80_FR_34881 80 FR 34765 - Automated Matching Systems Exchange, LLC; Order Denying an Application for a Limited Volume Exemption From Registration as a National Securities Exchange Under Section 5 of the Securities Exchange Act of 1934

80 FR 34765 - Automated Matching Systems Exchange, LLC; Order Denying an Application for a Limited Volume Exemption From Registration as a National Securities Exchange Under Section 5 of the Securities Exchange Act of 1934

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 116 (June 17, 2015)

Page Range34765-34770
FR Document2015-14807

Federal Register, Volume 80 Issue 116 (Wednesday, June 17, 2015)
[Federal Register Volume 80, Number 116 (Wednesday, June 17, 2015)]
[Notices]
[Pages 34765-34770]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-14807]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75157; File No. 10-214]


Automated Matching Systems Exchange, LLC; Order Denying an 
Application for a Limited Volume Exemption From Registration as a 
National Securities Exchange Under Section 5 of the Securities Exchange 
Act of 1934

June 11, 2015.

I. Introduction

    Automated Matching Systems Exchange, LLC (``AMSE'') believes that 
its proposed business model would qualify it as an exchange. As defined 
in Section 3(a)(1) of the Securities Exchange Act of 1934 (``Exchange 
Act'' or ``Act''), an ``exchange'' is ``any organization, association, 
or group of persons, whether incorporated or unincorporated, which 
constitutes, maintains, or provides a market place or facilities for 
bringing together purchasers and sellers of securities or for otherwise 
performing with respect to securities the functions commonly performed 
by a stock exchange as that term is generally understood, and includes 
the market place and the market facilities maintained by such 
exchange.'' \1\ Under Section 5 of the Act, it is unlawful for an 
exchange to effect any transaction in a security, or to report such 
transaction, ``unless such exchange (1) is registered as a national 
securities exchange . . . or (2) is exempted from such registration 
upon application by the exchange because, in the opinion of the 
Commission, by reason of the limited volume of transactions effected on 
such exchange, it is not practicable and not necessary or appropriate 
in the public interest or for the protection of investors to require 
such registration.'' \2\
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    \1\ 15 U.S.C. 78c(a)(1). Rule 3b-16 under the Act further 
provides that an organization, association, or group of persons 
shall be considered to constitute, maintain, or provide `a market 
place or facilities for bringing together purchasers and sellers of 
securities or for otherwise performing with respect to securities 
the functions commonly performed by a stock exchange,' as those 
terms are used in Section 3(a)(1) of the Act, (15 U.S.C. 78c(a)(1)), 
if such organization, association, or group of persons: (1) Brings 
together the orders for securities of multiple buyers and sellers; 
and (2) Uses established, non-discretionary methods (whether by 
providing a trading facility or by setting rules) under which such 
orders interact with each other, and the buyers and sellers entering 
such orders agree to the terms of a trade. 17 CFR 240.3b-16(a).
    \2\ 15 U.S.C. 78e.
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    AMSE has chosen the latter option, seeking from the Commission an 
exemption from registration as a national securities exchange.\3\ After 
a careful review of the exemption application, however, we have 
determined to deny it.
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    \3\ We note that, in a December 2014 public notice, the 
Commission expressly stated that it understood AMSE to be seeking an 
exemption under Section 5--not registration--and that AMSE did not 
respond otherwise. See Securities Exchange Act Release No. 73911 
(December 22, 2014), 79 FR 78507, note 1 (December 30, 2014) 
(``Amendment Notice'') (``The Commission notes that AMSE's 
application only seeks a limited volume exemption under Section 5 of 
the Exchange Act from registration as a national securities exchange 
under Section 6 of the Exchange Act. AMSE's application does not 
seek to register as a national securities exchange.''). We therefore 
deem any claim to the contrary waived.
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    Although our review leads us to identify a number of potential 
issues that might warrant this result (including whether AMSE would 
even qualify as an exchange),\4\ we find that the application is 
fatally flawed because AMSE is proposing to possess the broad 
regulatory powers and responsibilities that are reserved for self-
regulatory organizations (``SROs''), while simultaneously seeking 
exemption from registration as an exchange.\5\ Under the Act, for an 
exchange to possess the powers and responsibilities of an SRO, it must 
register as a national securities exchange. An exchange that is exempt 
from such registration does not meet the definition of an SRO under the 
Act. Moreover, the Commission has never allowed an exempt exchange to 
possess the broad range of regulatory powers and responsibilities of an 
SRO. We believe that doing so here would be contrary to the Act and 
inconsistent with the public interest and the protection of investors.
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    \4\ See infra Section III.A.
    \5\ SROs are privately-funded entities, entrusted with quasi-
governmental authority, which generally adopt rules to govern their 
members and enforce these rules as well as the federal securities 
laws. See generally Free Enterprise Fund v. Public Co. Accounting 
Oversight Bd., 561 U.S. 477, 484 (2010) (explaining that ``private 
self-regulatory organizations in the securities industry--such as 
the New York Stock Exchange--. . . investigate and discipline their 
own members subject to Commission oversight''). The quasi-
governmental authority afforded to SROs includes prosecutorial, 
adjudicatory, and rulemaking authority.
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II. Background

A. Procedural History

    On July 7, 2014, AMSE filed with the Commission an application 
seeking a limited volume exemption, under Section 5 of the Act, from 
the requirement to register as a national securities exchange under 
Section 6 of the Act.\6\ Notice of AMSE's exemption application was 
published for comment in the Federal Register on July 29, 2014.\7\
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    \6\ In the interest of completeness, we note the events that 
preceded AMSE's filing of its July 7th application. From December 
2013 through March 2014, staff had numerous communications with AMSE 
about its (then-draft) application, including multiple email 
exchanges and at least one phone call; during these exchanges, the 
staff explained that it was concerned that AMSE's proposed business 
model was not an ``exchange.'' In March 2014, AMSE formally 
submitted a Form 1 application. On April 24, 2014, the staff 
returned AMSE's application because, based on its review, the staff 
believed that AMSE had erred in submitting an application for an 
exchange and instead should have submitted an application for a 
national securities association, a classification that the staff 
believed better fit with AMSE's proposed business model. On May 6, 
2014, the staff had a phone call with AMSE in which the staff again 
explained its view that AMSE's proposed business model was not an 
exchange. On June 16, 2014, AMSE brought suit against the Commission 
in the U.S. District Court for the District of South Dakota seeking 
certain injunctive and declaratory relief in connection with its 
application. See AMSE v. SEC, Civ. 14-4095 (D.S.D.). On June 24, 
2014, the Commission staff and AMSE reached an agreement pursuant to 
which AMSE would submit a new Form 1 application that would include 
certain additional information needed to complete the application 
and the staff would thereafter proceed to process the revised 
application for Commission consideration.
    \7\ See Securities Exchange Act Release No. 72661 (July 23, 
2014), 79 FR 44070.
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    On October 23, 2014, the Commission issued an order instituting 
proceedings to determine whether to grant or deny AMSE's exemption 
application.\8\ In that order, the Commission explained that it ``is 
concerned that AMSE's exemption application does not meet a key 
threshold requirement for being granted an exemption from exchange 
registration--namely, that the applicant actually be an `exchange' as 
defined under Section 3(a)(1) of the Exchange Act and Rule 3b-16 
thereunder.'' \9\ The Commission specifically identified the fact that 
``it does not appear that any AMSE system would operate as an exchange 
by bringing together purchasers and sellers of securities.'' \10\
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    \8\ See Securities Exchange Act Release No. 73419, 79 FR 64421 
(October 29, 2014) (``Order Instituting Proceedings'').
    \9\ Id. at 64422.
    \10\ Id.

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[[Page 34766]]

    On November 10, 2014, AMSE submitted Amendment No. 1 to its 
exemption application. Notice of Amendment No. 1 to AMSE's exemption 
application was published for comment in the Federal Register on 
December 30, 2014.\11\ In the notice, the Commission advised interested 
parties that it was considering potential ``additional grounds for 
denial.'' As the Commission explained, ``AMSE's exemption application 
states that AMSE would operate as a self-regulatory organization that 
would exercise self-regulatory authority over its members,'' \12\ but 
under the Act an exempt exchange is not an SRO; thus, ``any attempts by 
AMSE to hold itself out as a self-regulatory organization while 
simultaneously seeking an exemption under Section 5 would be contrary 
to the Exchange Act.'' \13\
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    \11\ See Amendment Notice, supra note 3. In Amendment No. 1, 
AMSE added language to Exhibit E that described proposed 
consolidated quotation systems and a proposed optional order router 
that could send orders between the distinct member-operated order 
books.
    \12\ 79 FR at 78508.
    \13\ Id. On January 22, 2015, the Commission provided notice of 
an extension of the time for the conclusion of the proceedings to 
determine whether to grant or deny AMSE's exemption application. See 
Securities Exchange Act Release No. 74116 (January 22, 2015), 80 FR 
4321 (January 27, 2015) (``Extension Notice''). The Extension Notice 
extended the time for the conclusion of the proceedings by 90 days, 
to April 24, 2015. Id. AMSE subsequently consented to an additional 
60-day extension of the time for the conclusion of the proceedings 
to June 23, 2015. See Letter from Michael Stegawski, Chief 
Regulatory Officer, AMSE, to SEC staff, dated February 27, 2015 
(``AMSE February 27 Letter'').
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    On February 11, 2015, AMSE submitted Amendment Nos. 2A and 2B, 
along with a comment letter.\14\ Among other things, Amendments 2A and 
2B changed most of the application's references to ``self-regulatory 
organization'' to ``limited volume exempt regulatory organization.'' 
\15\ Notwithstanding this change in nomenclature, AMSE did not 
otherwise modify the accompanying description of the powers and 
responsibilities it contemplated possessing. In some instances, AMSE 
continued to refer to itself in terms that pertain only to SROs under 
the Act or implied that it falls generally within the category of an 
SRO and would exercise authority as such.\16\
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    \14\ See Letter from Michael Stegawski, Chief Regulatory 
Officer, AMSE, to SEC staff, dated February 8, 2015 (``AMSE February 
8 Letter''). Attached to the AMSE February 8 Letter were five 
exhibits: Exhibit A--Amendment to Form 1 Application 2A, February 
16, 2015 (``Amendment 2A''); Exhibit B--Amendment to Form 1 
Application 2B, February 16, 2015 (``Amendment 2B''); Exhibit C--
January 16, 2015 Correspondence--Paul G. Alvarez; Exhibit D--January 
5, 2015 Correspondence--Michael Stegawski (``AMSE January 5 
Letter''); Exhibit E--Discussion Draft--Form 1 Application, January 
5, 2015.
    \15\ See AMSE February 8 Letter. We note that Amendment Nos. 2A 
and 2B appear to present different business models. We find it 
unnecessary to analyze these proposed alternatives separately, 
however, because both involve the same fatal flaw concerning AMSE's 
proposal to exercise the panoply of self-regulatory powers and 
responsibilities. Further, we note that neither the Act, nor Form 1, 
nor the rules relating thereto provide for amendments in the 
alternative.
    \16\ See infra notes 23-30 and accompanying text.
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    The Commission received thereafter one comment letter from 1st 
Trade opposing AMSE's exemption application,\17\ to which AMSE 
subsequently submitted a response.\18\
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    \17\ See Letter from Lori C. Sarian, Managing Partner, 1st 
Trade, to Kevin M. O'Neill, Deputy Secretary, Commission, dated 
April 14, 2015 (``1st Trade Letter''). This comment letter expresses 
concerns about an overall lack of clarity and detail in AMSE's 
application. This comment letter also raises concerns with respect 
to specific aspects of AMSE's application, citing, among other 
things, an ambiguity and vagueness surrounding membership 
qualifications and obligations, an unclear application process for 
certain potential members, proposed best execution obligations that 
may be inconsistent with industry standards, an inadequate 
description of operations and trade processing, inadequate issuer 
requirements, and the duplication of requirements for potential 
members who are already broker-dealers. Because the Commission's 
focus in this order is on threshold matters with respect to AMSE's 
application, many of 1st Trade's specific concerns are not addressed 
herein.
    \18\ See Letter from Michael Stegawski, Chief Regulatory 
Officer, AMSE, to Kevin M. O'Neill, Deputy Secretary, Commission, 
dated April 22, 2015 (``AMSE Response Letter''). The AMSE Response 
Letter provides responses to each of 1st Trade's specific comments. 
See supra note 17.
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B. AMSE's Proposed Regulatory Functions

    In its exemption application, AMSE proposes that it would operate a 
marketplace for securities processing.\19\ According to the 
application, persons seeking to buy or sell securities could only enter 
their orders through an AMSE member.\20\ And pursuant to AMSE's 
proposed rules, any person may become a member of AMSE, provided that 
the person submits an application and complies with any conditions 
imposed by AMSE.\21\ AMSE proposes a specific application form for 
broker-dealer firms to become its members.\22\
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    \19\ See Amendment 2B, Exhibit E, Section A.
    \20\ See Amendment 2B, Exhibit E, Section E. The definition of 
``participant'' was added to the AMSE rules in Amendment 2B. 
Participant means ``a Person who has entered into a contractual 
agreement with an Exchange Member for the purpose of effecting 
transactions in securities or submitting, disseminating, or 
displaying orders.'' See AMSE Rule 1.5(w). In addition, Amendment 2B 
replaced the term ``customer'' with ``participant'' throughout 
AMSE's rules and other Form 1 Exhibits. See, e.g., AMSE Rules 
Chapters III, IV, VI, VII, XI, and Amendment 2B, Exhibit E.
    \21\ See AMSE Rule 2.3. Amendment 2B removed the requirement 
that AMSE members be registered broker-dealers. See Amendment No. 1, 
AMSE Rule 2.3. In addition, Amendment 2B removed the requirement 
that AMSE members comply with Regulation ATS. See Amendment No. 1, 
Rules 15.1 -15.5.
    \22\ See Amendment 2B, Exhibit F and Rule 2.6(b).
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    Although AMSE's application seeks approval as an exempt exchange, 
its proposal reveals AMSE's aim to exist simultaneously as an SRO. 
Throughout its exemption application, AMSE refers to itself in terms 
that pertain only to SROs under the Act. For example, AMSE's exemption 
application refers to AMSE's rules being filed with the Commission 
under Section 19(b) of the Act,\23\ which governs the filing of rules 
by SROs with the Commission.\24\ AMSE's rules also state that its 
disciplinary decisions and access decisions would be subject to agency 
review under the Act,\25\ where such review is available only for the 
activities of SROs under Section 19 of the Act.\26\ AMSE's exemption 
application also repeatedly implies that it falls generally within the 
category of an SRO and that it would exercise authority as such.\27\ 
AMSE also has stated in a comment letter that AMSE ``will become a 
dedicated SRO for securities matching systems. . . .'' \28\ Further, 
AMSE asserts that its members would hold a status under the Act that is 
only conferred on members of SROs.\29\
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    \23\ See AMSE Rule 1.5(b).
    \24\ See 15 U.S.C. 78s(b).
    \25\ See AMSE Rules 8.14 and 9.7.
    \26\ See 15 U.S.C. 78s(b), (d).
    \27\ See, e.g., AMSE Rule 1.5(j) (``a self-regulatory 
organization, other than the Exchange . . .'') and AMSE Rule 12.5 
(``The Exchange may 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. . . .Notwithstanding the 
fact that the Exchange may enter into one or more regulatory 
services agreements, the Exchange shall retain ultimate legal 
responsibility for, and control of, its self-regulatory 
responsibilities . . .'').
    \28\ See AMSE Response Letter at 10; see also id. at 9 (AMSE 
states that it ``will exercise self-regulatory powers.'').
    \29\ See AMSE Rule 1.5(l) (``An Exchange Member shall have the 
status as provided in Section 3(a)(3) of the Act or, where 
applicable, a Person operating pursuant to an exemption from 
registration under the Act''). Section 3(a)(3) of the Act defines 
``member'' exclusively within the context of either a national 
securities exchange or a national securities association, which are 
self-regulatory organizations. See 15 U.S.C. 78c(a)(3), (26).
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    In addition, throughout its exemption application, AMSE proposes to 
perform regulatory oversight of its members that is consistent with the 
powers and responsibilities of an SRO.\30\

[[Page 34767]]

Specifically, AMSE proposes to regulate its members with respect to: 
training, experience, and competence; \31\ financial responsibility and 
operational capacity; \32\ the maintenance of books and records; \33\ 
business conduct; \34\ anti-money laundering compliance programs; \35\ 
extension of margin or credit; \36\ custody of customer funds or 
securities; \37\ fraud and manipulation; \38\ and compliance with 
broker best execution obligations.\39\ AMSE also proposes to regulate 
the associated persons of its members and would require each member to 
establish, maintain, and enforce written supervisory procedures to 
enable the member to supervise the activities of its associated persons 
and to ensure their compliance with the securities laws, rules, 
regulations and statements of policy promulgated thereunder, as well as 
with AMSE rules.\40\ Moreover, at times AMSE asserts that it is 
required to perform such functions under the Act,\41\ implying that it 
will be an SRO, or acting in an equivalent, self-designated capacity it 
calls a ``limited volume exempt regulatory organization.'' \42\ As the 
1st Trade Letter observed, AMSE appears to be ``attempting to operate 
with the most lenient regulatory constraints possible and in this 
attempt are circumventing many accepted practices and regulatory 
requirements.'' \43\
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    \30\ SROs' wide-ranging responsibilities generally involve 
rulemaking, examining member firms for compliance with those rules 
and the securities laws (including the Commission's rules 
thereunder), taking disciplinary action against members that fail to 
comply, and market monitoring, as well as professional activities 
such as testing, training, and licensing. See, e.g., 15 U.S.C. 
78f(b)(1) (requiring a national securities exchange to be so 
organized and have the capacity to enforce compliance by its members 
and associated persons with the Exchange Act, the rules and 
regulations thereunder, and the rules of the exchange); 15 U.S.C. 
78o-3(b)(2) (requiring the same of registered securities 
associations); 15 U.S.C. 78f(b)(2)-(10) (specifying requirements for 
the rules of a national securities exchange, including with respect 
to preventing fraudulent acts and practices, and with the discipline 
of members); 15 U.S.C. 78o-3(b)(3)-(15) (specifying requirements for 
rules of a registered securities association, including with respect 
to preventing fraudulent acts and practices, and with the discipline 
of members); 15 U.S.C. 78o-3(g)(3)(B) (providing that a registered 
securities association may bar natural persons from association with 
a member if the person does not meet standards of training, 
experience, and competence prescribed by rules of the association); 
and 15 U.S.C. 78q(d) (providing for allocation of examination 
authority across self-regulatory organizations).
    \31\ See AMSE Rule 2.4(b).
    \32\ See AMSE Rule 2.4(c)(1).
    \33\ See AMSE Rules 2.4(c)(2) and 4.1-4.4.
    \34\ See AMSE Rules 3.1-3.14.
    \35\ See AMSE Rule 5.6.
    \36\ See AMSE Rule 6.1.
    \37\ See AMSE Rule 10.12.
    \38\ See AMSE Rules 11.1-11.4.
    \39\ See AMSE Rule 11.8.
    \40\ See AMSE Rule 5.1; see also AMSE Rules 5.2-5.5.
    \41\ See, e.g., AMSE February 8 Letter at 5 (stating ``AMSE has 
expressly elected not to register as a broker-dealer and comply with 
the provisions of Regulation ATS and therefore is required to 
exercise self-regulatory powers.''); and AMSE Rule 12.5 (``The 
Exchange may 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 . . .''). Section 6 of the 
Act imposes regulatory obligations on national securities exchanges, 
which are self-regulatory organizations; Section 19(g) of the Act 
imposes obligations on self-regulatory organizations. See 15 U.S.C. 
78f and 78s(g); see also 15 U.S.C. 78c(26) (defining self-regulatory 
organization to include registered national securities exchange, 
national securities associations, and clearing agencies).
    \42\ The term ``limited volume exempt regulatory organization'' 
is not a recognized term under the Act. AMSE created this defined 
term in its rules. See AMSE Rule 1.5(ee) (```LVERO' means an entity 
exercising self-regulatory powers pursuant to an exemption from 
registration under the Act''). As noted above, prior to submitting 
Amendments 2A and 2B, AMSE had referred to itself as an SRO; AMSE 
replaced many of these references with ``limited volume exempt 
regulatory organization'' after the Commission explained in December 
2014 its preliminary view that AMSE would not qualify as an SRO. 
Critically, AMSE did not accompany this nomenclature change with any 
meaningfully limitations on the powers and responsibilities that it 
proposed to exercise.
    \43\ 1st Trade Letter at 3.
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    AMSE also proposes to require its members and their associated 
persons to agree to be regulated by AMSE and to recognize AMSE as being 
obligated to enforce their compliance with the Act and regulations 
thereunder.\44\ AMSE also would require its members and associated 
persons to recognize AMSE as being required to discipline them for 
violations of the Act, including through: expulsion; suspension; 
limitation of activities, functions, and operation; fines; censure; 
suspension or bar from association with an AMSE member; or any other 
sanction determined in AMSE's discretion for violations of the Act.\45\ 
Here again, these are powers and responsibilities exercised by an 
SRO.\46\
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    \44\ See AMSE Rules 2.2 and 2.5(e).
    \45\ See AMSE Rule 2.2. AMSE's rules quote the language in the 
Act that gives national securities exchanges and national securities 
associations the authority to enforce compliance by their members 
with the Act. See 15 U.S.C. 78f(b)(6) and 78o-3(b)(7).
    \46\ See infra Section III.B.
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III. Discussion

A. AMSE Does Not Appear to Meet the Definition of an ``Exchange.''

    At the outset, we note that AMSE has urged the Commission to 
conclude that AMSE should be granted an exemption from exchange 
registration under the Act. Certain provisions of AMSE's amended 
application indicate that AMSE's members may operate multiple distinct 
trading systems, under an AMSE umbrella, while other provisions 
indicate that AMSE itself would operate the proposed trading 
systems.\47\
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    \47\ Compare AMSE Rule 11.8 (referring to participant orders 
being executed ``on a designated trading platform, including that of 
a trading system operated by the Exchange Member''); and Amendment 
2B, Exhibit E, Section D (requiring AMSE members to be responsible 
for having procedures for safeguarding their systems); with 
Amendment 2B, Exhibit E, Section A (``the Exchange will operate one 
or more fully automated electronic order books''); id. at Section E 
(``[o]rders of Participants shall be ranked and maintained in the 
Exchange's electronic books for orders''); and id. at Section F 
(``[o]rders shall be matched for execution . . . on the Exchange's 
electronic order book'').
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    These conflicting provisions make it difficult to ascertain the 
operation of the trading system. Moreover, the lack of detail and 
clarity in AMSE's exemption application prevents the Commission from 
understanding precisely how AMSE proposes to bring together the orders 
of multiple buyers and sellers and otherwise satisfy the definition of 
``exchange.'' Under these circumstances, we would have grave doubts as 
to whether AMSE could in fact qualify as an exchange exempt from 
registration under the Act. We need not reach the merits of this issue, 
however, because as we describe below AMSE's exemption application 
suffers from a separate, fatal flaw.

B. It Is Contrary to the Act and Inconsistent With the Public Interest 
and the Protection of Investors for an Exempt Exchange To Exercise the 
Powers and Responsibilities of an SRO

    Even assuming that AMSE were deemed to be an exchange, the 
Commission cannot find that AMSE should be granted an exemption from 
the requirement to register as a national securities exchange under 
Section 6 of the Act because the Commission believes that AMSE's 
proposal is inconsistent with the Act.\48\ As described above, AMSE 
proposes to exercise extensive self-regulatory powers that are reserved 
under the Act for an SRO--indeed, the bulk of AMSE's rules are devoted 
to this proposed regulatory function, and at times AMSE even refers to 
itself as an SRO. But the Act does not afford the powers and 
responsibilities of an SRO to an exchange that is exempt from 
registration, nor does it require an exchange that is exempt from 
registration to exercise such powers and responsibilities.\49\
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    \48\ For a history of the formation and regulation of stock 
exchanges, see generally Concept Release Concerning Self-Regulation, 
Securities Exchange Act Release No. 50700 (November 18, 2004), 69 FR 
71256, at 71257-58 (December 8, 2004); Charles R. Geisst, Wall 
Street: A History (1997); Michael E. Parrish, Securities Regulation 
and the New Deal (1970); Joel Seligman, The Transformation of Wall 
Street: A History of the Securities and Exchange Commission and 
Modern Corporate Finance (3d ed. 2003).
    \49\ See supra note 42 and accompanying text.
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    Section 3(a)(26) of the Act defines an SRO, in pertinent part, as 
any ``national

[[Page 34768]]

securities exchange.'' \50\ An entity may only become a ``national 
securities exchange'' by registering under Section 6(a) of the Act, 
\51\ as the Commission has previously explained.\52\ And, although 
Section 5 of the Act permits an exempt exchange to operate lawfully 
without registering as a national securities exchange,\53\ an exempt 
exchange is, by definition, not a national securities exchange,\54\ 
and, thus, does not fall within the definition of ``self-regulatory 
organization'' under the Act. It necessarily follows that, were we to 
grant AMSE the exemption it seeks, AMSE would not be entitled, much 
less required by the Act, to hold itself out as an SRO or to exercise 
the self-regulatory authority that is statutorily afforded to SROs.
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    \50\ 15 U.S.C. 78c(a)(26) (defining SRO as ``any national 
securities exchange, registered securities association, or 
registered clearing agency''). See generally Barbara v. New York 
Stock Exchange, Inc., 99 F.3d 49, 51 (2d Cir. 1996) (explaining that 
``[u]nder the Act, [a national securities exchange] `is a self-
regulatory organization''').
    \51\ ``An exchange may be registered as a national securities 
exchange under the terms and conditions hereinafter provided in this 
section and in accordance with the provisions of section 19(a) of 
this title, by filing with the Commission an application for 
registration. . . .'' 15 U.S.C. 78f(a).
    \52\ In a previous order granting an exemption from registration 
under Section 5 of the Act, the Commission stated that ``[b]y virtue 
of this exemption from registration, the Wunsch System falls outside 
the definition of a national securities exchange because the term 
`national securities exchange' implies a registered entity (see, 
e.g., sections 3(a)(26) of the Act (defining the term `self-
regulatory organization') and section 6(a) of the Act.''). See 
Securities Exchange Act Release No. 28899 (February 20, 1991), 56 FR 
8377, 8382 note 51 (February 28, 1991).
    \53\ To grant an exemption from the requirement to register as a 
national securities exchange, the Commission must conclude that, in 
the opinion of the Commission, by reason of the limited volume of 
transactions effected on such exchange, it is not practicable and 
not necessary or appropriate in the public interest or for the 
protection of investors to require registration. 15 U.S.C. 78e.
    \54\ It is self-evident that an exchange cannot be exempt, under 
Section 5, from registering as a national securities exchange under 
Section 6, while simultaneously existing as a national securities 
exchange under Section 6.
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    Nevertheless, there remains the question whether, in our 
discretion, we could allow AMSE to exercise the powers and 
responsibilities of an SRO, notwithstanding the fact that AMSE, as an 
exempt exchange, would not meet the definition of an SRO. Although the 
statutory language does not unambiguously forbid such a result, we 
conclude that we lack the authority under the Act to permit an exempt 
exchange to exercise the powers and responsibilities reserved for an 
SRO. In our view, the Act reflects a deliberate balance between, on the 
one hand, granting SROs the broad, quasi-governmental authority that 
AMSE proposes to exercise, and, on the other hand, ensuring that an 
SRO's exercise of this authority is carefully checked by close 
Commission oversight.\55\ Indeed, we believe this understanding is 
further supported by a primary Congressional purpose underlying the 
1975 amendments to the Act,\56\ through which ``Congress specifically 
and importantly modified [the system of self-regulation in the 
securities industry] to enhance the SEC's oversight of self-regulatory 
organizations.'' \57\ As the Senate Report accompanying the 1975 
amendments explained, ``[t]he SEC is charged with supervising the 
exercise of this self-regulatory power in order to assure that it is 
used effectively to fulfill the responsibilities assigned to the self-
regulatory agencies, and that it is not used in a manner inimical to 
the public interest or unfair to private interests.'' \58\
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    \55\ See, e.g., In re Series 7 Broker Qualification Exam Scoring 
Litig., 548 F.3d 110, 112, 114 (D.C. Cir. 2008) (explaining that 
``[t]he Exchange Act reveals a deliberate and careful design for 
regulation of the securities industry'' that ``depends on the SEC's 
delegation of certain governmental functions to private SROs'' and 
describing how this ``delegation involves close oversight'' by the 
Commission). See also S. Rep No. 94-75, at 24 (``self-regulatory 
organizations exercise government power'').
    \56\ Securities Acts Amendments of 1975, P.L. 94-29.
    \57\ NASD v. SEC, 431 F.3d 803, 807 (D.C. Cir. 2005).
    \58\ S. Rep No. 94-75, at 23. See also id. at 22 (explaining 
that the 1975 amendments were intended to ``clarify and strengthen 
the Commission's oversight role with respect to the self-regulatory 
organizations''); id. at 23 (``The self-regulatory organizations 
exercise authority subject to SEC oversight. They have no authority 
to regulate independently of the SEC's control.''); id. (explaining 
that an objective of the 1975 amendments was ``assuring that the 
self-regulatory organizations follow effective and fair procedures, 
that their activities are not anticompetitive and that the 
Commission's oversight powers are ample and its responsibility to 
correct self-regulatory lapses is unmistakable''). See generally 
Onnig H. Dombalagian, Demythologizing the Stock Exchange: 
Reconciling Self-Regulation and the National Market System, 39 U. 
Rich. L. Rev. 1069, 1080 (2005) (``One of the principal changes [of 
the 1975 amendments] to the framework for exchange self-regulation 
was to impose greater limitations on the exercise of rule making and 
disciplinary authority by exchanges.'').
---------------------------------------------------------------------------

    Yet were we to allow AMSE to exercise the powers and 
responsibilities of an SRO without actually qualifying as such under 
the Act--i.e., without registering as a national securities exchange--
we would be deprived of many of the means that Congress thought were 
critical for our effective oversight of the exercise of self-regulatory 
powers. By its express terms, the Act affords us such oversight 
authority only over an entity that qualifies as an SRO, which AMSE 
would not have done. Accordingly, if we allowed an exempt exchange to 
exercise the broad powers and responsibilities of an SRO, we would lack 
the authority over that exempt entity that we would normally have 
possessed over SROs to, among other things, ``approve or disapprove the 
proposed rule change[s],'' \59\ ``abrogate, add to, [or] delete from'' 
an exchange rule,\60\ review a final disciplinary sanction imposed by 
the exchange or any denial of access,\61\ ``suspend for a period not 
exceeding twelve months . . . or to censure or impose limitations upon 
the activities, functions, and operations'' of the exchange for 
specified misconduct,\62\ or ``remove from office or censure'' any 
officer or director of the exchange for specified misconduct.\63\ We do 
not believe that such a result would be consistent with the 
Congressional desire, as revealed through the statutory language and 
the legislative history, that the Commission closely oversee the 
exercise of self-regulatory authority.\64\
---------------------------------------------------------------------------

    \59\ 15 U.S.C. 78s(b).
    \60\ 15 U.S.C. 78s(c).
    \61\ 15 U.S.C. 78s(d)-(e).
    \62\ 15 U.S.C. 78s(h)(1). See generally S. Rep No. 94-75, at 34 
(explaining that the oversight authorities under Section 19(h)(1) of 
the Act are ``in addition to suspension and deregistration and are 
intended to provide more usable sanctions than the SEC's traditional 
`big stick''').
    \63\ 15 U.S.C. 78s(h)(4).
    \64\ We note that Congress also afforded the Commission 
authority to enlist the assistance of the federal courts in carrying 
out its oversight role. See S. Rep No. 94-75, at 35 (``Sections 
21(e) and 21(f) [of the Exchange Act] would empower the SEC to apply 
to a federal court for an order to (1) enjoin the violation of the 
rules of a self-regulatory organization, (2) command a member of a 
self-regulatory organization to comply with the rules of such 
organization, or (3) command a self-regulatory organization to 
enforce compliance by its members with the Exchange Act, the rules 
thereunder, and the organization's own rules.'').
---------------------------------------------------------------------------

    This conclusion is consistent with our prior reading of the Act. As 
the Commission has previously stated, ``any system exercising self-
regulatory powers, such as regulating its members' or subscribers' 
conduct when engaged in activities outside of that trading system, must 
register as an exchange or be operated by a national securities 
association [which is also an SRO under the statutory definition]. This 
is because self-regulatory activities in the securities markets must be 
subject to Commission oversight under Section 19 of the Exchange Act.'' 
\65\ As we have explained, under our view of the Act, ``any system that 
uses its market power to regulate its participants should be regulated 
as an SRO.'' \66\
---------------------------------------------------------------------------

    \65\ See Securities Exchange Act Release No. 40760 (December 8, 
1998), 63 FR 70844, 70847 (December 22, 1998) (``Regulation ATS 
Adopting Release'').
    \66\ See Regulation ATS Adopting Release, 63 FR at 70859.

---------------------------------------------------------------------------

[[Page 34769]]

    Accordingly, as we read the Act, an exempt exchange is relieved of 
the statutory obligations of a registered SRO but also forfeits the 
ability to exercise the statutory authority of an SRO. To the extent 
that AMSE desires to perform the extensive range of self-regulatory 
responsibilities described in its exemption application, it must 
qualify and register as a national securities exchange (or a national 
securities association).
    In any event, even if we possessed the authority to grant AMSE an 
exemption notwithstanding its intention to exercise the powers and 
responsibilities reserved for SROs, we do not believe that doing so 
would be consistent either with investor protection or the public 
interest. In our view, when an exchange wants to exercise the broad 
powers and responsibilities that AMSE is seeking here, an exemption 
from registration is not appropriate because the Commission would lack 
sufficient oversight mechanisms to ensure that the self-regulatory 
authority is not exercised in a manner inimical to the public interest 
or unfair to private interests. The Commission's oversight 
responsibilities towards SROs has been a cornerstone of self-regulation 
from its inception.\67\ Indeed, due to the potential harm to capital 
formation, investors, and the public interest that could result from 
the misuse of the securities markets, as noted above, Congress 
intentionally created a highly regulated environment in which SROs must 
be subject to close oversight by the Commission. Put simply, an entity 
seeking to establish and enforce a comprehensive regulatory structure 
with respect to the securities business of its broker-dealer members--
including the full range of business conduct, financial condition, and 
regulatory compliance matters--could have a substantial impact on the 
way those members engage in the securities business and comply with the 
federal securities laws.\68\ In our view, any such entity should be 
subject to full Commission oversight to assure its performance of such 
functions is consistent with the protection of investors and the public 
interest. For these additional reasons, in the exercise of our 
discretion under Section 5 of the Act, we would deny the exemption 
application.
---------------------------------------------------------------------------

    \67\ See William O. Douglas, Democracy and Finance 82 (1940).
    \68\ See, e.g., Securities Industry Study, Report of the 
Subcommittee on Securities, Committee on Banking, Housing, and Urban 
Affairs, U.S. Senate, 93rd Cong., at 14 (1973) (``The broad powers 
delegated to the exchanges and the NASD under the Exchange Act 
include the power to affect the interests of individuals and firms, 
both members and non-members.'').
---------------------------------------------------------------------------

    Our conclusion today is not inconsistent with prior Commission 
practice. At the outset, we think it is important to observe that the 
Commission has rarely exercised its exemptive authority under Section 
5--indeed, it has granted a limited volume exemption, as sought by AMSE 
here, on only two prior occasions in the past 79 years.\69\ And while 
the Commission imposed certain conditions upon exemptions from exchange 
registration when it granted them, the exemptions and conditions 
thereto neither allowed nor required the exercise of the extensive SRO 
authority that AMSE is seeking.\70\ Moreover, although the Commission 
acknowledged in the Regulation ATS Adopting Release that an exemption 
under Section 5 could be available for an exchange that has self-
regulatory attributes,\71\ the Commission has never granted an 
exemption to an exchange seeking to carry out the broad range of self-
regulatory functions performed by registered SROs, as proposed by 
AMSE.\72\ Rather, the Commission has granted an exemption only once to 
an exchange with ``self-regulatory attributes'' \73\ and, in that case, 
the exchange sought only to impose financial and operational standards 
as a condition for eligibility

[[Page 34770]]

for trading.\74\ The limited self-regulatory attributes in that case 
stand in stark contrast to the full scope of self-regulatory powers 
sought by AMSE here.
---------------------------------------------------------------------------

    \69\ In 1991, the Commission issued a limited volume exemption 
from exchange registration for Wunsch Auction Systems, Inc. 
(``WASI'') (now known as ``Arizona Stock Exchange''). See Securities 
Exchange Act Release No. 28899 (February 20, 1991), 56 FR 
8377(February 28, 1991) (``WASI Order''). WASI proposed to operate 
an auction trading system for after-hours trading three times a 
week, at a half an hour each. In 1999, the Commission issued a 
limited volume exemption from exchange registration for Tradepoint 
Financial Networks plc (``Tradepoint'') (now known as ``Swiss 
Exchange''). See Securities Exchange Act Release No. 41199 (March 
22, 1999), 64 FR 14953 (March 29, 1999). Tradepoint operated as a 
U.K.-registered trading facility and offered trading only in 
securities listed on the London Stock Exchange. Aside from these two 
exemptions, the Commission has only issued limited volume exemptions 
under Section 5 of the Act in the period from 1935 to1936; the 
exemptions issued then were for a small group of municipally-based 
securities exchanges that were already in existence at the time of 
the initial adoption of the Act in 1934. See Securities Exchange Act 
Release No. 416, November 14, 1935 (exempting the Honolulu Stock 
Exchange, the Milwaukee Grain and Stock Exchange, and Minneapolis-
St. Paul Stock Exchange); Securities Exchange Act Release No. 432, 
December 2, 1935 (exempting the Richmond Stock Exchange and Wheeling 
Stock Exchange); Securities Exchange Act Release No. 472, February 
3, 1936 (exempting the Colorado Springs Stock Exchange); Securities 
Exchange Act Release No. 589, April 10, 1936 (exempting the Seattle 
Stock Exchange).
    \70\ See Securities Exchange Act Release No. 416, November 14, 
1935 (requiring the Honolulu Stock Exchange, the Milwaukee Grain and 
Stock Exchange, and the Minneapolis-St. Paul Stock Exchange to keep 
up-to-date and available to the public the data contained in the 
application for exemption, make and keep required records, provide 
reports as necessary, and provide in their rules that a willful 
violation of any of the exemption conditions shall be inconsistent 
with just and equitable principles of trade, and providing that the 
same restrictions with regard to the extension of credit for 
registered securities are imposed on securities listed on these 
exchanges, that members of the exchanges are subject to Commission-
imposed financial responsibility rules and regulations, that the 
manipulation provisions of the Securities Exchange Act apply to the 
exchanges and their members, and that companies whose securities are 
listed on the exchanges are required to file with the exchange and 
Commission certain annual financial statements); Securities Exchange 
Act Release No. 432, December 2, 1935 (granting exemptions for the 
Richmond Stock Exchange and the Wheeling Stock Exchange upon the 
same conditions imposed on the exchanges in Securities Exchange Act 
Release No. 416); Securities Exchange Act Release No. 472, February 
3, 1936 (granting an exemption to the Colorado Springs Stock 
Exchange upon the same conditions imposed on the exchanges in 
Securities Exchange Act Release Nos. 416 and 432); Securities 
Exchange Act Release No. 589, April 10, 1936 (granting an exemption 
to the Seattle Stock Exchange upon the same conditions imposed on 
the exchanges in Securities Exchange Act Release Nos. 416, 432, and 
472); WASI Order (granting an exemption based on the condition that 
WASI (1) permit the Commission to conduct examinations; (2) comply 
with its agreement to report volume and price data to the Commission 
and to SROs, and provide other information (such as the identities 
of participants who have entered orders) to the Commission and the 
SROs upon request; (3) comply with its undertaking to implement 
procedures to conduct surveillance of its employees and adopt 
requirements to ensure the non-disclosure of confidential 
information; (4) suspend trading in any security subject to a 
regulatory halt for pending news called by the primary market for 
the security or during suspensions of trading ordered by the 
Commission pursuant to Section 12(k) of the Act, and consult with 
the Commission subsequent to an exchange or NASDAQ session in which 
an operational trading halt has occurred or a circuit breaker has 
gone into effect; (5) suspend any auction at the request of the 
Commission, assuming adequate notice is given, and (6) continue to 
comply with the capacity, security, and contingency planning 
guidelines contained in the Commission's Automation Review Policy).
    \71\ In the Regulation ATS Adopting Release, the Commission 
stated that it ``believes that the low volume exemption continues to 
be appropriate for some exchanges, such as an exchange that, for 
example, disciplines its members (other than by excluding them or 
limiting them from trading based on objective criteria, such as 
creditworthiness), or has other self-regulatory attributes that 
exclude it from the definition of alternative trading system.'' See 
Regulation ATS Adopting Release, 63 FR at 70848, note 33.
    \72\ See supra notes 31-46 and accompanying text.
    \73\ The Commission notes the distinction between entities that 
display ``self-regulatory attributes''--which implies having only a 
few features of an SRO, such as disciplining members for violations 
of its own rules--and entities seeking to exercise all or nearly all 
of the powers of SROs under the Act. As discussed above, AMSE's 
application shows that it is not proposing merely to have a few 
self-regulatory attributes, but rather seeks to exercise the full 
range of powers available to SROs under the Act. See supra notes 31-
46 and accompanying text. Under these conditions, the Commission 
continues to believe, as previously stated, that the SRO functions 
can be exercised only by an SRO, not an exempt exchange.
    \74\ See Securities Exchange Act Release No. 41199 (March 22, 
1999), 64 FR 14953 (March 29, 1999) (order granting a limited volume 
exemption under Section 5 of the Act to Tradepoint).
---------------------------------------------------------------------------

C. AMSE Is Mistaken in Its Interpretation of the Relevant Procedural 
Requirements Relating to Its Exemption Application

    AMSE has labored under certain misunderstandings of the relevant 
procedures throughout its interactions with the staff on this matter. 
To the extent that there is any ambiguity in these procedures, we take 
this opportunity to provide clarification. AMSE erroneously reads Rule 
202.3(b)(2) of the Commission's procedural rules as establishing an 
enforceable right on the part of AMSE to require the Commission's staff 
to confer with AMSE. Rule 202.3(b)(2) provides, in relevant part:

    Applications for registration as national securities exchanges, 
or exemption from registration as exchanges by reason of such 
exchanges' limited volume of transactions filed with the Commission 
are routed to the Division of Market Regulation, which examines 
these applications to determine whether all necessary information 
has been supplied and whether all required financial statements and 
other documents have been furnished in proper form. . . . The staff 
confers with applicants and makes suggestions in appropriate cases 
for amendments and supplemental information. Where it appears 
appropriate in the public interest and where a basis therefore 
exists, denial proceedings may be instituted.

    AMSE appears to construe the second sentence in the quoted language 
above to establish a binding obligation on the Commission staff to work 
with AMSE to achieve Commission approval of its exemption application.
    But the rule contains no such requirement; indeed, it does not 
prescribe any procedure that the Commission staff must follow when 
working with applicants on applications for registration or exemption 
from registration. To the contrary, when the rule refers to Commission 
staff conferring with applicants, it is expressly descriptive, rather 
than prescriptive, as to the staff's actions. And, critically, it 
provides only that the staff will ``confer[] with applicants and make[] 
suggestions in appropriate cases . . . .'' \75\ The rule thus 
explicitly leaves it to the staff to identify the situations in which 
it would be appropriate to confer with applicants.\76\ It certainly 
does not (as AMSE appears to believe) entitle applicants to obtain 
guidance from the staff so that the applicants can repeatedly amend 
their applications before the Commission issues its final order.\77\ In 
any event, as noted above, Commission staff in fact consulted with AMSE 
and provided views and input to AMSE about its application.\78\
---------------------------------------------------------------------------

    \75\ 17 CFR 202.3(b)(2) (emphasis added).
    \76\ See, e.g., Dichter-Mad Family Partners, LLP v. United 
States, 707 F.Supp.2d 1016, 1042-43 (C.D. Cal. 2010), aff'd, 709 
F.3d 749 (9th Cir. 2013) (dismissing plaintiffs' claims upon 
finding, among other things, that even though statute mandated that 
agency staff ``shall'' engage in certain conduct, such language was 
``modified by the discretionary `as appropriate''' and thus statute 
conferred discretion upon agency officials). Cf. Nat'l Env't. Dev. 
Ass'n's Clean Air Project v. EPA, 686 F.3d 803, 813 (D.C. Cir. 2012) 
(concluding that the statutory phrase ``as appropriate'' conferred 
``significant discretion'' upon the agency); Bear Valley Mut. Water 
Co. v. Salazar, No. 11-01263, 2012 WL 5353353 (C.D. Cal. Oct. 17, 
2012) (same); City of Toledo v. Beazer Materials & Servs., Inc., No. 
90-CV-7344, 1995 WL 770396 (N.D. Ohio June 14, 1995) (the same 
phrase in a federal regulation indicated that the described activity 
was ``not mandatory'').
    \77\ Nor does the rule contain any suggestion that, absent such 
a conference with the staff, the administrative record would be 
fatally deficient and any subsequent action by the Commission on the 
application would be improper.
    \78\ See supra note 6 (discussing communications between 
Commission staff and AMSE regarding AMSE's application occurring 
between December 2013 and March 2014).
---------------------------------------------------------------------------

IV. Conclusion

    The Commission has reviewed AMSE's application for a limited volume 
exemption from registration as a national securities exchange and has 
determined, for the reasons described above, to deny AMSE's 
application.\79\
---------------------------------------------------------------------------

    \79\ We note that, at times during the pendency of its exemption 
application, AMSE made unsubstantiated claims of bad faith on the 
staff's part. We see no indication of any bad faith, however. And in 
any event, we have reached our determination to deny AMSE's 
exemption application based on our own independent review of the 
application. Accordingly, we are confident that AMSE has had a full 
and fair opportunity to present its application to us for 
consideration and that AMSE has suffered no prejudice.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 5 of the Act, that 
AMSE's application for an exemption from registration as a national 
securities exchange be, and hereby is, denied.

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2015-14807 Filed 6-16-15; 8:45 am]
 BILLING CODE 8011-01-P



                                                                                 Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices                                                          34765

                                                    IV. Conclusion                                          any transaction in a security, or to                      contrary to the Act and inconsistent
                                                      It is therefore ordered, pursuant to                  report such transaction, ‘‘unless such                    with the public interest and the
                                                    Section 19(b)(2) of the Act,21 that the                 exchange (1) is registered as a national                  protection of investors.
                                                    proposed rule change (File No. SR–                      securities exchange . . . or (2) is
                                                                                                                                                                      II. Background
                                                    MIAX–2015–19) be, and hereby is,                        exempted from such registration upon
                                                    approved.                                               application by the exchange because, in                   A. Procedural History
                                                                                                            the opinion of the Commission, by
                                                      For the Commission, by the Division of                                                                             On July 7, 2014, AMSE filed with the
                                                                                                            reason of the limited volume of
                                                    Trading and Markets, pursuant to delegated                                                                        Commission an application seeking a
                                                    authority.22
                                                                                                            transactions effected on such exchange,
                                                                                                                                                                      limited volume exemption, under
                                                                                                            it is not practicable and not necessary or
                                                    Robert W. Errett,                                                                                                 Section 5 of the Act, from the
                                                                                                            appropriate in the public interest or for
                                                    Deputy Secretary.                                                                                                 requirement to register as a national
                                                                                                            the protection of investors to require
                                                    [FR Doc. 2015–14826 Filed 6–16–15; 8:45 am]                                                                       securities exchange under Section 6 of
                                                                                                            such registration.’’ 2
                                                    BILLING CODE 8011–01–P                                     AMSE has chosen the latter option,                     the Act.6 Notice of AMSE’s exemption
                                                                                                            seeking from the Commission an                            application was published for comment
                                                                                                            exemption from registration as a                          in the Federal Register on July 29,
                                                    SECURITIES AND EXCHANGE                                 national securities exchange.3 After a                    2014.7
                                                    COMMISSION                                              careful review of the exemption                              On October 23, 2014, the Commission
                                                    [Release No. 34–75157; File No. 10–214]                 application, however, we have                             issued an order instituting proceedings
                                                                                                            determined to deny it.                                    to determine whether to grant or deny
                                                    Automated Matching Systems                                 Although our review leads us to                        AMSE’s exemption application.8 In that
                                                    Exchange, LLC; Order Denying an                         identify a number of potential issues                     order, the Commission explained that it
                                                    Application for a Limited Volume                        that might warrant this result (including                 ‘‘is concerned that AMSE’s exemption
                                                    Exemption From Registration as a                        whether AMSE would even qualify as                        application does not meet a key
                                                    National Securities Exchange Under                      an exchange),4 we find that the                           threshold requirement for being granted
                                                    Section 5 of the Securities Exchange                    application is fatally flawed because                     an exemption from exchange
                                                    Act of 1934                                             AMSE is proposing to possess the broad                    registration—namely, that the applicant
                                                                                                            regulatory powers and responsibilities                    actually be an ‘exchange’ as defined
                                                    June 11, 2015.                                                                                                    under Section 3(a)(1) of the Exchange
                                                                                                            that are reserved for self-regulatory
                                                    I. Introduction                                         organizations (‘‘SROs’’), while                           Act and Rule 3b–16 thereunder.’’ 9 The
                                                                                                            simultaneously seeking exemption from                     Commission specifically identified the
                                                       Automated Matching Systems
                                                                                                            registration as an exchange.5 Under the                   fact that ‘‘it does not appear that any
                                                    Exchange, LLC (‘‘AMSE’’) believes that
                                                                                                            Act, for an exchange to possess the                       AMSE system would operate as an
                                                    its proposed business model would
                                                                                                            powers and responsibilities of an SRO,                    exchange by bringing together
                                                    qualify it as an exchange. As defined in
                                                                                                            it must register as a national securities                 purchasers and sellers of securities.’’ 10
                                                    Section 3(a)(1) of the Securities
                                                    Exchange Act of 1934 (‘‘Exchange Act’’                  exchange. An exchange that is exempt
                                                                                                                                                                         6 In the interest of completeness, we note the
                                                    or ‘‘Act’’), an ‘‘exchange’’ is ‘‘any                   from such registration does not meet the
                                                                                                                                                                      events that preceded AMSE’s filing of its July 7th
                                                    organization, association, or group of                  definition of an SRO under the Act.                       application. From December 2013 through March
                                                    persons, whether incorporated or                        Moreover, the Commission has never                        2014, staff had numerous communications with
                                                    unincorporated, which constitutes,                      allowed an exempt exchange to possess                     AMSE about its (then-draft) application, including
                                                    maintains, or provides a market place or                the broad range of regulatory powers                      multiple email exchanges and at least one phone
                                                                                                                                                                      call; during these exchanges, the staff explained
                                                    facilities for bringing together                        and responsibilities of an SRO. We                        that it was concerned that AMSE’s proposed
                                                    purchasers and sellers of securities or                 believe that doing so here would be                       business model was not an ‘‘exchange.’’ In March
                                                    for otherwise performing with respect to                                                                          2014, AMSE formally submitted a Form 1
                                                    securities the functions commonly                         2 15 U.S.C. 78e.                                        application. On April 24, 2014, the staff returned
                                                                                                              3 We  note that, in a December 2014 public notice,      AMSE’s application because, based on its review,
                                                    performed by a stock exchange as that                                                                             the staff believed that AMSE had erred in
                                                                                                            the Commission expressly stated that it understood
                                                    term is generally understood, and                       AMSE to be seeking an exemption under Section             submitting an application for an exchange and
                                                    includes the market place and the                       5—not registration—and that AMSE did not                  instead should have submitted an application for a
                                                    market facilities maintained by such                    respond otherwise. See Securities Exchange Act            national securities association, a classification that
                                                                                                            Release No. 73911 (December 22, 2014), 79 FR              the staff believed better fit with AMSE’s proposed
                                                    exchange.’’ 1 Under Section 5 of the Act,                                                                         business model. On May 6, 2014, the staff had a
                                                                                                            78507, note 1 (December 30, 2014) (‘‘Amendment
                                                    it is unlawful for an exchange to effect                Notice’’) (‘‘The Commission notes that AMSE’s             phone call with AMSE in which the staff again
                                                                                                            application only seeks a limited volume exemption         explained its view that AMSE’s proposed business
                                                      21 15  U.S.C. 78s(b)(2).                              under Section 5 of the Exchange Act from                  model was not an exchange. On June 16, 2014,
                                                      22 17  CFR 200.30–3(a)(12).                           registration as a national securities exchange under      AMSE brought suit against the Commission in the
                                                      1 15 U.S.C. 78c(a)(1). Rule 3b–16 under the Act       Section 6 of the Exchange Act. AMSE’s application         U.S. District Court for the District of South Dakota
                                                                                                            does not seek to register as a national securities        seeking certain injunctive and declaratory relief in
                                                    further provides that an organization, association,
                                                                                                            exchange.’’). We therefore deem any claim to the          connection with its application. See AMSE v. SEC,
                                                    or group of persons shall be considered to
                                                                                                            contrary waived.                                          Civ. 14–4095 (D.S.D.). On June 24, 2014, the
                                                    constitute, maintain, or provide ‘a market place or
                                                                                                              4 See infra Section III.A.                              Commission staff and AMSE reached an agreement
                                                    facilities for bringing together purchasers and
                                                                                                                                                                      pursuant to which AMSE would submit a new
                                                    sellers of securities or for otherwise performing         5 SROs are privately-funded entities, entrusted
                                                                                                                                                                      Form 1 application that would include certain
                                                    with respect to securities the functions commonly       with quasi-governmental authority, which generally
                                                                                                                                                                      additional information needed to complete the
asabaliauskas on DSK5VPTVN1PROD with NOTICES




                                                    performed by a stock exchange,’ as those terms are      adopt rules to govern their members and enforce
                                                                                                                                                                      application and the staff would thereafter proceed
                                                    used in Section 3(a)(1) of the Act, (15 U.S.C.          these rules as well as the federal securities laws. See
                                                                                                                                                                      to process the revised application for Commission
                                                    78c(a)(1)), if such organization, association, or       generally Free Enterprise Fund v. Public Co.
                                                                                                                                                                      consideration.
                                                    group of persons: (1) Brings together the orders for    Accounting Oversight Bd., 561 U.S. 477, 484 (2010)           7 See Securities Exchange Act Release No. 72661
                                                    securities of multiple buyers and sellers; and (2)      (explaining that ‘‘private self-regulatory
                                                    Uses established, non-discretionary methods             organizations in the securities industry—such as          (July 23, 2014), 79 FR 44070.
                                                                                                                                                                         8 See Securities Exchange Act Release No. 73419,
                                                    (whether by providing a trading facility or by          the New York Stock Exchange—. . . investigate and
                                                    setting rules) under which such orders interact with    discipline their own members subject to                   79 FR 64421 (October 29, 2014) (‘‘Order Instituting
                                                    each other, and the buyers and sellers entering such    Commission oversight’’). The quasi-governmental           Proceedings’’).
                                                                                                                                                                         9 Id. at 64422.
                                                    orders agree to the terms of a trade. 17 CFR 240.3b–    authority afforded to SROs includes prosecutorial,
                                                    16(a).                                                  adjudicatory, and rulemaking authority.                      10 Id.




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                                                    34766                        Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices

                                                       On November 10, 2014, AMSE                           Notwithstanding this change in                          specific application form for broker-
                                                    submitted Amendment No. 1 to its                        nomenclature, AMSE did not otherwise                    dealer firms to become its members.22
                                                    exemption application. Notice of                        modify the accompanying description of                     Although AMSE’s application seeks
                                                    Amendment No. 1 to AMSE’s                               the powers and responsibilities it                      approval as an exempt exchange, its
                                                    exemption application was published                     contemplated possessing. In some                        proposal reveals AMSE’s aim to exist
                                                    for comment in the Federal Register on                  instances, AMSE continued to refer to                   simultaneously as an SRO. Throughout
                                                    December 30, 2014.11 In the notice, the                 itself in terms that pertain only to SROs               its exemption application, AMSE refers
                                                    Commission advised interested parties                   under the Act or implied that it falls                  to itself in terms that pertain only to
                                                    that it was considering potential                       generally within the category of an SRO                 SROs under the Act. For example,
                                                    ‘‘additional grounds for denial.’’ As the               and would exercise authority as such.16                 AMSE’s exemption application refers to
                                                    Commission explained, ‘‘AMSE’s                             The Commission received thereafter                   AMSE’s rules being filed with the
                                                    exemption application states that AMSE                  one comment letter from 1st Trade                       Commission under Section 19(b) of the
                                                    would operate as a self-regulatory                      opposing AMSE’s exemption                               Act,23 which governs the filing of rules
                                                    organization that would exercise self-                  application,17 to which AMSE                            by SROs with the Commission.24
                                                    regulatory authority over its                           subsequently submitted a response.18                    AMSE’s rules also state that its
                                                    members,’’ 12 but under the Act an                      B. AMSE’s Proposed Regulatory                           disciplinary decisions and access
                                                    exempt exchange is not an SRO; thus,                    Functions                                               decisions would be subject to agency
                                                    ‘‘any attempts by AMSE to hold itself                                                                           review under the Act,25 where such
                                                    out as a self-regulatory organization                     In its exemption application, AMSE                    review is available only for the activities
                                                    while simultaneously seeking an                         proposes that it would operate a                        of SROs under Section 19 of the Act.26
                                                    exemption under Section 5 would be                      marketplace for securities processing.19                AMSE’s exemption application also
                                                    contrary to the Exchange Act.’’ 13                      According to the application, persons                   repeatedly implies that it falls generally
                                                       On February 11, 2015, AMSE                           seeking to buy or sell securities could                 within the category of an SRO and that
                                                    submitted Amendment Nos. 2A and 2B,                     only enter their orders through an                      it would exercise authority as such.27
                                                    along with a comment letter.14 Among                    AMSE member.20 And pursuant to                          AMSE also has stated in a comment
                                                    other things, Amendments 2A and 2B                      AMSE’s proposed rules, any person may                   letter that AMSE ‘‘will become a
                                                    changed most of the application’s                       become a member of AMSE, provided                       dedicated SRO for securities matching
                                                    references to ‘‘self-regulatory                         that the person submits an application
                                                                                                                                                                    systems. . . .’’ 28 Further, AMSE asserts
                                                    organization’’ to ‘‘limited volume                      and complies with any conditions
                                                                                                                                                                    that its members would hold a status
                                                    exempt regulatory organization.’’ 15                    imposed by AMSE.21 AMSE proposes a
                                                                                                                                                                    under the Act that is only conferred on
                                                                                                              16 See
                                                                                                                                                                    members of SROs.29
                                                                                                                      infra notes 23–30 and accompanying text.
                                                       11 See Amendment Notice, supra note 3. In
                                                                                                              17 See  Letter from Lori C. Sarian, Managing
                                                                                                                                                                       In addition, throughout its exemption
                                                    Amendment No. 1, AMSE added language to                                                                         application, AMSE proposes to perform
                                                    Exhibit E that described proposed consolidated          Partner, 1st Trade, to Kevin M. O’Neill, Deputy
                                                    quotation systems and a proposed optional order         Secretary, Commission, dated April 14, 2015 (‘‘1st      regulatory oversight of its members that
                                                                                                            Trade Letter’’). This comment letter expresses          is consistent with the powers and
                                                    router that could send orders between the distinct
                                                                                                            concerns about an overall lack of clarity and detail
                                                    member-operated order books.
                                                                                                            in AMSE’s application. This comment letter also         responsibilities of an SRO.30
                                                       12 79 FR at 78508.
                                                                                                            raises concerns with respect to specific aspects of
                                                       13 Id. On January 22, 2015, the Commission
                                                                                                            AMSE’s application, citing, among other things, an        22 See  Amendment 2B, Exhibit F and Rule 2.6(b).
                                                    provided notice of an extension of the time for the     ambiguity and vagueness surrounding membership            23 See  AMSE Rule 1.5(b).
                                                    conclusion of the proceedings to determine whether      qualifications and obligations, an unclear                 24 See 15 U.S.C. 78s(b).
                                                    to grant or deny AMSE’s exemption application.          application process for certain potential members,         25 See AMSE Rules 8.14 and 9.7.
                                                    See Securities Exchange Act Release No. 74116           proposed best execution obligations that may be            26 See 15 U.S.C. 78s(b), (d).
                                                    (January 22, 2015), 80 FR 4321 (January 27, 2015)       inconsistent with industry standards, an inadequate
                                                                                                                                                                       27 See, e.g., AMSE Rule 1.5(j) (‘‘a self-regulatory
                                                    (‘‘Extension Notice’’). The Extension Notice            description of operations and trade processing,
                                                    extended the time for the conclusion of the             inadequate issuer requirements, and the duplication     organization, other than the Exchange . . .’’) and
                                                    proceedings by 90 days, to April 24, 2015. Id.          of requirements for potential members who are           AMSE Rule 12.5 (‘‘The Exchange may enter into
                                                    AMSE subsequently consented to an additional 60-        already broker-dealers. Because the Commission’s        one or more agreements with another self-regulatory
                                                    day extension of the time for the conclusion of the     focus in this order is on threshold matters with        organization to provide regulatory services to the
                                                    proceedings to June 23, 2015. See Letter from           respect to AMSE’s application, many of 1st Trade’s      Exchange to assist the Exchange in discharging its
                                                    Michael Stegawski, Chief Regulatory Officer,            specific concerns are not addressed herein.             obligations under Section 6 and Section 19(g) of the
                                                    AMSE, to SEC staff, dated February 27, 2015               18 See Letter from Michael Stegawski, Chief           Act. . . .Notwithstanding the fact that the Exchange
                                                    (‘‘AMSE February 27 Letter’’).                          Regulatory Officer, AMSE, to Kevin M. O’Neill,          may enter into one or more regulatory services
                                                       14 See Letter from Michael Stegawski, Chief          Deputy Secretary, Commission, dated April 22,           agreements, the Exchange shall retain ultimate legal
                                                    Regulatory Officer, AMSE, to SEC staff, dated           2015 (‘‘AMSE Response Letter’’). The AMSE               responsibility for, and control of, its self-regulatory
                                                    February 8, 2015 (‘‘AMSE February 8 Letter’’).          Response Letter provides responses to each of 1st       responsibilities . . .’’).
                                                                                                                                                                       28 See AMSE Response Letter at 10; see also id.
                                                    Attached to the AMSE February 8 Letter were five        Trade’s specific comments. See supra note 17.
                                                    exhibits: Exhibit A—Amendment to Form 1                   19 See Amendment 2B, Exhibit E, Section A.            at 9 (AMSE states that it ‘‘will exercise self-
                                                    Application 2A, February 16, 2015 (‘‘Amendment            20 See Amendment 2B, Exhibit E, Section E. The        regulatory powers.’’).
                                                    2A’’); Exhibit B—Amendment to Form 1                    definition of ‘‘participant’’ was added to the AMSE
                                                                                                                                                                       29 See AMSE Rule 1.5(l) (‘‘An Exchange Member

                                                    Application 2B, February 16, 2015 (‘‘Amendment          rules in Amendment 2B. Participant means ‘‘a            shall have the status as provided in Section 3(a)(3)
                                                    2B’’); Exhibit C—January 16, 2015                       Person who has entered into a contractual               of the Act or, where applicable, a Person operating
                                                    Correspondence—Paul G. Alvarez; Exhibit D—              agreement with an Exchange Member for the               pursuant to an exemption from registration under
                                                    January 5, 2015 Correspondence—Michael                  purpose of effecting transactions in securities or      the Act’’). Section 3(a)(3) of the Act defines
                                                    Stegawski (‘‘AMSE January 5 Letter’’); Exhibit E—       submitting, disseminating, or displaying orders.’’      ‘‘member’’ exclusively within the context of either
                                                    Discussion Draft—Form 1 Application, January 5,         See AMSE Rule 1.5(w). In addition, Amendment 2B         a national securities exchange or a national
                                                    2015.                                                                                                           securities association, which are self-regulatory
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                                                                                                            replaced the term ‘‘customer’’ with ‘‘participant’’
                                                       15 See AMSE February 8 Letter. We note that          throughout AMSE’s rules and other Form 1                organizations. See 15 U.S.C. 78c(a)(3), (26).
                                                    Amendment Nos. 2A and 2B appear to present              Exhibits. See, e.g., AMSE Rules Chapters III, IV, VI,      30 SROs’ wide-ranging responsibilities generally

                                                    different business models. We find it unnecessary       VII, XI, and Amendment 2B, Exhibit E.                   involve rulemaking, examining member firms for
                                                    to analyze these proposed alternatives separately,        21 See AMSE Rule 2.3. Amendment 2B removed            compliance with those rules and the securities laws
                                                    however, because both involve the same fatal flaw       the requirement that AMSE members be registered         (including the Commission’s rules thereunder),
                                                    concerning AMSE’s proposal to exercise the              broker-dealers. See Amendment No. 1, AMSE Rule          taking disciplinary action against members that fail
                                                    panoply of self-regulatory powers and                   2.3. In addition, Amendment 2B removed the              to comply, and market monitoring, as well as
                                                    responsibilities. Further, we note that neither the     requirement that AMSE members comply with               professional activities such as testing, training, and
                                                    Act, nor Form 1, nor the rules relating thereto         Regulation ATS. See Amendment No. 1, Rules 15.1         licensing. See, e.g., 15 U.S.C. 78f(b)(1) (requiring a
                                                    provide for amendments in the alternative.              -15.5.                                                  national securities exchange to be so organized and



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                                                                                 Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices                                                       34767

                                                    Specifically, AMSE proposes to regulate                 acting in an equivalent, self-designated                  These conflicting provisions make it
                                                    its members with respect to: training,                  capacity it calls a ‘‘limited volume                   difficult to ascertain the operation of the
                                                    experience, and competence; 31                          exempt regulatory organization.’’ 42 As                trading system. Moreover, the lack of
                                                    financial responsibility and operational                the 1st Trade Letter observed, AMSE                    detail and clarity in AMSE’s exemption
                                                    capacity; 32 the maintenance of books                   appears to be ‘‘attempting to operate                  application prevents the Commission
                                                    and records; 33 business conduct; 34 anti-              with the most lenient regulatory                       from understanding precisely how
                                                    money laundering compliance                             constraints possible and in this attempt               AMSE proposes to bring together the
                                                    programs; 35 extension of margin or                     are circumventing many accepted                        orders of multiple buyers and sellers
                                                    credit; 36 custody of customer funds or                 practices and regulatory                               and otherwise satisfy the definition of
                                                    securities; 37 fraud and manipulation; 38               requirements.’’ 43                                     ‘‘exchange.’’ Under these circumstances,
                                                    and compliance with broker best                            AMSE also proposes to require its                   we would have grave doubts as to
                                                    execution obligations.39 AMSE also                      members and their associated persons to                whether AMSE could in fact qualify as
                                                    proposes to regulate the associated                     agree to be regulated by AMSE and to                   an exchange exempt from registration
                                                    persons of its members and would                        recognize AMSE as being obligated to                   under the Act. We need not reach the
                                                    require each member to establish,                       enforce their compliance with the Act                  merits of this issue, however, because as
                                                    maintain, and enforce written                           and regulations thereunder.44 AMSE                     we describe below AMSE’s exemption
                                                    supervisory procedures to enable the                    also would require its members and                     application suffers from a separate, fatal
                                                    member to supervise the activities of its               associated persons to recognize AMSE                   flaw.
                                                    associated persons and to ensure their                  as being required to discipline them for               B. It Is Contrary to the Act and
                                                    compliance with the securities laws,                    violations of the Act, including through:              Inconsistent With the Public Interest
                                                    rules, regulations and statements of                    expulsion; suspension; limitation of                   and the Protection of Investors for an
                                                    policy promulgated thereunder, as well                  activities, functions, and operation;                  Exempt Exchange To Exercise the
                                                    as with AMSE rules.40 Moreover, at                      fines; censure; suspension or bar from                 Powers and Responsibilities of an SRO
                                                    times AMSE asserts that it is required to               association with an AMSE member; or
                                                    perform such functions under the Act,41                 any other sanction determined in                         Even assuming that AMSE were
                                                    implying that it will be an SRO, or                     AMSE’s discretion for violations of the                deemed to be an exchange, the
                                                                                                            Act.45 Here again, these are powers and                Commission cannot find that AMSE
                                                    have the capacity to enforce compliance by its          responsibilities exercised by an SRO.46                should be granted an exemption from
                                                    members and associated persons with the Exchange                                                               the requirement to register as a national
                                                    Act, the rules and regulations thereunder, and the      III. Discussion                                        securities exchange under Section 6 of
                                                    rules of the exchange); 15 U.S.C. 78o–3(b)(2)
                                                    (requiring the same of registered securities                                                                   the Act because the Commission
                                                                                                            A. AMSE Does Not Appear to Meet the
                                                    associations); 15 U.S.C. 78f(b)(2)–(10) (specifying                                                            believes that AMSE’s proposal is
                                                    requirements for the rules of a national securities
                                                                                                            Definition of an ‘‘Exchange.’’
                                                                                                                                                                   inconsistent with the Act.48 As
                                                    exchange, including with respect to preventing            At the outset, we note that AMSE has
                                                    fraudulent acts and practices, and with the
                                                                                                                                                                   described above, AMSE proposes to
                                                    discipline of members); 15 U.S.C. 78o–3(b)(3)–(15)      urged the Commission to conclude that                  exercise extensive self-regulatory
                                                    (specifying requirements for rules of a registered      AMSE should be granted an exemption                    powers that are reserved under the Act
                                                    securities association, including with respect to       from exchange registration under the                   for an SRO—indeed, the bulk of AMSE’s
                                                    preventing fraudulent acts and practices, and with      Act. Certain provisions of AMSE’s
                                                    the discipline of members); 15 U.S.C. 78o–3(g)(3)(B)                                                           rules are devoted to this proposed
                                                    (providing that a registered securities association     amended application indicate that                      regulatory function, and at times AMSE
                                                    may bar natural persons from association with a         AMSE’s members may operate multiple                    even refers to itself as an SRO. But the
                                                    member if the person does not meet standards of         distinct trading systems, under an                     Act does not afford the powers and
                                                    training, experience, and competence prescribed by
                                                    rules of the association); and 15 U.S.C. 78q(d)
                                                                                                            AMSE umbrella, while other provisions                  responsibilities of an SRO to an
                                                    (providing for allocation of examination authority      indicate that AMSE itself would operate                exchange that is exempt from
                                                    across self-regulatory organizations).                  the proposed trading systems.47                        registration, nor does it require an
                                                       31 See AMSE Rule 2.4(b).
                                                                                                                                                                   exchange that is exempt from
                                                       32 See AMSE Rule 2.4(c)(1).                             42 The term ‘‘limited volume exempt regulatory
                                                       33 See AMSE Rules 2.4(c)(2) and 4.1–4.4.
                                                                                                                                                                   registration to exercise such powers and
                                                                                                            organization’’ is not a recognized term under the
                                                       34 See AMSE Rules 3.1–3.14.                          Act. AMSE created this defined term in its rules.
                                                                                                                                                                   responsibilities.49
                                                       35 See AMSE Rule 5.6.                                See AMSE Rule 1.5(ee) (‘‘‘LVERO’ means an entity         Section 3(a)(26) of the Act defines an
                                                       36 See AMSE Rule 6.1.                                exercising self-regulatory powers pursuant to an       SRO, in pertinent part, as any ‘‘national
                                                       37 See AMSE Rule 10.12.                              exemption from registration under the Act’’). As
                                                       38 See AMSE Rules 11.1–11.4.
                                                                                                            noted above, prior to submitting Amendments 2A         Amendment 2B, Exhibit E, Section D (requiring
                                                       39 See AMSE Rule 11.8.
                                                                                                            and 2B, AMSE had referred to itself as an SRO;         AMSE members to be responsible for having
                                                                                                            AMSE replaced many of these references with            procedures for safeguarding their systems); with
                                                       40 See AMSE Rule 5.1; see also AMSE Rules 5.2–
                                                                                                            ‘‘limited volume exempt regulatory organization’’      Amendment 2B, Exhibit E, Section A (‘‘the
                                                    5.5.                                                    after the Commission explained in December 2014
                                                       41 See, e.g., AMSE February 8 Letter at 5 (stating                                                          Exchange will operate one or more fully automated
                                                                                                            its preliminary view that AMSE would not qualify       electronic order books’’); id. at Section E (‘‘[o]rders
                                                    ‘‘AMSE has expressly elected not to register as a       as an SRO. Critically, AMSE did not accompany          of Participants shall be ranked and maintained in
                                                    broker-dealer and comply with the provisions of         this nomenclature change with any meaningfully         the Exchange’s electronic books for orders’’); and id.
                                                    Regulation ATS and therefore is required to             limitations on the powers and responsibilities that
                                                    exercise self-regulatory powers.’’); and AMSE Rule                                                             at Section F (‘‘[o]rders shall be matched for
                                                                                                            it proposed to exercise.                               execution . . . on the Exchange’s electronic order
                                                    12.5 (‘‘The Exchange may enter into one or more            43 1st Trade Letter at 3.
                                                    agreements with another self-regulatory                                                                        book’’).
                                                                                                               44 See AMSE Rules 2.2 and 2.5(e).                      48 For a history of the formation and regulation of
                                                    organization to provide regulatory services to the         45 See AMSE Rule 2.2. AMSE’s rules quote the
                                                                                                                                                                   stock exchanges, see generally Concept Release
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                                                    Exchange to assist the Exchange in discharging its
                                                    obligations under Section 6 and Section 19(g) of the    language in the Act that gives national securities     Concerning Self-Regulation, Securities Exchange
                                                    Act . . .’’). Section 6 of the Act imposes regulatory   exchanges and national securities associations the     Act Release No. 50700 (November 18, 2004), 69 FR
                                                    obligations on national securities exchanges, which     authority to enforce compliance by their members       71256, at 71257–58 (December 8, 2004); Charles R.
                                                    are self-regulatory organizations; Section 19(g) of     with the Act. See 15 U.S.C. 78f(b)(6) and 78o–         Geisst, Wall Street: A History (1997); Michael E.
                                                    the Act imposes obligations on self-regulatory          3(b)(7).                                               Parrish, Securities Regulation and the New Deal
                                                                                                               46 See infra Section III.B.                         (1970); Joel Seligman, The Transformation of Wall
                                                    organizations. See 15 U.S.C. 78f and 78s(g); see also
                                                    15 U.S.C. 78c(26) (defining self-regulatory                47 Compare AMSE Rule 11.8 (referring to             Street: A History of the Securities and Exchange
                                                    organization to include registered national             participant orders being executed ‘‘on a designated    Commission and Modern Corporate Finance (3d ed.
                                                    securities exchange, national securities                trading platform, including that of a trading system   2003).
                                                    associations, and clearing agencies).                   operated by the Exchange Member’’); and                   49 See supra note 42 and accompanying text.




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                                                    34768                         Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices

                                                    securities exchange.’’ 50 An entity may                   proposes to exercise, and, on the other                    exercise the broad powers and
                                                    only become a ‘‘national securities                       hand, ensuring that an SRO’s exercise of                   responsibilities of an SRO, we would
                                                    exchange’’ by registering under Section                   this authority is carefully checked by                     lack the authority over that exempt
                                                    6(a) of the Act, 51 as the Commission has                 close Commission oversight.55 Indeed,                      entity that we would normally have
                                                    previously explained.52 And, although                     we believe this understanding is further                   possessed over SROs to, among other
                                                    Section 5 of the Act permits an exempt                    supported by a primary Congressional                       things, ‘‘approve or disapprove the
                                                    exchange to operate lawfully without                      purpose underlying the 1975                                proposed rule change[s],’’ 59 ‘‘abrogate,
                                                    registering as a national securities                      amendments to the Act,56 through                           add to, [or] delete from’’ an exchange
                                                    exchange,53 an exempt exchange is, by                     which ‘‘Congress specifically and                          rule,60 review a final disciplinary
                                                    definition, not a national securities                     importantly modified [the system of                        sanction imposed by the exchange or
                                                    exchange,54 and, thus, does not fall                      self-regulation in the securities                          any denial of access,61 ‘‘suspend for a
                                                    within the definition of ‘‘self-regulatory                industry] to enhance the SEC’s oversight                   period not exceeding twelve months
                                                    organization’’ under the Act. It                          of self-regulatory organizations.’’ 57 As                  . . . or to censure or impose limitations
                                                    necessarily follows that, were we to                      the Senate Report accompanying the                         upon the activities, functions, and
                                                    grant AMSE the exemption it seeks,                        1975 amendments explained, ‘‘[t]he SEC                     operations’’ of the exchange for
                                                    AMSE would not be entitled, much less                     is charged with supervising the exercise                   specified misconduct,62 or ‘‘remove
                                                    required by the Act, to hold itself out as                of this self-regulatory power in order to                  from office or censure’’ any officer or
                                                    an SRO or to exercise the self-regulatory                 assure that it is used effectively to fulfill              director of the exchange for specified
                                                    authority that is statutorily afforded to                 the responsibilities assigned to the self-                 misconduct.63 We do not believe that
                                                    SROs.                                                     regulatory agencies, and that it is not                    such a result would be consistent with
                                                      Nevertheless, there remains the                         used in a manner inimical to the public                    the Congressional desire, as revealed
                                                    question whether, in our discretion, we                   interest or unfair to private interests.’’ 58              through the statutory language and the
                                                    could allow AMSE to exercise the                             Yet were we to allow AMSE to                            legislative history, that the Commission
                                                    powers and responsibilities of an SRO,                    exercise the powers and responsibilities                   closely oversee the exercise of self-
                                                    notwithstanding the fact that AMSE, as                    of an SRO without actually qualifying as                   regulatory authority.64
                                                    an exempt exchange, would not meet                        such under the Act—i.e., without                              This conclusion is consistent with our
                                                    the definition of an SRO. Although the                    registering as a national securities                       prior reading of the Act. As the
                                                    statutory language does not                               exchange—we would be deprived of                           Commission has previously stated, ‘‘any
                                                    unambiguously forbid such a result, we                    many of the means that Congress                            system exercising self-regulatory
                                                    conclude that we lack the authority                       thought were critical for our effective                    powers, such as regulating its members’
                                                    under the Act to permit an exempt                         oversight of the exercise of self-                         or subscribers’ conduct when engaged
                                                    exchange to exercise the powers and                       regulatory powers. By its express terms,                   in activities outside of that trading
                                                    responsibilities reserved for an SRO. In                  the Act affords us such oversight                          system, must register as an exchange or
                                                    our view, the Act reflects a deliberate                   authority only over an entity that                         be operated by a national securities
                                                    balance between, on the one hand,                         qualifies as an SRO, which AMSE                            association [which is also an SRO under
                                                    granting SROs the broad, quasi-                           would not have done. Accordingly, if                       the statutory definition]. This is because
                                                    governmental authority that AMSE                          we allowed an exempt exchange to                           self-regulatory activities in the securities
                                                       50 15 U.S.C. 78c(a)(26) (defining SRO as ‘‘any            55 See, e.g., In re Series 7 Broker Qualification
                                                                                                                                                                         markets must be subject to Commission
                                                    national securities exchange, registered securities       Exam Scoring Litig., 548 F.3d 110, 112, 114 (D.C.          oversight under Section 19 of the
                                                    association, or registered clearing agency’’). See        Cir. 2008) (explaining that ‘‘[t]he Exchange Act           Exchange Act.’’ 65 As we have
                                                    generally Barbara v. New York Stock Exchange,             reveals a deliberate and careful design for                explained, under our view of the Act,
                                                    Inc., 99 F.3d 49, 51 (2d Cir. 1996) (explaining that      regulation of the securities industry’’ that ‘‘depends     ‘‘any system that uses its market power
                                                    ‘‘[u]nder the Act, [a national securities exchange] ‘is   on the SEC’s delegation of certain governmental
                                                    a self-regulatory organization’’’).                       functions to private SROs’’ and describing how this        to regulate its participants should be
                                                       51 ‘‘An exchange may be registered as a national       ‘‘delegation involves close oversight’’ by the             regulated as an SRO.’’ 66
                                                    securities exchange under the terms and conditions        Commission). See also S. Rep No. 94–75, at 24
                                                    hereinafter provided in this section and in               (‘‘self-regulatory organizations exercise government         59 15  U.S.C. 78s(b).
                                                    accordance with the provisions of section 19(a) of        power’’).                                                    60 15
                                                                                                                 56 Securities Acts Amendments of 1975, P.L. 94–
                                                                                                                                                                                  U.S.C. 78s(c).
                                                    this title, by filing with the Commission an                                                                            61 15 U.S.C. 78s(d)-(e).
                                                    application for registration. . . .’’ 15 U.S.C. 78f(a).   29.                                                           62 15 U.S.C. 78s(h)(1). See generally S. Rep No.
                                                       52 In a previous order granting an exemption from         57 NASD v. SEC, 431 F.3d 803, 807 (D.C. Cir.
                                                                                                                                                                         94–75, at 34 (explaining that the oversight
                                                    registration under Section 5 of the Act, the              2005).
                                                                                                                                                                         authorities under Section 19(h)(1) of the Act are ‘‘in
                                                    Commission stated that ‘‘[b]y virtue of this                 58 S. Rep No. 94–75, at 23. See also id. at 22
                                                                                                                                                                         addition to suspension and deregistration and are
                                                    exemption from registration, the Wunsch System            (explaining that the 1975 amendments were                  intended to provide more usable sanctions than the
                                                    falls outside the definition of a national securities     intended to ‘‘clarify and strengthen the
                                                    exchange because the term ‘national securities                                                                       SEC’s traditional ‘big stick’’’).
                                                                                                              Commission’s oversight role with respect to the               63 15 U.S.C. 78s(h)(4).
                                                    exchange’ implies a registered entity (see, e.g.,         self-regulatory organizations’’); id. at 23 (‘‘The self-
                                                                                                                                                                            64 We note that Congress also afforded the
                                                    sections 3(a)(26) of the Act (defining the term ‘self-    regulatory organizations exercise authority subject
                                                    regulatory organization’) and section 6(a) of the         to SEC oversight. They have no authority to regulate       Commission authority to enlist the assistance of the
                                                    Act.’’). See Securities Exchange Act Release No.          independently of the SEC’s control.’’); id.                federal courts in carrying out its oversight role. See
                                                    28899 (February 20, 1991), 56 FR 8377, 8382 note          (explaining that an objective of the 1975                  S. Rep No. 94–75, at 35 (‘‘Sections 21(e) and 21(f)
                                                    51 (February 28, 1991).                                   amendments was ‘‘assuring that the self-regulatory         [of the Exchange Act] would empower the SEC to
                                                       53 To grant an exemption from the requirement to       organizations follow effective and fair procedures,        apply to a federal court for an order to (1) enjoin
                                                    register as a national securities exchange, the           that their activities are not anticompetitive and that     the violation of the rules of a self-regulatory
                                                                                                                                                                         organization, (2) command a member of a self-
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                                                    Commission must conclude that, in the opinion of          the Commission’s oversight powers are ample and
                                                    the Commission, by reason of the limited volume           its responsibility to correct self-regulatory lapses is    regulatory organization to comply with the rules of
                                                    of transactions effected on such exchange, it is not      unmistakable’’). See generally Onnig H.                    such organization, or (3) command a self-regulatory
                                                    practicable and not necessary or appropriate in the       Dombalagian, Demythologizing the Stock Exchange:           organization to enforce compliance by its members
                                                    public interest or for the protection of investors to     Reconciling Self-Regulation and the National               with the Exchange Act, the rules thereunder, and
                                                    require registration. 15 U.S.C. 78e.                      Market System, 39 U. Rich. L. Rev. 1069, 1080              the organization’s own rules.’’).
                                                       54 It is self-evident that an exchange cannot be                                                                     65 See Securities Exchange Act Release No. 40760
                                                                                                              (2005) (‘‘One of the principal changes [of the 1975
                                                    exempt, under Section 5, from registering as a            amendments] to the framework for exchange self-            (December 8, 1998), 63 FR 70844, 70847 (December
                                                    national securities exchange under Section 6, while       regulation was to impose greater limitations on the        22, 1998) (‘‘Regulation ATS Adopting Release’’).
                                                    simultaneously existing as a national securities          exercise of rule making and disciplinary authority            66 See Regulation ATS Adopting Release, 63 FR

                                                    exchange under Section 6.                                 by exchanges.’’).                                          at 70859.



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                                                                                 Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices                                                        34769

                                                       Accordingly, as we read the Act, an                  Act, we would deny the exemption                        Commission acknowledged in the
                                                    exempt exchange is relieved of the                      application.                                            Regulation ATS Adopting Release that
                                                    statutory obligations of a registered SRO                 Our conclusion today is not                           an exemption under Section 5 could be
                                                    but also forfeits the ability to exercise               inconsistent with prior Commission                      available for an exchange that has self-
                                                    the statutory authority of an SRO. To the               practice. At the outset, we think it is                 regulatory attributes,71 the Commission
                                                    extent that AMSE desires to perform the                 important to observe that the                           has never granted an exemption to an
                                                    extensive range of self-regulatory                      Commission has rarely exercised its                     exchange seeking to carry out the broad
                                                    responsibilities described in its                       exemptive authority under Section 5—                    range of self-regulatory functions
                                                    exemption application, it must qualify                  indeed, it has granted a limited volume                 performed by registered SROs, as
                                                    and register as a national securities                   exemption, as sought by AMSE here, on                   proposed by AMSE.72 Rather, the
                                                    exchange (or a national securities                      only two prior occasions in the past 79                 Commission has granted an exemption
                                                    association).                                           years.69 And while the Commission                       only once to an exchange with ‘‘self-
                                                       In any event, even if we possessed the               imposed certain conditions upon                         regulatory attributes’’ 73 and, in that
                                                    authority to grant AMSE an exemption                    exemptions from exchange registration                   case, the exchange sought only to
                                                    notwithstanding its intention to exercise               when it granted them, the exemptions                    impose financial and operational
                                                    the powers and responsibilities reserved                and conditions thereto neither allowed                  standards as a condition for eligibility
                                                    for SROs, we do not believe that doing                  nor required the exercise of the
                                                    so would be consistent either with                      extensive SRO authority that AMSE is                    conditions imposed on the exchanges in Securities
                                                    investor protection or the public                       seeking.70 Moreover, although the                       Exchange Act Release No. 416); Securities Exchange
                                                    interest. In our view, when an exchange                                                                         Act Release No. 472, February 3, 1936 (granting an
                                                    wants to exercise the broad powers and                     69 In 1991, the Commission issued a limited          exemption to the Colorado Springs Stock Exchange
                                                                                                            volume exemption from exchange registration for         upon the same conditions imposed on the
                                                    responsibilities that AMSE is seeking                                                                           exchanges in Securities Exchange Act Release Nos.
                                                                                                            Wunsch Auction Systems, Inc. (‘‘WASI’’) (now
                                                    here, an exemption from registration is                 known as ‘‘Arizona Stock Exchange’’). See               416 and 432); Securities Exchange Act Release No.
                                                    not appropriate because the                             Securities Exchange Act Release No. 28899               589, April 10, 1936 (granting an exemption to the
                                                    Commission would lack sufficient                        (February 20, 1991), 56 FR 8377(February 28, 1991)      Seattle Stock Exchange upon the same conditions
                                                                                                            (‘‘WASI Order’’). WASI proposed to operate an           imposed on the exchanges in Securities Exchange
                                                    oversight mechanisms to ensure that the                                                                         Act Release Nos. 416, 432, and 472); WASI Order
                                                                                                            auction trading system for after-hours trading three
                                                    self-regulatory authority is not exercised              times a week, at a half an hour each. In 1999, the      (granting an exemption based on the condition that
                                                    in a manner inimical to the public                      Commission issued a limited volume exemption            WASI (1) permit the Commission to conduct
                                                    interest or unfair to private interests.                from exchange registration for Tradepoint Financial     examinations; (2) comply with its agreement to
                                                                                                            Networks plc (‘‘Tradepoint’’) (now known as             report volume and price data to the Commission
                                                    The Commission’s oversight                                                                                      and to SROs, and provide other information (such
                                                                                                            ‘‘Swiss Exchange’’). See Securities Exchange Act
                                                    responsibilities towards SROs has been                  Release No. 41199 (March 22, 1999), 64 FR 14953         as the identities of participants who have entered
                                                    a cornerstone of self-regulation from its               (March 29, 1999). Tradepoint operated as a U.K.-        orders) to the Commission and the SROs upon
                                                    inception.67 Indeed, due to the potential               registered trading facility and offered trading only    request; (3) comply with its undertaking to
                                                                                                            in securities listed on the London Stock Exchange.      implement procedures to conduct surveillance of its
                                                    harm to capital formation, investors,                                                                           employees and adopt requirements to ensure the
                                                                                                            Aside from these two exemptions, the Commission
                                                    and the public interest that could result               has only issued limited volume exemptions under         non-disclosure of confidential information; (4)
                                                    from the misuse of the securities                       Section 5 of the Act in the period from 1935 to1936;    suspend trading in any security subject to a
                                                    markets, as noted above, Congress                       the exemptions issued then were for a small group       regulatory halt for pending news called by the
                                                                                                            of municipally-based securities exchanges that were     primary market for the security or during
                                                    intentionally created a highly regulated                                                                        suspensions of trading ordered by the Commission
                                                                                                            already in existence at the time of the initial
                                                    environment in which SROs must be                       adoption of the Act in 1934. See Securities             pursuant to Section 12(k) of the Act, and consult
                                                    subject to close oversight by the                       Exchange Act Release No. 416, November 14, 1935         with the Commission subsequent to an exchange or
                                                    Commission. Put simply, an entity                       (exempting the Honolulu Stock Exchange, the             NASDAQ session in which an operational trading
                                                                                                            Milwaukee Grain and Stock Exchange, and                 halt has occurred or a circuit breaker has gone into
                                                    seeking to establish and enforce a                                                                              effect; (5) suspend any auction at the request of the
                                                                                                            Minneapolis-St. Paul Stock Exchange); Securities
                                                    comprehensive regulatory structure                      Exchange Act Release No. 432, December 2, 1935          Commission, assuming adequate notice is given,
                                                    with respect to the securities business of              (exempting the Richmond Stock Exchange and              and (6) continue to comply with the capacity,
                                                    its broker-dealer members—including                     Wheeling Stock Exchange); Securities Exchange Act       security, and contingency planning guidelines
                                                                                                            Release No. 472, February 3, 1936 (exempting the        contained in the Commission’s Automation Review
                                                    the full range of business conduct,                                                                             Policy).
                                                                                                            Colorado Springs Stock Exchange); Securities
                                                    financial condition, and regulatory                     Exchange Act Release No. 589, April 10, 1936               71 In the Regulation ATS Adopting Release, the

                                                    compliance matters—could have a                         (exempting the Seattle Stock Exchange).                 Commission stated that it ‘‘believes that the low
                                                    substantial impact on the way those                        70 See Securities Exchange Act Release No. 416,      volume exemption continues to be appropriate for
                                                                                                            November 14, 1935 (requiring the Honolulu Stock         some exchanges, such as an exchange that, for
                                                    members engage in the securities                                                                                example, disciplines its members (other than by
                                                                                                            Exchange, the Milwaukee Grain and Stock
                                                    business and comply with the federal                    Exchange, and the Minneapolis-St. Paul Stock            excluding them or limiting them from trading based
                                                    securities laws.68 In our view, any such                Exchange to keep up-to-date and available to the        on objective criteria, such as creditworthiness), or
                                                    entity should be subject to full                        public the data contained in the application for        has other self-regulatory attributes that exclude it
                                                                                                            exemption, make and keep required records,              from the definition of alternative trading system.’’
                                                    Commission oversight to assure its                                                                              See Regulation ATS Adopting Release, 63 FR at
                                                                                                            provide reports as necessary, and provide in their
                                                    performance of such functions is                        rules that a willful violation of any of the            70848, note 33.
                                                    consistent with the protection of                       exemption conditions shall be inconsistent with            72 See supra notes 31–46 and accompanying text.

                                                    investors and the public interest. For                  just and equitable principles of trade, and providing      73 The Commission notes the distinction between

                                                    these additional reasons, in the exercise               that the same restrictions with regard to the           entities that display ‘‘self-regulatory attributes’’—
                                                                                                            extension of credit for registered securities are       which implies having only a few features of an
                                                    of our discretion under Section 5 of the                imposed on securities listed on these exchanges,        SRO, such as disciplining members for violations of
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                                                                                                            that members of the exchanges are subject to            its own rules—and entities seeking to exercise all
                                                      67 See William O. Douglas, Democracy and
                                                                                                            Commission-imposed financial responsibility rules       or nearly all of the powers of SROs under the Act.
                                                    Finance 82 (1940).                                      and regulations, that the manipulation provisions of    As discussed above, AMSE’s application shows that
                                                      68 See, e.g., Securities Industry Study, Report of    the Securities Exchange Act apply to the exchanges      it is not proposing merely to have a few self-
                                                    the Subcommittee on Securities, Committee on            and their members, and that companies whose             regulatory attributes, but rather seeks to exercise the
                                                    Banking, Housing, and Urban Affairs, U.S. Senate,       securities are listed on the exchanges are required     full range of powers available to SROs under the
                                                    93rd Cong., at 14 (1973) (‘‘The broad powers            to file with the exchange and Commission certain        Act. See supra notes 31–46 and accompanying text.
                                                    delegated to the exchanges and the NASD under the       annual financial statements); Securities Exchange       Under these conditions, the Commission continues
                                                    Exchange Act include the power to affect the            Act Release No. 432, December 2, 1935 (granting         to believe, as previously stated, that the SRO
                                                    interests of individuals and firms, both members        exemptions for the Richmond Stock Exchange and          functions can be exercised only by an SRO, not an
                                                    and non-members.’’).                                    the Wheeling Stock Exchange upon the same               exempt exchange.



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                                                    34770                        Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices

                                                    for trading.74 The limited self-regulatory              appropriate to confer with applicants.76                 SECURITIES AND EXCHANGE
                                                    attributes in that case stand in stark                  It certainly does not (as AMSE appears                   COMMISSION
                                                    contrast to the full scope of self-                     to believe) entitle applicants to obtain
                                                    regulatory powers sought by AMSE                        guidance from the staff so that the                      [Release No. 34–75151; File No. SR–
                                                    here.                                                   applicants can repeatedly amend their                    NYSEMKT–2015–42]
                                                    C. AMSE Is Mistaken in Its                              applications before the Commission
                                                    Interpretation of the Relevant                          issues its final order.77 In any event, as               Self-Regulatory Organizations; NYSE
                                                    Procedural Requirements Relating to Its                 noted above, Commission staff in fact                    MKT, LLC; Notice of Filing and
                                                    Exemption Application                                   consulted with AMSE and provided                         Immediate Effectiveness of Proposed
                                                                                                            views and input to AMSE about its                        Rule Change Revising the Schedule for
                                                      AMSE has labored under certain
                                                                                                            application.78                                           Implementing the Exchange’s Recently
                                                    misunderstandings of the relevant
                                                                                                                                                                     Approved Rule To Provide a Price
                                                    procedures throughout its interactions                  IV. Conclusion
                                                    with the staff on this matter. To the                                                                            Protection for Market Maker Quotes
                                                    extent that there is any ambiguity in                     The Commission has reviewed                            Pursuant to Rule 967.1NY
                                                    these procedures, we take this                          AMSE’s application for a limited
                                                                                                                                                                     June 11, 2015.
                                                    opportunity to provide clarification.                   volume exemption from registration as a
                                                    AMSE erroneously reads Rule                             national securities exchange and has                        Pursuant to Section 19(b)(1) 1 of the
                                                    202.3(b)(2) of the Commission’s                         determined, for the reasons described                    Securities Exchange Act of 1934 (the
                                                    procedural rules as establishing an                     above, to deny AMSE’s application.79                     ‘‘Act’’) 2 and Rule 19b–4 thereunder,3
                                                    enforceable right on the part of AMSE                                                                            notice is hereby given that on June 5,
                                                                                                              It is therefore ordered, pursuant to
                                                    to require the Commission’s staff to                                                                             2015, NYSE MKT LLC (the ‘‘Exchange’’
                                                                                                            Section 5 of the Act, that AMSE’s
                                                    confer with AMSE. Rule 202.3(b)(2)                                                                               or ‘‘NYSE MKT’’) filed with the
                                                                                                            application for an exemption from
                                                    provides, in relevant part:                                                                                      Securities and Exchange Commission
                                                                                                            registration as a national securities
                                                       Applications for registration as national                                                                     (the ‘‘Commission’’) the proposed rule
                                                                                                            exchange be, and hereby is, denied.
                                                    securities exchanges, or exemption from                                                                          change as described in Items I and II
                                                    registration as exchanges by reason of such               By the Commission.                                     below, which Items have been prepared
                                                    exchanges’ limited volume of transactions               Brent J. Fields,                                         by the self-regulatory organization. The
                                                    filed with the Commission are routed to the             Secretary.                                               Commission is publishing this notice to
                                                    Division of Market Regulation, which
                                                                                                            [FR Doc. 2015–14807 Filed 6–16–15; 8:45 am]              solicit comments on the proposed rule
                                                    examines these applications to determine
                                                    whether all necessary information has been              BILLING CODE 8011–01–P                                   change from interested persons.
                                                    supplied and whether all required financial                                                                      I. Self-Regulatory Organization’s
                                                    statements and other documents have been
                                                    furnished in proper form. . . . The staff
                                                                                                                                                                     Statement of the Terms of the Substance
                                                                                                              76 See,  e.g., Dichter–Mad Family Partners, LLP v.
                                                    confers with applicants and makes                                                                                of the Proposed Rule Change
                                                                                                            United States, 707 F.Supp.2d 1016, 1042–43 (C.D.
                                                    suggestions in appropriate cases for                    Cal. 2010), aff’d, 709 F.3d 749 (9th Cir. 2013)
                                                    amendments and supplemental information.                                                                           The Exchange proposes to revise the
                                                                                                            (dismissing plaintiffs’ claims upon finding, among
                                                    Where it appears appropriate in the public              other things, that even though statute mandated that
                                                                                                                                                                     schedule for implementing the
                                                    interest and where a basis therefore exists,            agency staff ‘‘shall’’ engage in certain conduct, such   Exchange’s recently approved rule to
                                                    denial proceedings may be instituted.                   language was ‘‘modified by the discretionary ‘as         provide a price protection for Market
                                                       AMSE appears to construe the second                  appropriate’’’ and thus statute conferred discretion     Maker quotes pursuant to Rule 967.1NY.
                                                                                                            upon agency officials). Cf. Nat’l Env’t. Dev. Ass’n’s    The text of the proposed rule change is
                                                    sentence in the quoted language above                   Clean Air Project v. EPA, 686 F.3d 803, 813 (D.C.
                                                    to establish a binding obligation on the                                                                         available on the Exchange’s Web site at
                                                                                                            Cir. 2012) (concluding that the statutory phrase ‘‘as
                                                    Commission staff to work with AMSE to                   appropriate’’ conferred ‘‘significant discretion’’       www.nyse.com, at the principal office of
                                                    achieve Commission approval of its                      upon the agency); Bear Valley Mut. Water Co. v.          the Exchange, and at the Commission’s
                                                    exemption application.                                  Salazar, No. 11–01263, 2012 WL 5353353 (C.D. Cal.        Public Reference Room.
                                                       But the rule contains no such                        Oct. 17, 2012) (same); City of Toledo v. Beazer
                                                                                                            Materials & Servs., Inc., No. 90–CV–7344, 1995 WL        II. Self-Regulatory Organization’s
                                                    requirement; indeed, it does not
                                                                                                            770396 (N.D. Ohio June 14, 1995) (the same phrase        Statement of the Purpose of, and
                                                    prescribe any procedure that the
                                                    Commission staff must follow when
                                                                                                            in a federal regulation indicated that the described     Statutory Basis for, the Proposed Rule
                                                                                                            activity was ‘‘not mandatory’’).                         Change
                                                    working with applicants on applications                    77 Nor does the rule contain any suggestion that,

                                                    for registration or exemption from                      absent such a conference with the staff, the               In its filing with the Commission, the
                                                    registration. To the contrary, when the                 administrative record would be fatally deficient and     self-regulatory organization included
                                                    rule refers to Commission staff                         any subsequent action by the Commission on the
                                                                                                                                                                     statements concerning the purpose of,
                                                    conferring with applicants, it is                       application would be improper.
                                                                                                               78 See supra note 6 (discussing communications        and basis for, the proposed rule change
                                                    expressly descriptive, rather than
                                                                                                            between Commission staff and AMSE regarding              and discussed any comments it received
                                                    prescriptive, as to the staff’s actions.
                                                                                                            AMSE’s application occurring between December            on the proposed rule change. The text
                                                    And, critically, it provides only that the
                                                    staff will ‘‘confer[] with applicants and
                                                                                                            2013 and March 2014).                                    of those statements may be examined at
                                                                                                               79 We note that, at times during the pendency of
                                                    make[] suggestions in appropriate                                                                                the places specified in Item IV below.
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                                                                                                            its exemption application, AMSE made
                                                    cases . . . .’’ 75 The rule thus explicitly                                                                      The Exchange has prepared summaries,
                                                                                                            unsubstantiated claims of bad faith on the staff’s
                                                    leaves it to the staff to identify the                  part. We see no indication of any bad faith,
                                                                                                                                                                     set forth in sections A, B, and C below,
                                                    situations in which it would be                         however. And in any event, we have reached our           of the most significant parts of such
                                                                                                            determination to deny AMSE’s exemption                   statements.
                                                      74 See Securities Exchange Act Release No. 41199      application based on our own independent review
                                                    (March 22, 1999), 64 FR 14953 (March 29, 1999)          of the application. Accordingly, we are confident
                                                                                                                                                                      1 15 U.S.C. 78s(b)(1).
                                                    (order granting a limited volume exemption under        that AMSE has had a full and fair opportunity to
                                                                                                                                                                      2 15 U.S.C. 78a.
                                                    Section 5 of the Act to Tradepoint).                    present its application to us for consideration and
                                                      75 17 CFR 202.3(b)(2) (emphasis added).               that AMSE has suffered no prejudice.                      3 17 CFR 240.19b–4.




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Document Created: 2015-12-15 14:22:25
Document Modified: 2015-12-15 14:22:25
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
FR Citation80 FR 34765 

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