is relieved of those 
responsibilities allocated to FINRA under the Plan in File No. 4-663.
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    \22\ 17 CFR 200.30-3(a)(34).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-20568 Filed 8-22-13; 8:45 am]
BILLING CODE 8011-01-P