how to register as a broker-dealer, ats, or exchangepools and common enterprises devised by persons...

How to Register as a Broker-Dealer, ATS, or Exchange

Richard B. Levin, Peter Waltz, Daniel McAvoyPolsinelli PCMay 19, 2020

What is a Security

Digital Assets as Securities

The DAO Report and Recent SEC Enforcement Actions

What is a Broker-Dealer?

What is an Exchange?

What is an Alternative Trading System?

Registering as a Broker-Dealer, ATS, or Exchange

Consequences of Failing to Register

Q&A

2

Agenda

The definitions of “security” under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of

1934 (the “Exchange Act”) are nearly identical and each is broad enough to include the various types of instruments

that are used in commercial marketplaces that one might suspect to fall within the ordinary concepts of a security.

This would include common instruments like stocks, bonds, and notes, as well as the various collective investment

pools and common enterprises devised by persons seeking to generate profits from the efforts and investments of

others (i.e. investment contracts and instruments commonly known as securities).

Section 2(a)(1) of the Securities Act defines a “security” as:

[A]any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness,

. . . transferable share, investment contract, . . . any put, call, straddle, option, or privilege on any security,

certificate of deposit, . . . or any put, call, straddle, option, or privilege entered into on a national securities exchange

relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any

certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or

right to subscribe to or purchase, any of the foregoing.

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What is a Security?

The term “investment contract” is the residual category in the definition that captures securities that do not fall within

other categories.

Although not defined in the securities laws, it refers to an interest that is not a conventional security like “stock” or

“bond,” but has the essential properties of a security and is treated as one for purposes of the securities laws.

In the leading case on the subject, SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946), the U.S. Supreme Court

defined an investment contract as “a contract, transaction or scheme whereby a person invests his money in a

common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”

The definition establishes a four-part test (the “Howey Test”) to determine whether a particular scheme is an

investment contract.

The Howey Test requires that there be: (i) an investment of money (ii) in a common enterprise (iii) with an

expectation of profits (iv) which are derived solely from the efforts of the promoter.

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What is a Security?

Investment of Money

The SEC has taken the position the investment does not have to be in the form of “money,” but it can be any

“specific consideration in return for a separable financial interest with the characteristics of a security.”

An Investment of Money Need Not be in Traditional Currency

See SEC v. Shavers, 2013 U.S. Dist. LEXIS 110018 (E.D. Tex. Aug. 6, 2013) (finding that making investments

denominated in bitcoin, a form of digital virtual currency, constituted an investment of money subject to federal

securities laws); see also SEC v. Shavers, No. 4:13-CV-416 (E.D. Tex. Aug. 26, 2014) (upholding on rehearing).

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Howey Test

Expectation of Profits

Under the Howey Test, profits can be either capital appreciation resulting from the development of the initial investment, or a

participation in earnings resulting from the use of investors’ funds.

Profits are income or return that investors seek on their investment, not the profits of the scheme in which they invest.

Profits include, for example, dividends, other periodic payments, or the increased value of the investment. The determining

factor under this prong of the Howey Test is that the investor is “attracted solely by the prospects of a return” on his

investment.

The investor may not have been motivated by a desire to use or consume the item purchased.

In determining whether an investor was “attracted or led” by the expectation of profits, courts look at whether the promoter

has induced prospective investors with proposed or promised profits.

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Howey Test

Solely from the Efforts of the Promoter or a Third Party

The Howey test requires that the profits of the investment be derived “solely from the efforts of the promoter or a third

party.”

The courts have uniformly declined to give literal meaning to the word “solely,” and have adopted liberal interpretations,

emphasizing the economic reality of the transaction.

The interpretation by the Ninth Circuit Court of Appeals has been widely cited and adopted by other circuit courts, and it

requires that the efforts made by those other than the investor be “undeniably significant” ones and be “essential

managerial efforts which affect the failure or success of the enterprise.”

See Glenn W. Turner Enters., 474 F.2d 476.

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Howey Test

The SEC has argued that investments in digital assets making are investment contracts - a contract, transaction,or scheme involving: (1) an investment of money, (2) in a common enterprise, (3) with the expectation that profitswill be derived from the efforts of the promoter or a third party.

Any investment in securities in the United States remains subject to the jurisdiction of the SEC regardless of whether theinvestment is made in U.S. dollars or a digital currency.

Individuals selling investments are typically subject to federal or state licensing requirements.

SEC Framework for “Investment Contract” Analysis of Digital Assets: https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets

Whether a digital asset is a security for the purposes of the Securities Act and the Exchange Act has been at the heart of anumber of SEC enforcement actions.

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When Are Digital Assets Securities?

https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets

A Distributed Autonomous Organization (“DAO”) is a computer program, running on a peer-to-peer network,

incorporating governance and decision-making rules.

DAOs can be programmed to operate autonomously, without human involvement, or the code can provide for direct,

real-time control of the DAO and funds controlled by it.

The earliest DAOs are software controlled community organization experiments which seek to re-implement certain

aspects of traditional corporate governance, replacing voluntary compliance with a corporation’s charter with actual

compliance with pre-agreed computer code.

A DAO is effectively a community, with its resources organized according to rules agreed in advance and set out in

its code.

DAOs are open source software, capable of modification through member consensus.

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The DAO Report

“The DAO” was the most prominent example of a DAO.

The DAO gained significant media attention after it raised the equivalent of USD 168 million from individual investors in

its initial creation phase.

The DAO was created as a crowd-sourced investment fund.

The DAO was a for-profit entity which took in funds from investors (in the form of Ether) in exchange for

divisible and freely transferable tokens allocating ownership and voting rights.

There are approximately 23,000 voting addresses of The DAO, although it is thought that approximately half of the

invested funds came from 70 Ethereum addresses.

The DAO existed to invest in companies, projects and ideas, with the aim of providing a positive return (in the form of

dividends or other benefits) to its participants.

10

The DAO Report

See SEC Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO (July 25,

2017) (the “DAO Report”), available at: https://www.sec.gov/litigation/investreport/34-81207.pdf).

In the DAO Report, the SEC staff argued that the sale of digital assets such as “tokens” through an Initial Coin Offering

(“ICO”) are investment contracts.

Relying on the Howey Test, and the expansive reading of investment contacts in the Ninth Circuit, the SEC argues the

sale of tokens through an ICO constitutes a sale of securities because they involve an investment of money (Bitcoin or

Ethereum), in a common enterprise (a partnership), with an expectation of profits, derived solely from the efforts of the

promoter.

As in previous enforcement actions, the SEC argues the investment does not have to be in the form of “money,” but it

can be any specific consideration in return for a separable financial interest with the characteristics of a security.

The SEC has said the determination of whether a token is a security is based on an analysis of the facts and

circumstances.

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The DAO Report

https://www.sec.gov/litigation/investreport/34-81207.pdf)

In June of 2018, William Hinman, the Director of the SEC Division of Corporation Finance, delivered a speech setting out

the analysis the SEC applies in assessing whether a digital asset constitutes a security.

Hinman stated with certainty that sales of ether and bitcoin are not securities transactions.

Instead of focusing on the digital asset itself, Hinman’s analysis focused on the “circumstances surrounding the digital

asset and the manner in which it is sold.”

Hinman’s analysis provided that a digital asset itself may not be a security, but the way it is sold may give investors a

reasonable expectation of profits based on the efforts of others, a key component of the Howey Test.

When the network where the digital assets function becomes “sufficiently decentralized,” such as in the cases of ether

and bitcoin, the expectation of profits based on the efforts of others no longer exists because there is not a central third

party or promoter fundamental to the digital assets value.

The following are several SEC enforcement actions involving platforms that facilitate sales and transactions of digital

assets that are securities.

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Hinman Speech

The SEC settled charges with Bitqyck and its founders, who allegedly defrauded investors in securities offerings of

two digital assets, Bitqy and BitqyM, and operated an unregistered exchange to permit trading in one of them,

a digital token called Bitqy.

Bitqyck and founders Bruce Bise and Sam Mendez created and sold Bitqy and BitqyM in unregistered securities

offerings to more than 13,000 investors, raising more than $13 million.

Investors allegedly received $4.5 million for referring new investors to Bitqyck but collectively lost more than two-

thirds of their investment in the Dallas-based company.

Bitqyck aided and abetted by its founders, also is alleged to have illegally operated TradeBQ, an

unregistered national security exchange offering trading in a single security, Bitqy.

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Bitqyck

The SEC sued ICOBox and its founder Nikolay Evdokimov for conducting an illegal $14 million securities offering of

ICOBox’s digital tokens and for acting as unregistered brokers for other digital asset offerings.

ICOBox raised funds in 2017 to develop a platform for initial coin offerings by selling, in an unregistered offering,

roughly $14.6 million of “ICOS” tokens to over 2,000 investors.

The complaint alleges that defendants claimed the tokens would increase in value upon trading and that ICOS token

holders would be able to swap them at a discount for other tokens promoted on the ICOBox platform. According to

the complaint, the ICOS tokens are virtually worthless.

The complaint also alleges that ICOBox failed to register as a broker, but acted as one by facilitating initial

coin offerings that raised more than $650 million for dozens of clients.

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ICOBox

In SEC v. BTC Corp., the SEC charged a computer programmer for operating two online platforms trading securities

purchased with virtual currencies without registering either platform as a broker-dealer or stock exchange.

The online platforms gave account holders the ability to use virtual currencies to buy, sell, and trade securities of

businesses listed on the exchanges’ websites.

The platforms were not registered as stock exchanges despite enlisting issuers to offer securities for the

public to buy and sell and providing issuers a platform to create and list initial and secondary offerings of

securities in exchange for a listing fee.

Both platforms actively solicited the public to open accounts by advertising on public forums and other virtual currency-

dedicated website.

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BTC Trading Corp.

The SEC settled charges against the founder of EtherDelta, a digital token trading platform for nearly $400,000 in

total, including disgorgement, a prejudgment interest, and a civil penalty.

This case marked the SEC’s first enforcement action based on findings that a digital token trading

platform was operating as an unregistered national securities exchange.

The SEC found that EtherDelta was an online platform for secondary market trading a of type of blockchain-based

token issued through ICOs.

EtherDelta offered a marketplace to match buyers and sellers of digital asset securities through an order book and

a “smart contract” on the Ethereum blockchain.

Users on the platform executed more than 3.6 million orders for ERC20 tokens, which the SEC determined to be

securities under federal securities laws.

The SEC found that “EtherDelta had both the user interface and underlying functionality of an online

national securities exchange and was required to register with the SEC or qualify for an exemption.”

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EtherDelta

The SEC charged BitFunder and its found Jon E. Montroll with operating an unregistered online securities exchange and

defrauding exchange users in 2018.

BitFunder was an unregistered securities exchange where users would buy and sell bitcoins.

The SEC noted that “platforms that engage in the activity of a national securities exchange, regardless of whether

that activity involves digital assets, tokens, or coins, must register with the SEC or operate pursuant to an

exemption.

A cyberattack on BitFunder’s unregistered exchange resulted in more than 6,000 Bitcoins being stolen from users, and

Montroll’s failure to disclose such cyberattack resulted in violations of federal anti-fraud provisions.

The Southern District of New York charged Montroll with perjury and obstruction of justice in connection with the SEC’s

investigation.

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BitFunder

Courts and the SEC have identified the following factors which indicate a person is “engaged in the business”:

Receiving transaction-related compensation;

Holding oneself out as a broker, as executing trades, or as

Assisting others in settling securities transactions; and

Soliciting securities transactions.

Effecting Transactions

A person “effects transactions in securities” if the person participates in such transactions “at key points in the chain of

distribution” such as:

Helping an issuer to identify potential purchasers of securities;

Screening potential participants in a transaction for creditworthiness;

Handling customer funds or securities; and

Preparing and sending transaction confirmations (other than on behalf of a broker-dealer that executes the trades).

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What is a Broker?

Section 3(a)(4)(A) of the Exchange Act defines a “broker” as “any person engaged in the business of effecting

transactions in securities for the account of others.”

The definition of “broker” focuses on three elements. A broker must:

be “engaged in the business”

of “effecting transactions in securities”

“for the account of others.”

Engaged in the Business

Courts have read that “engaged in the business” implies a regularity of participation in purchasing and selling

activities rather than isolated transactions.

The two most important factors in the regularity of business determination are: (i) the number of transactions and

clients, and (ii) the dollar amount of securities sold.

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What is a Broker?

For the Account of Others

A broker effects transactions in securities for others, not itself.

As a result, firms effect transactions solely on their own behalf are generally not considered “brokers.”

Role of Compensation in the Broker Analysis

Receiving commissions or other transaction-related compensation is one of the determinative factors in deciding whether

a person is a broker.

Transaction-related compensation refers to compensation based, directly or indirectly, on the size, value, or

completion of any securities transactions.

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What is a Broker?

Section 3(a)(5)(A) of the Exchange Act defines a “dealer” as “any person engaged in the business of buying and

selling securities … for such person’s own account through a broker or otherwise.”

Section 3(a)(5)(B) explicitly excludes “a person that buys or sells securities … for such person’s own account, either

individually or in a fiduciary capacity, but not as a part of a regular business” from the definition of “dealer.”

Two factual questions determine whether a person is a dealer:

Whether a person is “buying and selling securities for its own account;” and

Whether a person is engaged in that activity “as part of a regular business.”

Those that buy and sell securities for investment purposes are not considered dealers when they are not buying and

selling contemporaneously, even when they only hold the position for a short amount of time.

The regularity of business consideration is the same for dealers as it is for brokers.

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What is a Dealer?

Section 3(a)(1) of the Exchange Act defines the term “exchange” as “any organization, association, or group of person,

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.”

Exchange Act Rule 3b-16(a) interprets the section 3(a)(1) definition to mean any organization, association or group of

persons that:

Brings together the orders of multiple buyers and sellers; and

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.

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Rule 3b-16(b) expressly excludes the following systems from the definition of “exchange”:

Systems merely routing orders to other facilities for execution;

Systems operated by a single registered market maker to display its own bids and offers and the limit orders of its

customers, and to execute trades against such orders; and

Systems that allow persons to enter orders for execution against bids and offers of a single dealer.

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The following is a non exclusive list of systems that meet the Rule 3b-16 definition of an Exchange:

System C allows participants to enter limit orders and matches those orders with other orders in System C based on internal

parameters. System C displays unmatched limit orders in the system’s book on an anonymous basis to all participants. The

broker-dealer operating System C acts as a riskless principal in executing all matched orders.

System D limits participation to institutional investors that trade illiquid restricted securities. To offer a security, a seller notifies

System D as to the security, the price and the amount offered. After System D accepts an order, it enters it into the system

where it is posted anonymously. Prospective purchasers may accept a posted order or seek to negotiate a transaction by

contacting System D. System D facilitates the purchase and sale of securities through the system on an agency basis.

Participants enter a bid or offer by calling a dedicated telephone number at System D. Once each side of the transaction

agrees to the terms of the trade, System D obtains necessary documentation from the participants and reviews all the

documentation. Once all the documentation has been processed, System D notifies the parties setting the transfer and

settlement date, at which time System D will coordinate the transfer of funds and the issuer is notified to effect the transfer on

its books.

Additional examples of systems that would be deemed an Exchange under Rule 3b-16 are discussed in the

Regulation ATS adopting release which is attached as an appendix to this presentation.

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Systems That Would be an Exchange

The following is a non exclusive list of systems that not meet the Rule 3b-16 definition of an Exchange:

System J routes orders from broker-dealers to registered exchanges or to other broker-dealers for execution.

System J also routes execution reports back to the broker-dealers that entered the orders. System J provides no

facility for execution, but rather only acts as a communications system for the transmission of orders and execution

reports.

System L allows a dealer to disseminate its proprietary quotations to its customers and permits customers to

transmit orders to buy from or sell to that dealer at those quoted prices.

System N allows participants to post the names of securities they wish to buy or sell. Other participants view this

‘‘bids wanted list’’ or ‘‘offers wanted list’’ and place bids or offers for the specified securities during a defined auction

period. The participant who posted the security on the ‘‘bids wanted list’’ or ‘‘offers wanted list’’ may either accept or

reject the best bid or offer at the close of the auction.

Additional examples of systems that would not be deemed an Exchange under Rule 3b-16 are discussed in

the Regulation ATS adopting release which is attached as an appendix to this presentation.

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Systems That Would Not be an Exchange

An alternative trading system (“ATS”) is any organization, association, person, group of person, or system:

That 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

an exchange, and

That does not set rules governing the conduct of subscribers other than the conduct of such subscribers’ trading

on such organization, association, person, group of persons, or system; or discipline subscribers other than by

exclusion from trading.

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.

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What is an ATS?

Broker-dealers cannot begin business until:

They have properly filed a Form BD and the SEC has granted its registration;

They have become a member of a self-regulatory organization (“SRO”) (FINRA);

They have become a member of the Securities Investor Protection Corporation;

They comply with all applicable state requirements; and

Their “associated persons” have satisfied applicable qualifications requirements.

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Broker-dealer Registration

Form BD

The Form BD asks questions about the broker-dealer and its principals, controlling persons, and employees.

One copy of Form BD must be filed with the Central Registration Depository operated by FINRA. The SEC does not charge

a filing fee for Form BD, but SROs and states may.

Within 45 days of filing, the SEC will either grant registration or being proceedings to determine whether it should deny

registration. Registered broker-dealers must promptly update Form BD by filing amendments whenever information on file

becomes inaccurate or incomplete.

Form BD can be found on the SEC website: https://www.sec.gov/about/forms/formbd.pdf

SRO Membership

SROs assist the SEC in regulating the activities of broker-dealers. FINRA and national securities exchanges are all SROs.

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SRO Membership (continued)

If broker-dealers restrict transactions to the national securities exchanges of which they are members, they may be

required only to be members of those exchanges.

If broker-dealers effect transactions other than on exchanges of which they are members, including any over-the-counter

business, they must become members of FINRA.

SIPC Membership

SIPC insures that its members’ customers receive back their cash and securities in the event of a member’s liquidation,

up to $500,000 per customer.

SIPC members must pay an annual fee to SIPC.

Every registered broker-dealer must be a member of SIPC unless their principal business is conducted outside of the

U.S. or consists exclusively of the sale or distribution of investment company shares, variable annuities, or insurance.

29


Associated Persons

The Exchange Act defines “associated person” of a broker-dealer as any partner, officer, director, branch manager, or

employee of the broker-dealer, any person performing similar functions, or any person controlling, controlled by, or

under common control with, the broker-dealer.

Broker-dealers must file Form U-4 with the applicable SRO for each associated person who will effect transactions in

securities. Form U-4 records individuals’ prior employment and disciplinary history.

Associated persons must also pass one or more SRO securities qualification exam, such as the “Series 7” exam.

State Requirements

Each state has their own requirements for conducting business as a broker-dealer within that state.

The state’s securities regulator can provide information about such state’s requirements.

30


An ATS, while fitting the definition of an exchange, is regulated as a broker-dealer.

An ATS must register as a broker-dealer with the SEC and become a member of FINRA.

In addition, an ATS must file Form ATS and submit to the SEC and FINRA detailed information regarding:

The types of subscribers it expects to admit;

The securities it expects to trade;

The manner in which the system operates, including how orders and transactions are entered, executed,

reported, cleared and settled; and

The relevant infrastructure and procedures for accessing the system, capacity, supervision, security,

contingency planning, and subscriber compliance.

A sample Form ATS is attached as an appendix to this presentation.

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How to Register as an ATS

In July 2019, the SEC and FINRA issued a joint statement (the “Joint Statement”) concerning broker-dealers looking to

facilitate transactions in digital assets classified as securities.

The Joint Statement acknowledged that existing SEC and FINRA rules raise complex questions as industry

technologies evolve, including:

The ability of broker-dealers to comply with the Customer Protection Rule under the Exchange Act;

Record-keeping requirements for broker-dealers dealing with digital assets classified as securities; and

Protections for investors in case of broker-dealer failure when digital assets are not defined as securities within the

Securities Investor Protection Act.

The Customer Protection Rule applies to entities that buy, sell, or are otherwise involved in transactions in all securities,

including digital securities, for customers or their own accounts. The intent of the Customer Protection Rule is to

protect customers’ securities held by a broker-dealer in the event that the broker-dealer fails.

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Joint Statement on Custody

Broker-dealers are required to maintain physical possession or control over their customers’ fully paid and excess margin

securities, or maintain them free of liens at a good control location – generally being a third-party custodian, such as

the Depository Trust Company, a bank, or a transfer agent.

The Joint Statement had particular concerns with broker-dealers maintaining custody of digital asset securities,

including that the manner in which digital asset securities are issued, held, and transferred may create greater risk that a

broker-dealer maintaining custody of those assets:

Could be victimized by fraud or theft,

Lose a “private key” necessary to transfer a client’s digital asset securities, or

Could transfer a client’s digital asset securities to an unknown or unintended address without meaningful recourse to

invalidate fraudulent transactions, recover or replace lost digital assets, or remedy errors.

33


The Joint Statement noted that certain noncustodial broker-dealer business models do not raise the same level

of regulatory concern – providing a potential path forward for broker-dealers seeking to transact, or facilitate

transactions, in digital asset securities, including the following three examples of noncustodial business models:

A digital asset broker-dealer that resembles a private placement agent;

A broker-dealer that is an over-the-counter (“OTC”) market facilitator for digital assets - the broker-dealer

facilitates OTC transactions in digital asset securities where the buyer and seller complete the transaction

directly, apart from the broker-dealer; and

A broker-dealer that operates an ATS with digital assets with the trades being settled directly between the buyer

and seller, or the buyer and seller could instruct their respective custodians to settle the transactions.

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There are a number of potential adverse consequences of doing business illegally as an unregistered broker-dealer,

including:

Cease-and-desist orders from the SEC or relevant state regulator or court injunctions;

Civil penalties including fines and disgorgement;

Criminal liabilities;

Potential rescission rights of investors under federal or state law; and

Reputational harm.

SEC and State Enforcement:

The SEC and the state regulators have authority to enforce respective federal and state securities laws through

administrative proceedings, civil court proceedings, and referrals for criminal prosecutions. Exchange Act § 21(a)(1)

grants the SEC the authority to make investigations to detect securities law violations.


Cease-and-Desist Order: Once it determines that there is a violation, the SEC can enter a cease-and-desist order which

may, in addition to requiring a person to cease and desist from committing a violation, require such person to comply with a

rule upon such terms and within such time as the SEC may specify. The SEC can also impose civil penalties and require

accounting and disgorgement.

Injunctive Relief: The SEC can also bring an action in court and seek permanent or temporary injunction or a restraining

order against an unregistered broker, dealer, ATS, or exchange. In addition to an injunction, the SEC may also seek civil

penalties and equitable relief for such violation. The SEC may also transmit evidence of securities laws violations to the

attorney general, who may, in his or her discretion, institute the necessary criminal proceedings under the Exchange Act.

State Enforcement Action: In addition to SEC actions, an unregistered broker or dealer may also be subject to state

enforcement actions under respective state blue-sky laws.

Private Actions: Exchange Act § 29(b) provides that contracts made in violation of any provision of the Exchange Act or

any rule thereunder are “void” (though, in reality, courts treat such contracts as being voidable rather than void ab initio).


Courts have held that, under Section 29(b), a contract is only voidable at the option of the innocent party, not the

unregistered broker-dealer, and that the unregistered broker-dealer is not entitled to any fees as yet unpaid.

However, when the services contracted for have been performed by an unregistered broker-dealer, courts have been

unwilling to grant restitution of payments made for such services, except for those by which the defendant unregistered

broker-dealer has been unjustly enriched.

A plaintiff in a section 29(b) action does not have to prove a causal connection between its harm and the defendant’s

violation of the broker-dealer registration requirements.67 A plaintiff can avoid a contract by showing that:

The contract involved a “prohibited transaction”;

He or she is in contractual privity with the defendant; and

He or she is in the class of persons the Exchange Act was designed to protect.


Polsinelli’s Chambers rated FinTech and Regulation practice helps clients meet the challenges posed by the development

of these new technologies, including digital assets and ICOs.

Bringing together attorneys from across the firm, members of the FinTech and Regulation practice advise clients on a

variety of matters, including:

Corporate and transactional issues

Cybersecurity

Government investigations and compliance

Intellectual property

Labor and employment

38

Polsinelli’s FinTech and Practice

Litigation

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Regulation by the CFTC, the SEC and

FinCEN

Securities and corporate finance

Tax

To learn more about our FinTech and Regulation practice, or to contact a member of our team, click here or visit our website

at polsinelli.com. For additional information, please call:

Contacts

Daniel L. McAvoy

Shareholder

Tel. 212-413-2844

Email: [email protected]

Richard B. Levin

Chair FinTech and Regulation

Practice

Tel. 303-583-8261


Peter F. Waltz

Shareholder

Tel. 303-583-8254


http://www.polsinelli.com/industries/financial-technology-fintech

http://www.polsinelli.com/

mailto:[email protected]



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Company:

Address: City: State: Zip Code: Phone: Fax: Email: Request Type: Broker Dealer Funding Portal If this request is being made for a current FINRA member firm, please provide the firm’s name and CRD Number:

Please list the name(s) you wish to reserve below. You may provide up to three names in order of preference. FINRA will reserve the highest-ranked name that is acceptable. Name(s) Requested: 1.

2.

3.

If the requesting firm has any affiliates that are registered with FINRA, please list the affiliate(s) below:

1. 2.

3. 4.

5. 6.


https://www.finra.org/filing-reporting/web-crd/broker-dealer-name-guidelines

New Organization Agreement Instructions

New SAA Agreement Instructions Ver. 4 – 1/23/2018 Page 1 of 2

New Organization Super Account Administrator (SAA) Form & FINRA Entitlement Agreement (FEA)

Instructions

Use this form when your Organization is: 1) New and requires access to systems owned or maintained by FINRA2) An existing Investment Adviser (IA) firm that has not yet filed its initial Form ADV and needs to replace its SAA3) An existing Investment Adviser (IA) firm applying to be a broker-dealer firm4) An existing BD/CAB firm applying to be a joint BD/IA or CAB/IA firm5) An existing Relying Adviser firm applying to be an IA firm - Note: Use your Relying Adviser Organization ID#

Note: To modify contact information on your Organization’s SAA, or to replace your SAA, contact FINRA to request an Update/Re-place SAA Agreement.

This form has two versions -- Form A and Form B. Complete only one form.

Form A - Use this form when the person signing this form meets the Authorized Signatory Requirements below and the SAA who

is being designated by your Organization is a person different from the person who signs this form.

Form B - Use this form when the person signing this form is designating himself/herself as the SAA for your Organization. This

form typically is used when: 1) the Organization is a sole proprietorship; 2) due to unusual circumstances such as illness or travel, at the time the form is completed, the Organization has no other person authorized to sign the form other than the person being designated as the SAA (FINRA will verify); or, 3) the Authorized Signatory is someone who is authorized to execute this agreement on behalf of the Organization but does not meet the Authorized Signatory Requirements below.

Authorized Signatory Requirements:

Broker-Dealer (BD) and CAB Firms: An Authorized Signatory is the Chief Compliance Officer (CCO) or authorized officer (or

other authorized person) who is currently listed on Schedule A of the Organization’s Form BD.

Investment Adviser Firms: An Authorized Signatory is the Chief Compliance Officer (CCO), Additional Regulatory Contact

(ARC) or authorized officer (or other authorized person) who is currently listed on Schedule A of the Organization’s Form ADV.

Regulators: An Authorized Signatory is the Securities Commissioner, Chief Regulatory Officer or other Authorized Signatory.

Note that an SAA is formally delegated the authority by the organization submitting this form to perform the SAA responsibilities on the organization’s behalf. Refer to the Super Account Administrator Quick Reference Guide available from www.finra.org/enti-tlement for more information on the responsibilities of the SAA. Following FINRA processing, a confirmation email is sent to the person who signed the form and to the SAA.

An asterisk (*) indicates a required field. Complete all required fields and follow Authorized Signatory requirements or the form will not be processed.

How To Submit this Form:

You may execute this FINRA Entitlement Agreement by completing all required sections and either: a) submit via DocuSign, or use another electronic signature (as defined in 15 U.S.C. § 7006), on condition that (i) you must have in place a technical or technological security procedure to attribute the electronic signature to the signatory, and (ii) a textual or graphical statement is included next to the electronic signature identifying the signatory and the date of execution and noting that the signature was generated electronically; or, b) mail the manually-signed Agreement to the address below; or, c) attach a scanned image (such as a .pdf file or fax) of the manually-signed Agreement to an email or other electronic transmission and send to FINRA.

Mailing Address: FINRA Entitlement Group, 9509 Key West Ave, Rockville, Maryland 20850 Fax: 301-216-3721 or Email: [email protected]

Questions: Contact the FINRA Gateway Call Center 301-869-6699 (Broker-Dealers/Capital Acquisition Brokers) or 240-386-4848 (Investment Advisers)

http://www.finra.org/entitlement

https://www.finra.org/filing-reporting/entitlement

New Organization Agreement Instructions

New SAA Agreement Instructions Ver. 4 – 1/23/2018 Page 2 of 2

New Organization Super Account Administrator (SAA) Form

& FINRA Entitlement Agreement (FEA) Instructions (continued)

This form has two versions, Form A and Form B. To determine which form you need to complete for access to FINRA Systems, please answer the two questions below: Question 1: Are you authorized to sign this agreement on behalf of your firm?

Yes No Question 2: Are you the designated Super Account Administrator (SAA) on this agreement?

Yes No Complete Form A if you answered:

Yes to Question 1 and No to Question 2. Complete Form B if you answered:

No to Question 1, OR

Yes to Question 1 and Yes to Question 2.

Complete only one form.

New Organization Form – A

New SAA/FEA Form Ver. 4 – 1/23/2018 Page 1 of 2

Form ANew Organization Super Account Administrator (SAA) Form

& FINRA Entitlement Agreement (FEA)

Section 1 – Organization Information

Organization ID # (if available):

Organization Legal Name:*

Primary Business Name:*

Organization Type*:

Broker-Dealer (BD) – Registration with FINRA Broker-Dealer (BD) – Registration with SRO (other than FINRA)

Broker Dealer (BD) – Registration with FINRA as Capital Acquisition Broker (CAB)

Investment Adviser (IA)

Joint Broker-Dealer/Investment Adviser (BD/IA)

Regulator

By selecting Joint BD/IA, you affirm that both firms are truly one legal entity, sharing the same ownership and control.

Broker-Dealers:

Will a Service Provider be transmitting OATS data on your firm’s behalf?* Yes No

Principal Office and Place of Business

Address:*

City:* State/Province:*

Country:* Zip/Postal Code:*

Phone Number:*

Section 2 – SAA Designation

First Name:* MI: Last Name:* Suffix:

Email:*

Phone Number:*

Section 3 – Agreement and Signature

FINRA Entitlement Agreement

I,_____________________________________*(name), ___________________________*(title) hereby acknowledge and agree that I am an individual legally authorized to act for and on behalf of the organization identified in Section 1 of this Agreement (“Organization”) and that I am authorized to execute this agreement on behalf of that Organization.

New Organization Form – A


I acknowledge and agree that my Organization designated the individual identified in Section 2 to act as a Super Account Administrator (“SAA”) for the purposes of accessing certain systems owned or operated by FINRA. I further acknowledge and agree that the designated SAA, on behalf of the Organization, will ensure only authorized employees of the Organization are granted entitlement to view the data within those systems. In the event the SAA terminates employment or otherwise has its authority rescinded by the Organization, a replacement SAA will be promptly appointed. I further acknowledge and agree that the systems that I or my Organization may access may contain personal and/or confidential information pertaining to my Organization or my Organization’s employees that must be safeguarded from inadvertent loss or theft. I agree that my Organization will take affirmative steps to ensure the security of such information by actively managing entitlements, encrypting electronic copies of such information, locking up or otherwise securing physical copies of such information and generally ensuring compliance with appropri-ate state or federal laws pertaining to information security.

I acknowledge and agree that my Organization and the designated SAA for my Organization are solely re-sponsible for obtaining, distributing, revoking and monitoring Account Administrator (AA) and User entitlements granted by my Organization. I further acknowledge and agree that my Organization assumes full responsibility for such entitle-ments and actions.

All applications, materials and services for which entitlements are hereby granted are governed by the FINRA Entitlement Program Terms of Use and can be found at www.finra.org/entitlement/termsofuse. I hereby acknowledge that I have read and agree to bind my Organization and employees to the FINRA Entitlement Program Terms of Use without exception, alteration or addition thereto. FINRA may revise the FINRA Entitlement Program Terms of Use from time to time in its sole discretion. I assume the obligation and responsibility to periodically review the current FINRA Entitlement Program Terms of Use. Use of the systems accessed by the Organization and the Organization’s SAA and AA(s) after modification of the FINRA Entitlement Program Terms of Use constitutes my Organization’s renewed agreement to the FINRA Entitlement Program Terms of Use as modified.

If you are duly authorized by the Organization to execute this Agreement, I certify under penalty of perjury under the laws of the United States of America, 18 U.S.C. § 1746, that the foregoing information provided by me on behalf of the Organization is true and correct to the best of my knowledge, information and belief and that I am legally authorized to make the foregoing certification on behalf of the Organization.

Authorized Signatory’s Signature:*________________________________________________________ Title:*______________________________________________________________________ Print Name:*_________________________________________________________________ Email:* _____________________________________________________________________ Executed on:* __________________________. Note: The email address provided by an Organization’s Authorized Signatory must match the email address that will

be filed in CRD, IARD or on the FINRA Contact System.

New Organization Form – B


Form B New Organization Super Account Administrator (SAA) Form

& FINRA Entitlement Agreement (FEA)

Section 1 – Organization Information

Organization ID # (if available):

Organization Legal Name:*

Primary Business Name:*

Organization Type*:

Broker-Dealer (BD) – Registration with FINRA

Broker-Dealer (BD) – Registration with SRO (other than FINRA)

Broker Dealer (BD) – Registration with FINRA as Capital Acquisition Broker (CAB)

Investment Adviser (IA)

Joint Broker-Dealer/Investment Adviser (BD/IA)

Regulator

By selecting Joint BD/IA, you affirm that both firms are truly one legal entity, sharing the same ownership and control.

Broker-Dealers: Will a Service Provider be transmitting OATS data on your firm’s behalf?* Yes No

Principal Office and Place of Business

Address:*

City:* State/Province:*

Country:* Zip/Postal Code:*

Phone Number:*

Section 2 – SAA Designation

First Name:* MI: Last Name:* Suffix:

Email:*

Phone Number:*

Section 3 – Agreement and Signature

FINRA Entitlement Agreement

I,_____________________________________*(name), ___________________________*(title) hereby acknowledge and agree that I am an individual legally authorized to act for and on behalf of the organization identified in Section 1 of this Agreement (“Organization”) and that I am authorized to execute this agreement on behalf of that Organization.

I acknowledge and agree that my Organization designated the individual identified in Section 2 to act as a Super Account Administrator (“SAA”) for the purposes of accessing certain systems owned or operated by FINRA. I

New Organization Form – B


further acknowledge and agree that the designated SAA, on behalf of the Organization, will ensure only authorized employees of the Organization are granted entitlement to view the data within those systems. In the event the SAA terminates employment or otherwise has its authority rescinded by the Organization, a replacement SAA will be promptly appointed. I further acknowledge and agree that the systems that I or my Organization may access may contain personal and/or confidential information pertaining to my Organization or my Organization’s employees that must be safeguarded from inadvertent loss or theft. I agree that my Organization will take affirmative steps to ensure the security of such information by actively managing entitlements, encrypting electronic copies of such information, locking up or otherwise securing physical copies of such information and generally ensuring compliance with appropri-ate state or federal laws pertaining to information security.

I acknowledge and agree that my Organization and the designated SAA for my Organization are solely respon-sible for obtaining, distributing, revoking and monitoring Account Administrator (AA) and User entitlements granted by my Organization. I further acknowledge and agree that my Organization assumes full responsibility for such entitle-ments and actions.

All applications, materials and services for which entitlements are hereby granted are governed by the FINRA Entitlement Program Terms of Use and can be found at www.finra.org/entitlement/termsofuse. I hereby acknowledge that I have read and agree to bind my Organization and employees to the FINRA Entitlement Program Terms of Use without exception, alteration or addition thereto. FINRA may revise the FINRA Entitlement Program Terms of Use from time to time in its sole discretion. I assume the obligation and responsibility to periodically review the current FINRA Entitlement Program Terms of Use. Use of the systems accessed by the Organization and the Organization’s SAA and AA(s) after modification of the FINRA Entitlement Program Terms of Use constitutes my Organization’s renewed agreement to the FINRA Entitlement Program Terms of Use as modified.

If you are duly authorized by the Organization to execute this Agreement, I certify under penalty of perjury under the laws of the United States of America, 18 U.S.C. § 1746, that the foregoing information provided by me on behalf of the Organization is true and correct to the best of my knowledge, information and belief and that I am legally authorized to make the foregoing certification on behalf of the Organization.

Please answer the two questions below:*

a. Explain why another Authorized Signatory is not available to execute this Agreement:

b. Explain your authority to act on behalf of the Organization:

Authorized Signatory’s Signature:*________________________________________________________ Title:*______________________________________________________________________ Print Name:*_________________________________________________________________ Email:* _____________________________________________________________________ Executed on:* __________________________.

Note: The email address provided by an Organization’s Authorized Signatory must match the email address that will be filed in CRD, IARD or on the FINRA Contact System.

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OMB APPROVAL OMB Number: 3235-0012 Expires: October 31, 2022 Estimated average burden hours per response. . . . . . . 2.75 per amendment . . . . . . . . 0.33

Form BD

Uniform Application for Broker-Dealer Registration

Persons who respond to the collection of information contained in this form are not required to respond unless the form displays

SEC1490 (1-08) a currently valid OMB control number.

FORM BD INSTRUCTIONS A. GENERAL INSTRUCTIONS

1. Form BD is the Uniform Application for Broker-Dealer Registration. Broker-Dealers must file this form to register with the Securities and Exchange Commission, the self-regulatory organizations, and jurisdictions through the Central Registration Depository (“CRD”) system, operated by FINRA.

2. UPDATING – By law, the applicant must promptly update Form BD information by submitting amendments whenever the information on file becomes inaccurate or incomplete for any reason.

3. CONTACT EMPLOYEE – The individual listed as the contact employee must be authorized to receive all compliance information, communications, and mailings, and be responsible for disseminating it within the applicant’s organization.

4. GOVERNMENT SECURITIES ACTIVITIES

A. Broker-dealers registered or applicants applying for registration under Section 15(b) of the Exchange Act that conduct (or intend to conduct) a government securities business in addition to other broker-dealer activities (if any) must file a notice on Form BD by answering “yes” to Item 2B.

B. Section 15C of the Securities Exchange Act of 1934 requires sole government securities broker-dealers to register with the SEC. To do so, answer “yes” to Item 2C if conducting only a government securities business.

C. Broker-dealers registered under Section 15(b) of the Exchange Act that cease to conduct a government securities business must file notice when ceasing their activities in government securities. To do so, file an amendment to Form BD and answer “yes” to ltem 2D.

NOTE: Broker-dealers registered under Section 15C may register under Section 15(b) by filing an amendment to Form BD and answering “yes” to Items 2A and 2D. By doing so, broker-dealer expressly consents to withdrawal of broker-dealer’s registration under 15C of the Exchange Act.

5. FEDERAL INFORMATION LAW AND REQUIREMENTS – An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. Section 15, 15B, 15C, 17(a) and 23(a) of the Exchange Act authorize the Commission to collect the Information on this Form from registrants. See 15 U.S.C. 78o, 78o4, 78o-5, 78-q and 78w. Filing of this Form is mandatory; however the social security number information, which aids in identifying the applicant, is voluntary. The principal purpose of this Form is to permit the Commission to determine whether the applicant meets the statutory requirement to engage in the securities business. The Form also is used by applicants to register as broker-dealers with certain self-regulatory organizations and all of the states. The Commission and the Financial Industry Regulatory Authority, Inc. maintain the files of the information on this Form and will make the information publicly available. Any member of the public may direct to the Commission any comments concerning the accuracy of the burden estimate on application facing page of this Form, and any suggestions for reducing this burden. This collection of information has been reviewed by the Office of Management and Budget in accordance with the clearance requirements of 44 U.S.C. §3507. The information contained in this form is part of a system of records subject to the Privacy Act of 1974, as amended. The Securities and Exchange Commission has published in the Federal Register the Privacy Act Systems of Records Notice for these records.

B. PAPER FILING INSTRUCTIONS (FIRST TIME APPLICANTS FILING WITH CRD AND WITH SOME JURISDICTIONS)

1. FORMAT

A. A full paper Form BD is required when the applicant is filing with the CRD for the first time. In addition, some jurisdictions may require a separate paper filing of Form BD. The applicant should contact the appropriate jurisdiction(s) for specific filing requirements.

B. Attach an Execution Page (Page 1) with original manual signatures to the initial Form BD filing. C. Type all information. D. Give the name of the broker-dealer and date on each page. E. Use only the current version of Form BD and its Schedules or a reproduction of them.

2. DISCLOSURE REPORTING PAGE (DRP) – Information concerning the applicant or control affiliate that relates to the occurrence of an event reportable under Item 11 must be provided on the applicant’s appropriate DRP(BD). If a control affiliate is an individual or organization registered through the CRD, such control affiliate need only complete Part I of the applicant’s appropriate DRP(BD). Details of the event must be submitted on the control affiliate’s appropriate DRP(BD) or DRP(U-4). Attach a copy of the fully completed DRP(BD), or DRP(U-4) previously submitted. If a control affiliate is an individual or organization not registered through the CRD, provide complete answers to all of the items on the applicant’s appropriate DRP(BD).

3. SCHEDULES A, B AND C – File Schedules A and B only with initial applications for registration. Use Schedule C to update Schedules A and B. Individuals not required to file a Form U-4 (individual registration) with the CRD system who are listed on Schedules A, B, or C must attach page 2 of Form U-4. The applicant broker-dealer must be listed in Form U-4 Item 20 or 21. Signatures are not required.

4. SCHEDULE D – Schedule D provides additional space for explaining answers to Item 1C(2), and ‘’yes’’ answers to items 5, 7, 8, 9,10,12, and 13 of Form BD.

C. ELECTRONIC FILING INSTRUCTIONS (APPLICANTS/ REGISTERED BROKER-DEALERS FILING AMENDMENTS WITH CRD)

1. FORMAT

A. Items 1-13 must be answered and all fields requiring a response must be completed before the filing will be accepted.

B. Applicant must complete the execution screen certifying that Form BD and amendments thereto have been executed properly and that the information contained therein is accurate and complete.

C. To amend information, applicant must update the appropriate Form BD screens. D. A paper copy, with original manual signatures, of the initial Form BD filing and amendments to Disclosure Reporting Pages

(DRPs BD) must be retained by the applicant and be made available for inspection upon a regulatory request.

2. DISCLOSURE REPORTING PAGE (DRP) – Information concerning the applicant or control affiliate that relates to the occurrence of an event reportable under Item 11 must be provided on the applicant’s appropriate DRP(BD). If a control affiliate is an individual or organization registered through the CRD, such control affiliate need only complete the control affiliate name and CRD number of the applicant’s appropriate DRP(BD). Details for the event must be submitted on the control affiliate’s appropriate DRP(BD) or DRP(U-4). If a control affiliate is an individual or organization not registered through the CRD, provide complete answers to all of the questions and complete all fields requiring a response on the applicant’s appropriate DRP(BD) screen.

3. DIRECT AND INDIRECT OWNERS – Amend the Direct Owners and Executive Officers screen and the Indirect Owners screen when changes in ownership occur. Control affiliates that are individuals who are not required to file a Form U-4 (individual registration) with the CRD must complete page 2 of Form U-4 (i.e., submit/file the information elicited by the Personal Data, Residential History, and Employment and Personal History sections of that Form). The applicant broker-dealer must be listed in Form U-4 Item 20 or 21.

The CRD mailing address for questions and correspondence is:

NASAA/FINRA CENTRAL REGISTRATION DEPOSITORY P.O. BOX 9495 GAITHERSBURG, MD 20898-9495

EXPLANATION OF TERMS (The following terms are italicized throughout this form.)

1. GENERAL

APPLICANT – The broker-dealer applying on or amending this form.

CONTROL – The power, directly or indirectly, to direct the management or policies of a company, whether through ownership of securities, by contract, or otherwise. Any person that (i) is a director, general partner or officer exercising executive responsibility (or having similar status or functions); (ii) directly or indirectly has the right to vote 25% or more of a class of a voting security or has the power to sell or direct the sale of 25% or more of a class of voting securities; or (iii) in the case of a partnership, has the right to receive upon dissolution, or has contributed, 25% or more of the capital, is presumed to control that company. (This definition is used solely for the purpose of Form BD.)

JURISDICTION – A state, the District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, or any subdivision or regulatory body thereof.

PERSON – An individual, partnership, corporation, trust, or other organization.

SELF-REGULATORY ORGANIZATION – Any national securities or commodities exchange or registered securities association, or registered clearing agency.

2. FOR THE PURPOSE OF ITEM 5 AND SCHEDULE D

SUCCESSOR - An unregistered entity that assumes or acquires substantially all of the assets and liabilities, and that continues the business of, a registered predecessor broker-dealer, who ceases its broker-dealer activities. [See Securities Exchange Act Release No. 31661 (December 28, 1992), 58 FR 7 (January 4, 1993)]

3. FOR THE PURPOSE OF ITEM 11 AND THE CORRESPONDING DISCLOSURE REPORTING PAGES (DRPs)

CONTROL AFFILIATE – A person named in Items 1A, 9 or in Schedules A, B or C as a control person or any other individual or organization that directly or indirectly controls, is under common control with, or is controlled by, the applicant, including any current employee except one performing only clerical, administrative, support or similar functions, or who, regardless of title, performs no executive duties or has no senior policy making authority.

INVESTMENT OR INVESTMENT-RELATED – Pertaining to securities, commodities, banking, insurance, or real estate (including, but not limited to, acting as or being associated with a broker-dealer, municipal securities dealer, government securities broker or dealer, issuer, investment company, investment adviser, futures sponsor, bank, or savings association).

INVOLVED – Doing an act or aiding, abetting, counseling, commanding, inducing, conspiring with or failing reasonably to supervise another in doing an act.

FOREIGN FINANCIAL REGULATORY AUTHORITY – Includes (1) a foreign securities authority; (2) other governmental body or foreign equivalent of a self-regulatory organization empowered by a foreign government to administer or enforce its laws relating to the regulation of investment or investment-related activities; and (3) a foreign membership organization, a function of which is to

2

regulate the participation of its members in the activities listed above. PROCEEDING – Includes a formal administrative or civil action initiated by a governmental agency, self-regulatory organization or a foreign financial regulatory authority; a felony criminal indictment or information (or equivalent formal charge); or a misdemeanor criminal information (or equivalent formal charge). Does not include other civil litigation, investigations, or arrests or similar charges effected in the absence of a formal criminal indictment or information (or equivalent formal charge).

CHARGED – Being accused of a crime in a formal complaint, information, or indictment (or equivalent formal charge).

ORDER – A written directive issued pursuant to statutory authority and procedures, including orders of denial, suspension, or revocation; does not include special stipulations, undertakings or agreements relating to payments, limitations on activity or other restrictions unless they are included in an order.

FELONY – For jurisdictions that do not differentiate between a felony and a misdemeanor, a felony is an offense punishable by a sentence of at least one year imprisonment and/or a fine of at least $1,000. The term also includes a general court martial.

MISDEMEANOR – For jurisdictions that do not differentiate between a felony and a misdemeanor, a misdemeanor is an offense punishable by a sentence of less than one year imprisonment and/or a fine of less than $1,000. The term also includes a special court martial.

FOUND – Includes adverse final actions, including consent decrees in which the respondent has neither admitted nor denied the findings, but does not include agreements, deficiency letters, examination reports, memoranda of understanding, letters of caution, admonishments, and similar informal resolutions of matters.

MINOR RULE VIOLATION – A violation of a self-regulatory organization rule that has been designated as “minor’’ pursuant to a plan approved by the U.S. Securities and Exchange Commission. A rule violation may be designated as “minor’’ under a plan if the sanction imposed consists of a fine of $2,500 or less, and if the sanctioned person does not contest the fine. (Check with the appropriate self-regulatory organization to determine if a particular rule violation has been designated as “minor” for these purposes).

ENJOINED – Includes being subject to a mandatory injunction, prohibitory injunction, preliminary injunction, or a temporary restraining order.

3

FORM BD PAGE 1

(Execution Page)

UNIFORM APPLICATION FOR BROKER-DEALER REGISTRATION

Date:____________________ SEC File No: 8- __________________ Firm CRD No.: _______________

OFFICIAL USE OFFICIAL

USE ONLY

WARNING: Failure to keep this form current and to file accurate supplementary information on a timely basis, or the failure to keep accurate books and records or otherwise to comply with the provisions of law applying to the conduct of business as a broker-dealer would violate the Federal securities laws and the laws of the jurisdictions and may result in disciplinary, administrative, injunctive or criminal action.

INTENTIONAL MISSTATEMENTS OR OMISSIONS OF FACTS MAY CONSTITUTE CRIMINAL VIOLATIONS.

APPLICATION AMENDMENT 1. Exact name, principal business address, mailing address, if different, and telephone number of applicant:

A. Full name of applicant (if sole proprietor, state last, first and middle name):

B. IRS Empl. Ident. No.:

C. (1) Name under which broker-dealer business primarily is conducted, if different from Item 1A.

(2) List on Schedule D, Page1, Section I any other name by which the firm conducts business and where it is used.

D. If this filing makes a name change on behalf of the applicant, enter the new name and specify whether the name change is of the applicant name (1A) or business name (1C):

Please check above.___________________________________________________________________________________________________________________

E. Firm main address: (Do not use a P.O. Box)

______________________________________________________________________________________________________________________________ (Number and Street) (City) (State/Country) (Zip+4/Postal Code)

Branch offices or other business locations must be reported on Schedule E.

F. Mailing address, if different:

______________________________________________________________________________________________________________________________

G. Business Telephone Number:

___________ ________________________________ (Area Code) (Telephone Number)

H. Contact Employee:

______________________________________________________________ ___________ _________________________________ (Name and Title) (Area Code) (Telephone Number)

EXECUTION:

For the purposes of complying with the laws of the State(s) designated in Item 2 relating to either the offer or sale of securities or commodities, the undersigned and applicant hereby certify that the applicant is in compliance with applicable state surety bonding requirements and irrevocably appoint the administrator of each of those State(s) or such other person designated by law, and the successors in such office, attorney for the applicant in said State(s), upon whom may be served any notice, process, or pleading in any action or proceeding against the applicant arising out of or in connection with the offer or sale of securities or commodities, or out of the violation or alleged violation of the laws of those State(s), and the applicant hereby consents that any such action or proceeding against the applicant may be commenced in any court of competent jurisdiction and proper venue within said State(s) by service of process upon said appointee with the same effect as if applicant were a resident in said State(s) and had lawfully been served with process in said State(s).

The applicant consents that service of any civil action brought by or notice of any proceeding before the Securities and Exchange Commission or any self-regulatory organization in connection with the applicant’s broker-dealer activities, or of any application for a protective decree filed by the Securities Investor Protection Corporation, may be given by registered or certified mail or confirmed telegram to the applicant’s contact employee at the main address, or mailing address if different, given in Items 1E and IF.

The undersigned, being first duly sworn, deposes and says that he/she has executed this form on behalf of, and with the authority of, said applicant. The undersigned and applicant represent that the information and statements contained herein, including exhibits attached hereto, and other information filed herewith, all of which are made a part hereof, are current, true and complete. The undersigned and applicant further represent that to the extent any information previously submitted is not amended such information is currently accurate and complete.

__________________________ _______________________________________________________________________________ Date (MM/DD/YYYY) Name of Applicant

By: _____________________________________________________ __________________________________________________________________ Signature Print Name and Title

Subscribed and sworn before me this _________ day of __________________________ , _________ by ______________________________________ Year Notary Public

My Commision expires ________________________ County of ____________________________ State of _______________________________

This page must always be completed in full with original, manual signature and notarization. To amend, circle items being amended. Affix notary stamp or seal where applicable.

DO NOT WRITE BELOW THIS LINE - FOR OFFICIAL USE ONLY

__________________________________________________________________________________________________________________

OFFICIAL USEOFFICIAL USEFORM BD ONLYApplicantName:______________________________________________________________________

PAGE 2 Date:____________________ Firm CRD No.: _______________

2. Indicate by checking the appropriate box(es) each governmental authority, organization, or jurisdiction in which the applicant is registered or registering as a broker-dealer.

If applicant is registered or registering with the SEC, check here and answer Items 2A through 2D below.

YES NO

A. Is applicant registered or registering as a broker-dealer under Section 15(b) or Section 15B of the Securities Exchange Act of 1934? ..................................................................................................................................

B. Is applicant registered or registering as a broker-dealer under Section 15(b) of the Securities Exchange Act of 1934 and also acting or intending to act as a government securities broker or dealer? ..................................

C. Is applicant registered or registering solely as a government securities broker or dealer under Section 15C of the Securities Exchange Act of 1934? ................................................................................................................

Do not answer “yes” to Item 2C if applicant answered “yes” to Item 2A or Item 2B.

D. Is applicant ceasing its activities as a government securities broker or dealer? .........................................................

If applicant answers “yes” to Items 2A and 2D, applicant expressly consents to the withdrawal of its registration as a government securities broker or dealer under Section 15C of the Securities Exchange Act of 1934. See “Instructions.”

___________________________________

AMEX BSE CBOE CHX NSX FINRA NQX NYSE PHLX ARCA ISE OTHER (specify)

Alabama Hawaii Michigan North Carolina Texas

Alaska Idaho Minnesota North Dakota Utah

Arizona Illinois Mississippi Ohio Vermont

Arkansas Indiana Missouri Oklahoma Virgin Islands

California Iowa Montana Oregon Virginia

Colorado Kansas Nebraska Pennsylvania Washington

Connecticut Kentucky Nevada Puerto Rico West Virginia

Delaware Louisiana New Hampshire Rhode Island Wisconsin

District of Columbia Maine New Jersey South Carolina Wyoming

Florida Maryland New Mexico South Dakota

Georgia Massachusetts New York Tennessee

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3. A. Indicate legal status of applicant.

Corporation Sole Proprietorship Other (specify) _________________________________ Partnership Limited Liability Company

B. Month applicant’s fiscal year ends: _______________

C. If other than a sole proprietor, indicate date and place applicant obtained its legal status (i.e., state or country where incorporated, where partnership agreement was filed, or where applicant entity was formed):

State/Country of formation: ____________________________________ Date of formation: ___________________________ (MM/DD/YYYY)

Schedule A and, if applicable, Schedule B must be completed as part of all initial applications. Amendments to these schedules must be provided on Schedule C.

4. If applicant is a sole proprietor, state full residence address and Social Security Number.

Social Security Number: __ __ __ – __ __ __ – __ __ __ __

(Number and Street) (City) (State/Country) (Zip+4/Postal Code)

5. Is applicant at the time of this filing succeeding to the business of a currently registered broker-dealer? YES NO Do not report previous successions already reported on Form BD. ..................................................................................... If “Yes,” contact CRD prior to submitting form; complete appropriate items on Schedule D, Page 1, Section lll.

6. Does applicant hold or maintain any funds or securities or provide clearing services for any other broker or dealer? ...

7. Does applicant refer or introduce customers to any other broker or dealer? ..................................................................... If “Yes,”complete appropriate items on Schedule D, Page 1, Section IV.

FORM BD

PAGE 3 ApplicantName:______________________________________________________________________

Date:____________________ Firm CRD No.: _______________


USE ONLY

8. Does applicant have any arrangement with any other person, firm, or organization under which: YES NO

A. any books or records of applicant are kept or maintained by such other person, firm or organization? ...................

B. accounts, funds, or securities of the applicant are held or maintained by such other person, firm, or organization?

C. accounts, funds, or securities of customers of the applicant are held or maintained by such other person, firm or organization? ...................................................................................................................................................................

For purposes of 8B and 8C, do not include a bank or satisfactory control location as defined in paragraph (c) of Rule 15c3-3 under the Securities Exchange Act of 1934 (17 CFR 240.15c3-3).

if “Yes” to any part of Item 8, complete appropriate items on Schedule D, Page 1, Section IV.

9. Does any person not named in Item 1 or Schedules A, B, or C, directly or indirectly:

A. control the management or policies of the applicant through agreement or otherwise? ............................................

B. wholly or partially finance the business of applicant? ...................................................................................................

Do not answer “Yes” to 9B if the person finances the business of the applicant through: 1) a public offering of securities made pursuant to the Securities Act of 1933; 2) credit extended in the ordinary course of business by suppliers, banks, and others; or 3) a satisfactory subordination agreement, as defined in Rule 15c3-1 under the Securities Exchange Act of 1934 (17 CFR 240.15c3-1).

If “Yes’’ to any part of Item 9, complete appropriate items on Schedule D, Page 1, Section IV.

10. A. Directly or indirectly, does applicant control, is applicant controlled by, or is applicant under common control with, any partnership, corporation, or other organization that is engaged in the securities or investment advisory business? .........................................................................................................................................................................

If “Yes” to Item 10A, complete appropriate items on Schedule D, Page 2, Section V.

B. Directly or indirectly, is applicant controlled by any bank holding company, national bank, state member bank of the Federal Reserve System, state non-member bank, savings bank or association, credit union, or foreign bank? ..

If “Yes” to Item 10B, complete appropriate items on Schedule D, Page 3, Section VI.

11. Use the appropriate DRP for providing details to “yes” answers to the questions in Item 11. Refer to the Explanation of Terms section of Form BD Instructions for explanations of italicized terms.

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A. In the past ten years has the applicant or a control affiliate:

(1) been convicted of or pled guilty or nolo contendere (“no contest’’) in a domestic, foreign or military court to any felony? ...........................................................................................................................................................

(2) been charged with any felony? ...............................................................................................................................

B. In the past ten years has the applicant or a control affiliate:

(1) been convicted of or pled guilty or nolo contendere (“no contest’’) in a domestic, foreign or military court to a misdemeanor involving: investments or an investment-related business, or any fraud, false statements or omissions, wrongful taking of property, bribery, perjury, forgery, counterfeiting, extortion, or a conspiracy to commit any of these offenses? ...........................................................................................................................

(2) been charged with a misdemeanor specified in 11B(1)? .......................................................................................

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C. Has the U.S. Securities and Exchange Commission or the Commodity Futures Trading Commission ever:

(1) found the applicant or a control affiliate to have made a false statement or omission? .......................................

(2) found the applicant or a control affiliate to have been involved in a violation of its regulations or statutes? ......

(3) found the applicant or a control affiliate to have been a cause of an investment-related business having its authorization to do business denied, suspended, revoked, or restricted? ...........................................................

(4) entered an order against the applicant or a control affiliate in connection with investment-related activity? ......

(5) imposed a civil money penalty on the applicant or a control affiliate, or ordered the applicant or a control affiliate to cease and desist from any activity? .......................................................................................................

OFFICIAL USEOFFICIAL USEFORM BD ONLYApplicantName:______________________________________________________________________

PAGE 4 Date:____________________ Firm CRD No.: _______________

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D. Has any other federal regulatory agency, any state regulatory agency, or foreign financial regulatory authority: YES NO

(1) ever found the applicant or a control affiliate to have made a false statement or omission or been dishonest, unfair, or unethical? .................................................................................................................................................

(2) ever found the applicant or a control affiliate to have been involved in a violation of investment-related regulations or statutes? ...........................................................................................................................................

(3) ever found the applicant or a control affiliate to have been a cause of an investment-related business having its authorization to do business denied, suspended, revoked, or restricted? ......................................................

(4) in the past ten years, entered an order against the applicant or a control affiliate in connection with an investment-related activity? .....................................................................................................................................

(5) ever denied, suspended, or revoked the applicant’s or a control affiliate’s registration or license or otherwise, by order, prevented it from associating with an investment-related business or restricted its activities? ..........

E. Has any self-regulatory organization or commodities exchange ever:

(1) found the applicant or a control affiliate to have made a false statement or omission? .......................................

(2) found the applicant or a control affiliate to have been involved in a violation of its rules (other than a violation designated as a “minor rule violation’’ under a plan approved by the U.S. Securities and Exchange Commission)? ..........................................................................................................................................................

(3) found the applicant or a control affiliate to have been the cause of an investment-related business having its authorization to do business denied, suspended, revoked, or restricted? ...........................................................

(4) disciplined the applicant or a control affiliate by expelling or suspending it from membership, barring or suspending its association with other members, or otherwise restricting its activities? ......................................

F. Has the applicant’s or a control affiliate’s authorization to act as an attorney, accountant, or federal contractor ever been revoked or suspended? .........................................................................................................................................

G. Is the applicant or a control affiliate now the subject of any regulatory proceeding that could result in a “yes” answer to any part of 11C, D, or E? ...............................................................................................................................

H. (1) Has any domestic or foreign court:

(a) in the past ten years, enjoined the applicant or a control affiliate in connection with any investment-related activity? ..............................................................................................................................................................

(b) ever found that the applicant or a control affiliate was involved in a violation of investment-related statutes or regulations? ..................................................................................................................................................

(c) ever dismissed, pursuant to a settlement agreement, an investment-related civil action brought against the applicant or control affiliate by a state or foreign financial regulatory authority? .....................................

(2) Is the applicant or a control affiliate now the subject of any civil proceeding that could result in a “yes” answer to any part of 11H(1)? ..............................................................................................................................................

I. In the past ten years has the applicant or a control affiliate of the applicant ever been a securities firm or a control affiliate of a securities firm that:

(1) has been the subject of a bankruptcy petition? .....................................................................................................

(2) has had a trustee appointed or a direct payment procedure initiated under the Securities Investor Protection Act? ...........................................................................................................................................................................

J. Has a bonding company ever denied, paid out on, or revoked a bond for the applicant? .........................................

K. Does the applicant have any unsatisfied judgments or liens against it? ......................................................................

FORM BD PAGE 5

ApplicantName:______________________________________________________________________

Date:____________________ Firm CRD No.: _______________


USE ONLY

12. Check types of business engaged in (or to be engaged in, if not yet active) by applicant. Do not check any category that accounts for (or is expected to account for) less than 1% of annual revenue from the securities or investment advisory business.

A. Exchange member engaged in exchange commission business other than floor activities ...................................... EMC

B. Exchange member engaged in floor activities .............................................................................................................. EMF C. Broker or dealer making inter-dealer markets in corporate securities over-the-counter ............................................. IDM D. Broker or dealer retailing corporate equity securities over-the-counter ....................................................................... BDR E. Broker or dealer selling corporate debt securities ........................................................................................................ BDD F. Underwriter or selling group participant (corporate securities other than mutual funds) ........................................... USG G. Mutual fund underwriter or sponsor ............................................................................................................................... MFU H. Mutual fund retailer ......................................................................................................................................................... MFR

I. 1. U.S. government securities dealer .......................................................................................................................... GSD 2. U.S. government securities broker ......................................................................................................................... GSB

J. Municipal securities dealer ............................................................................................................................................. MSD K. Municipal securities broker. ............................................................................................................................................ MSB L . Broker or dealer selling variable life insurance or annuities ......................................................................................... VLA M. Solicitor of time deposits in a financial institution .......................................................................................................... SSL N. Real estate syndicator. . .................................................................................................................................................. RES O. Broker or dealer selling oil and gas interests ................................................................................................................ OGI P. Put and call broker or dealer or option writer ................................................................................................................ PCB Q. Broker or dealer selling securities of only one issuer or associate issuers (other than mutual funds) ...................... BIA R. Broker or dealer selling securities of non-profit organizations (e.g., churches, hospitals) ......................................... NPB S. Investment advisory services .......................................................................................................................................... IAD T. 1. Broker or dealer selling tax shelters or limited partnerships in primary distributions .......................................... TAP

2. Broker or dealer selling tax shelters or limited partnerships in the secondary market ........................................ TAS U. Non-exchange member arranging for transactions in listed securities by exchange member ................................... NEX V. Trading securities for own account ................................................................................................................................ TRA W. Private placements of securities ..................................................................................................................................... PLA X. Broker or dealer selling interests in mortgages or other receivables ........................................................................... MRI Y. Broker or dealer involved in a networking, kiosk or similar arrangement with a:

1. bank, savings bank or association, or credit union ............................................................................................... BNA

2. insurance company or agency ................................................................................................................................ INA

Z. Other (give details on Schedule D, Page 1, Section II) .................................................................................................. OTH

13. A. Does applicant effect transactions in commodity futures, commodities or commodity options as a broker for others or as a dealer for its own account? .............................................................................................................

B. Does applicant engage in any other non-securities business? ............................................................................. If “yes,” describe each other business briefly on Schedule D, Page 1, Section ll.

YES NO

Schedule A of FORM BD OFFICIAL USE

DIRECT OWNERS AND Applicant Name:_____________________________________________

EXECUTIVE OFFICERS

(Answer for Form BD Item 3) Date:____________________ Firm CRD No.: _______________

1. Use Schedule A only in new applications to provide information on the direct owners and executive officers of the applicant. Use Schedule B in new applications to provide information on indirect owners. File all amendments on Schedule C. Complete each column.

2. List below the names of:

(a) each Chief Executive Officer, Chief Financial Officer, Chief Operations Officer, Chief Legal Officer, Chief Compliance Officer, Director, and individuals with similar status or functions;

(b) in the case of an applicant that is a corporation, each shareholder that directly owns 5% or more of a class of a voting security of the applicant, unless the applicant is a public reporting company (a company subject to Sections 12 or 15(d) of the Securities Exchange Act of 1934); Direct owners include any person that owns, beneficially owns, has the right to vote, or has the power to sell or direct the sale of, 5% or more of a class of a voting security of the applicant. For purposes of this Schedule, a person beneficially owns any securities (i) owned by his/her child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-inlaw, daughter-in-law, brother-in-law, or sister-in-law, sharing the same residence; or (ii) that he/she has the right to acquire, within 60 days, through the exercise of any option, warrant or right to purchase the security.

(c) in the case of an applicant that is a partnership, all general partners and those limited and special partners that have the right to receive upon dissolution, or have contributed, 5% or more of the partnership’s capital; and

(d) in the case of a trust that directly owns 5% or more of a class of a voting security of the applicant, or that has the right to receive upon dissolution, or has contributed, 5% or more of the applicant’s capital, the trust and each trustee.

(e) in the case of an applicant that is a Limited Liability Company (“LLC”), (i) those members that have the right to receive upon dissolution, or have contributed, 5% or more of the LLC’s capital, and (ii) if managed by elected managers, all elected managers.

3. Are there any indirect owners of the applicant required to be reported on Schedule B? Yes No

4. In the “DE/FE/I” column, enter “DE” if the owner is a domestic entity, or enter “FE” if owner is an entity incorporated or domiciled in a foreign country, or enter “I” if the owner is an individual.

5. Complete the “Title or Status” column by entering board/management titles; status as partner, trustee, sole proprietor, or shareholder; and for shareholders, the class of securities owned (if more than one is issued).

6. Ownership codes are: NA - less than 5% B - 10% but less than 25% D - 50% but less than 75% A - 5% but less than 10% C - 25% but less than 50% E - 75% or more

7. (a) In the “Control Person” column, enter “Yes” if person has “control” as defined in the instructions to this form, and enter “No” if the person does not have control. Note that under this definition most executive officers and all 25% owners, general partners, and trustees would be “control persons”.

(b) In the “PR” column, enter “PR” if the owner is a public reporting company under Sections 12 or 15(d) of the Securities Exchange Act of 1934.

Date Title or Control CRD No. If None: Official FULL LEGAL NAME DE/FE/I Title or Status Status Acquired Ownership Person S.S. No., IRS Tax No. Use

(Individuals: Last Name, First Name, Middle Name) Code or Employer ID. Only MM YYYY PR

Schedule B of FORM BD OFFICIAL USE

INDIRECT OWNERS ApplicantName:_____________________________________________

(Answer for Form BD Item 3) Date:____________________ Firm CRD No.: _______________

1. Use Schedule B only in new applications to provide information on the indirect owners of the applicant. Use Schedule A in new applications to provide information on direct owners. File all amendments on Schedule C. Complete each column.

2. With respect to each owner listed on Schedule A, (except individual owners), list below:

(a) in the case of an owner that is a corporation, each of its shareholders that beneficially owns, has the right to vote, or has the power to sell or direct the sale of, 25% or more of a class of a voting security of that corporation;

For purposes of this Schedule, a person beneficially owns any securities (i) owned by his/her child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, sharing the same residence; or (ii) that he/she has the right to acquire, within 60 days, through the exercise of any option, warrant or right to purchase the security.

(b) in the case of an owner that is a partnership, all general partners and those limited and special partners that have the right to receive upon dissolution, or have contributed, 25% or more of the partnership’s capital; and

(c) in the case of an owner that is a trust, the trust and each trustee.

(d) in the case of an owner that is a Limited Liability Company (“LCC”), (i) those members that have the right to receive upon dissolution, or have contributed, 25% or more of the LLC’s capital, and (ii) if managed by elected managers, all elected managers.

3. Continue up the chain of ownership listing all 25% owners at each level. Once a public reporting company (a company subject to Sections 12 or 15(d) of the Securities Exchange Act of 1934) is reached, no ownership information further up the chain of ownership need be given.

4. In the “DE/FE/I” column, enter “DE” if the owner is a domestic entity, or enter “FE” if owner is an entity incorporated or domiciled in a foreign country, or enter “I” if the owner is an individual.

5. Complete the “Status” column by entering status as partner, trustee, shareholder, etc., and if shareholder, class of securities owned (if more than one is issued).

6. Ownership codes are: C - 25% but less than 50% D - 50% but less than 75% E - 75% or more F - Other General Partners

7. (a) In the “Control Person” column, enter “Yes” if person has “control” as defined in the instructions to this form, and enter “No” if the person does not have control. Note that under this definition most executive officers and all 25% owners, general partners, and trustees would be“control persons”.

(b) In the “PR” column, enter “PR” if the owner is a public reporting company under Sections 12 or 15(d) of the Securities Exchange Act of 1934.

Date Control CRD No. If None: Official FULL LEGAL NAME DE/FE/I Entity in Which Status Acquired Ownership Person S.S. No., IRS Tax No. Use

(Individuals: Last Name, First Name, Interest is Owned Status Code or Employer ID. Only Middle Name) MM YYYY PR

Schedule C of FORM BD OFFICIAL USE

AMENDMENTS TO Applicant Name:_____________________________________________

SCHEDULES A & B (Amendments to answers for Form BD Item 3) Date:____________________ Firm CRD No.: _______________

1. This Schedule C is used to amend Schedules A and B of Form BD. Refer to those schedules for specific instructions for completing this Schedule C. Complete each column. File with a completed Execution Page (Page 1).

2. In the Type of Amendment (“Type of Amd.”) column, indicate “A” (addition), “D” (deletion), or“C” (change in information about the same person).

3. Ownership codes are: NA - less than 5% B - 10% but less than 25% D - 50% but less than 75% F - Other General Partners A - 5% but less than 10% C - 25% but less than 50% E - 75% or more

4. List below all changes to Schedule A: (DIRECT OWNERS AND EXECUTIVE OFFICERS)

Type Date Title or Control CRD No. If None: Official FULL LEGAL NAME DE/FE/I of Title or Status Status Acquired Ownership Person S. S. No., IRS Tax No Use

(Individuals: Last Name, First Name, Middle Name) Amd. Code or Employer ID OnlyMM YYYY PR

5. List below all changes to Schedule B: (INDIRECT OWNERS)

FULL LEGAL NAME(Individuals: Last Name, First Name, Middle Name)

DE/FE/I Type

of Amd.

Entity in Which Interest is Owned

Status Date Status Acquired

MM YYYY

Ownership Code

Control Person

PR

CRD No. If None: S.S. No., IRS Tax No.

or Employer ID.

OfficialUse Only

Schedule D of FORM BD Page 1 Applicant Name:_____________________________________________

Date:____________________ Firm CRD No.: _______________


USE ONLY

Use this Schedule D Page 1 to report details for items listed below. Report only new information or changes/updates to previously submitted details. Do not repeat previously submitted information.

This is an INITIAL AMENDED detail filing for the Form BD items checked below:

SECTION I Other Business Names

(Check if applicable) Item 1C(2) List each of the “other’’ names and the jurisdiction(s) in which they are used.

1. Name Jurisdiction 2. Name Jurisdiction

3. Name Jurisdiction 4. Name Jurisdiction

SECTION ll Other Business

(Check one) Item 12Z Item 13B Applicant must complete a separate Schedule D Page 1 for each affirmative response in this section.

Briefly describe any other business (ITEM 12Z); or any other non-securities business (ITEM 13B). Use reverse side of this sheet for additional comments if necessary.

SECTION III Successions

(Check if applicable) Item 5 Date of Succession MM DD YYYY

/ / Name of Predecessor

Firm CRD Number IRS Employer Identification Number (if any) SEC File Number (if any)

Briefly describe details of the succession including any assets or liabilities not assumed by the successor. Use reverse side of this sheet for additional comments if necessary.

SECTION IV Introducing and Clearing Arrangements / Control Persons / Financings

(Check one) Item 7 Item 8A Item 8B Item 8C Item 9A Item 9B

Applicant must complete a separate Schedule D Page 1 for each affirmative response in this section including any multiple responses to any item. Complete the “Effective Date’’ box with the Month, Day and Year that the arrangement or agreement became effective. When reporting a change or termination of an arrangement or agreement, enter the effective date of the change. Firm or Organization Name CRD Number (if any)

Business Address (Street, City, State/Country, Zip+4 Postal Code) Effective Date MM DD Y YYY

/ /

Termination Date MM DD Y YYY

/ / Individual Name (if applicable) (Last, First, Middle) CRD Number (if any)

Business Address (if applicable) (Street, City, State/Country, Zip+4 Postal Code) Effective Date MM DD Y YYY

/ /

Termination Date MM DD Y YYY

/ /

Briefly describe the nature of reference or arrangement (ITEM 7 or ITEM 8); the nature of the control or agreement (ITEM 9A); or the method and amount of financing (ITEM 9B). Use reverse side of this sheet for additional comments if necessary.

OFFICIAL USEOFFICIAL USESchedule D of FORM BD ONLY

Applicant Name:_____________________________________________Page 2

Date:____________________ Firm CRD No.: _______________

Use this Schedule D Page 2 to report details for Item 10A. Report only new information or changes/updates to previously submitted details. Do not repeat previously submitted information. Supply details for all partnerships, corporations, organizations, institutions and individuals necessary to answer each item completely. Use additional copies of Schedule D Page 2 if necessary.

Use the “Effective Date” box to enter the Month, Day, and Year that the affiliation was effective or the date of the most recent change in the affiliation.

This is an INITIAL AMENDED detail filing for Form BD Item 10A

10A. Directly or indirectly, does applicant control, is applicant controlled by, or is applicant under common control with, any partnership, corporation, or other organization that is engaged in the securities or investment advisory business?

SECTION V Complete this section for control issues relating to ITEM 10A only.

The details supplied relate to:

Partnership, Corporation, or Organization Name CRD Number (if any) 1

( check only one)

This Partnership, Corporation, or Organization controls applicant is controlled by applicant is under common control with applicant

Business Address (Street, City, State/Country, Zip+4/Postal Code) Effective Date Termination Date MM DD Y YYY MM DD Y YYY

/ / / / Is Partnership, Corporation or If Yes, provide country of domicile Check “Yes” or “No” for Investment Organization a foreign entity? or incorporation: activities of this partnership, Securities Yes No Advisory Yes No

Yes No corporation, or organization: Activities: Activities:

Briefly describe the control relationship. Use reverse side of this sheet for additional comments if necessary.

Partnership, Corporation, or Organization Name CRD Number (if any) 2

( check only one)

This Partnership, Corporation, or Organization controls applicant is controlled by applicant is under common control with applicant Business Address (Street, City, State/Country, Zip+4/Postal Code) Effective Date Termination Date

MM DD Y YYY MM DD Y YYY / / / /

Is Partnership, Corporation or If Yes, provide country of domicile Check “Yes” or “No” for Investment Organization a foreign entity? or incorporation: activities of this partnership, Securities Yes No Advisory Yes No

Yes No corporation, or organization: Activities: Activities:


Partnership, Corporation, or Organization Name 3

CRD Number (if any)

( check only one)

This Partnership, Corporation, or Organization controls applicant is controlled by applicant is under common control with applicant Business Address (Street, City, State/Country, Zip+4/Postal Code) Effective Date Termination Date

MM DD Y YYY MM DD Y YYY

/ / / / Is Partnership, Corporation or If Yes, provide country of domicile Check “Yes” or “No” for Investment Organization a foreign entity? or incorporation: activities of this partnership, Securities Yes No Advisory Yes No

Yes No corporation, or organization: Activities: Activities: Briefly describe the control relationship. Use reverse side of this sheet for additional comments if necessary.

If applicant has more than 3 organizations to report, complete additional Schedule D Page 2s.

Financial Institution Name CRD Number (if applicable) 1

Institution Type (i.e., bank holding company, national bank, state member bank of the Federal Reserve System, state Effective Date MM DD YYYY non-member bank, savings association, credit union, or foreign bank) / /

Termination Date MM DD YYYY / /

Business Address (Street, City, State/Country, Zip+4/Postal Code) If foreign, country of domicile or incorporation

















OFFICIAL USEOFFICIAL USESchedule D of FORM BD ONLY

ApplicantName:_____________________________________________Page 3

Date:____________________ Firm CRD No.: _______________

Use this Schedule D Page 3 to report details for Item 10B. Report only new information or changes/updates to previously submitted details. Do not repeat previously submitted information. Supply details for all partnerships, corporations, organizations, institutions and individuals necessary to answer each item completely. Use additional copies of Schedule D Page 3 if necessary.

Use the “Effective Date” box to enter the Month, Day, and Year that the affiliation was effective or the date of the most recent change in the affiliation.

This is an INITIAL AMENDED detail filing for Form BD Item 10B

10B. Directly or indirectly, is applicant controlled by any bank holding company, national bank, state member bank of the Federal Reserve System, state non-member bank, savings bank or association, credit union, or foreign bank?

SECTION VI Complete this section for control issues relating to ITEM 10B only.

Provide the details for each organization or institution that controls the applicant, including each organization or institution in the applicant’s chain of ownership. The details supplied relate to:

If applicant has more than 4 organizations/institutions to report, complete additional Schedule D page 3s.

____________________________________________________________________

____________________________________________________________________

OFFICIAL USESchedule E of FORM BD ApplicantName:_____________________________________________

Date:____________________ Firm CRD No.: _______________

INSTRUCTIONS

General: Use this schedule to register or report branch offices or other business locations of the applicant. Repeat Items 1-12 for each branch office or other business location. Each item must be completed unless otherwise noted. Use additional copies of this schedule as necessary. If this branch office or other business location is using a name in connection with securities activities other than the applicant’s name, such name must be reported under Item 1C(2) on Page 1 of this Form.

Specific: Item 1. Specify only one box. Check “Add” when a branch office or other business location is opened and the applicant is filing the initial notice, “Delete’’ when a branch office or other business

location is closed, and “Amendment” to indicate any other change to previously filed information. Item 2. CRD will assign this branch number when the applicant adds a branch office or other business location as discussed in Item 1 above. If known, complete this item for all deletions and

amendments. Item 3. The Billing Code is an alpha/numeric value consisting of up to eight characters. It is the responsibility of the firm to establish and maintain its own unique billing codes. This is not a required

field. Item 4. Complete this item for all entries. A physical location must be included; post office box designations alone are not sufficient. Item 5. Complete this item only when the applicant changes the address of an existing branch office or other business location. Item 6. If the branch office or other business location occupies or shares space on premises within a bank, savings bank or association, credit union, or other financial institution, enter the name

of the institution in the space provided. Item 7. Complete this item for all entries. Enter the name of the supervisor or registered representative in charge who is physically at this location. Item 8. Provide the CRD number for the branch office supervisor named in Item 7. Item 9. Complete this item for all entries. Provide the date that the branch office or other business location was opened (ADD), closed (DELETE), or the effective date of the change (AMENDMENT). Item 10. Check “Yes” or “No” to denote whether the location will be an Office of Supervisory Jurisdiction (OSJ) as defined in FINRA rules. Item 11. Check “Yes” or “No” to denote whether the location is a business location that will operate pursuant to a written agreement or contract (other than an insurance agency agreement) with

the main office and any one or more of the following will apply: the location (A) assumes liability for its own expenses or has its expenses paid by a party other than the applicant; (B) has primary responsibility for decisions relating to the employment and remuneration of its registered representatives; (C) deems 5% or more of its total registered representatives to be “independent contractors” for tax purposes; or (D) engages in separate market making and/or underwriting activities.

Item 12. Check the appropriate box(es) if the branch or other business location is registering with FINRA or registering or reporting with a jurisdiction.

1. Check only one box: Add Delete Amendment

2. CRD Branch Number ___________________________________________________ 6. _____________________________________________________________________ Institution Name (if applicable)

3. Billing Code __________________________________________________________ 7. _____________________________________________________________________Supervisor Name

4. ____________________________________________________________________ 8. _____________________________________________________________________ Street CRD Number of Supervisor ____________________________________________________________________ 9. _____________________________________________________________________ P.0. Box (if applicable), Suite, Floor Effective Date (MM/DD/YYYY) ____________________________________________________________________ 10. OSJ Yes No City, State/Country, Zip Code + 4/Postal Code

If applicant is changing the address, enter the new address in Item 5. 11. Yes No

5. ____________________________________________________________________Street If Yes, indicate each Item 11 subset that applies:

A B C D P.0. Box (if applicable), Suite, Floor ____________________________________________________________________ 12. FINRA Jurisdiction City, State/Country, Zip Code + 4/Postal Code

1. Check only one box: Add Delete Amendment

2. CRD Branch Number ___________________________________________________ 6. _____________________________________________________________________Institution Name (if applicable)

3. Billing Code __________________________________________________________ 7. _____________________________________________________________________Supervisor Name

4. ____________________________________________________________________ 8. _____________________________________________________________________ Street CRD Number of Supervisor ____________________________________________________________________ 9. _____________________________________________________________________ P.0. Box (if applicable), Suite, Floor Effective Date (MM/DD/YYYY) ____________________________________________________________________ 10. OSJ Yes No City, State/Country, Zip Code + 4/Postal Code

If applicant is changing the address, enter the new address in Item 5. 11. Yes No

5. ____________________________________________________________________Street If Yes, indicate each Item 11 subset that applies:

A B C D P.0. Box (if applicable), Suite, Floor ____________________________________________________________________ 12. FINRA Jurisdiction City, State/Country, Zip Code + 4/Postal Code

CRIMINAL DISCLOSURE REPORTING PAGE (BD)

GENERAL INSTRUCTIONS

This Disclosure Reporting Page (DRP BD) is an INITIAL OR AMENDED response used to report details for affirmative responses to Items 11A and 11B of Form BD;

Check ;;;;; item(s) being responded to: 11A In the past ten years has the applicant or a control affiliate:

(1) been convicted of or pled guilty or nolo contendere (“no contest”) in a domestic, foreign, or military court to any felony? (2) been charged with any felony?

11B In the past ten years has the applicant or a control affiliate: (1) been convicted or pled guilty or nolo contendere (“no contest”) in a domestic, foreign or military court to a misdemeanor involving: investments

or an investment-related business, or any fraud, false statements or omissions, wrongful taking of property, bribery, perjury, forgery, counterfeiting, extortion, or a conspiracy to commit any of these offenses?

(2) been charged with a misdemeanor specified in 11B(1)?

Use a separate DRP for each event or proceeding. An event or proceeding may be reported for more than one person or entity using one DRP. File with a completed Execution Page.

Multiple counts of the same charge arising out of the same event(s) should be reported on the same DRP. Unrelated criminal actions, including separate cases arising out of the same event, must be reported on separate DRPs. Use this DRP to report all charges arising out of the same event. One event may result in more than one affirmative answer to the above items.

If a control affiliate is an individual or organization registered through the CRD, such control affiliate need only complete Part I of the applicant’s appropriate DRP (BD). Details of the event must be submitted on the control affiliate’s appropriate DRP (BD) or DRP (U-4). If a control affiliate is an individual or organization not registered through the CRD, provide complete answers to all the items on the applicant’s appropiate DRP (BD). The completion of this DRP does not relieve the control affiliate of its obligation to update its CRD records.

Applicable court documents (i.e., criminal complaint, information or indictment as well as judgment of conviction or sentencing documents) must be provided to the CRD if not previously submitted. Documents will not be accepted as disclosure in lieu of answering the questions on this DRP.

PART I

A. The person(s) or entity(ies) for whom this DRP is being filed is (are):

The Applicant

Applicant and one or more control affifiate(s)

One or more control affiliate(s)

If this DRP is being filed for a control affiliate, give the full name of the control affiliate below (for individuals, Last name, First name, Middle name).

If the control affiliate is registered with the CRD, provide the CRD number. If not, Indicate “non-registered’’ by checking the appropriate checkbox.

NAME OF APPLICANT APPLICANT CRD NUMBER

BD DRP - CONTROL AFFILIATE

CRD NUMBER This Control Affiliate is Firm Individual

Registered: Yes No

NAME (For individuals, Last, First, Middle)

This DRP should be removed from the BD record because the control affiliate(s) are no longer associated with the BD.

B. If the control affiliate is registered through the CRD, has the control affiliate submitted a DRP (with Form U-4) or BD DRP to the CRD System for the event? If the answer is “Yes,’’ no other information on this DRP must be provided.

Yes No

NOTE: The completion of this Form does not relieve the control affiliate of its obligation to update its CRD records.

(continued)

CRIMINAL DISCLOSURE REPORTING PAGE (BD) (continuation)

PART II

1. If charge(s) were brought against an organization over which the applicant or control affiliate exercise(d) control: Enter organization name, whether or not the organization was an investment-related business and the applicant’s or control affiliate’s position, title or relationship.

________________________________________________________________________________________________________________________

2. Formal Charge(s) were brought in: (include name of Federal, Military, State or Foreign Court, Location of Court - City or County and State or Country, Docket/Case number).

_______________________________________________________________________________________________________________________

3. Event Disclosure Detail (Use this for both organizational and individual charges.)

A. Date First Charged (MM/DD/YYYY): Exact Explanation

If not exact, provide explanation: __________________________________________________________________________________________

B. Event Disclosure Detail (include Charge(s)/Charge Description(s), and for each charge provide: 1. number of counts, 2. felony or misdemeanor, 3. plea for each charge, and 4. product type if charge is investment-related):

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

C. Did any of the Charge(s) within the Event involve a Felony? Yes No

D. Current status of the Event? Pending On Appeal Final

E. Event Status Date (complete unless status is Pending) (MM/DD/YYYY): Exact Explanation


4. Disposition Disclosure Detail: Include for each charge, A. Disposition Type [e.g., convicted, acquitted, dismissed, pretrial, etc.], B. Date, C. Sentence/Penalty, D. Duration [if sentence-suspension, probation, etc.], E. Start Date of Penalty, F. Penalty/Fine Amount and G. Date Paid.

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

5. Provide a brief summary of circumstances leading to the charge(s) as well as the disposition. Include the relevant dates when the conduct which was the subject of the charge(s) occurred. (The information must fit within the space provided.)

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

REGULATORY ACTION DISCLOSURE REPORTING PAGE (BD)


This Disclosure Reporting Page (DRP BD) is an INITIAL OR AMENDED response used to report details for affirmative responses to Items 11C, 11D, 11E, 11F or 11G of Form BD; Check ;;;;; item(s) being responded to: 11C. Has the U.S. Securities and Exchange Commission or the Commodity Futures Trading Commission ever:

(1) found the applicant or a control affiliate to have made a false statement or omission? (2) found the applicant or a control affiliate to have been involved in a violation of its regulations or statutes? (3) found the applicant or a control affiliate to have been a cause of an investment-related business having its authorization to do business denied, suspended, revoked, or restricted? (4) entered an order against the applicant or a control affiliate in connection with investment-related activity? (5) imposed a civil money penalty on the applicant or a control affiliate, or ordered the applicant or a control affiliate to cease and desist from any activity?

11D. Has any other federal regulatory agency, any state regulatory agency, or foreign financial regulatory authority: (1) ever found the applicant or a control affiliate to have made a false statement or omission or been dishonest, unfair, or unethical? (2) ever found the applicant or a control affiliate to have been involved in a violation of investment-related regulations or statutes? (3) ever found the applicant or a control affiliate to have been a cause of an investment-related business having its authorization to do business denied, suspended, revoked, or restricted? (4) in the past ten years, entered an order against the applicant or a control affiliate in connection with an investment-related activity? (5) ever denied, suspended, or revoked the applicant’s or a control affiliate’s registration or license or otherwise, by order, prevented it from associating with an investment-related business or restricted its activities?

11E. Has any self-regulatory organization or commodities exchange ever: (1) found the applicant or a control affiliate to have made a false statement or omission? (2) found the applicant or a control affiliate to have been involved in a violation of its rules (other than a violation designated as a “ minor rule violation’’ under a plan approved by the U.S. Securities and Exchange Commission)? (3) found the applicant or a control affiliate to have been the cause of an investment-related business having its authorization to do business denied, suspended, revoked, or restricted? (4) disciplined the applicant or a control affiliate by expelling or suspending it from membership, barring or suspending its association with other members, or otherwise restricting its activities?

11F. Has the applicant’s or a control affiliate’s authorization to act as an attorney, accountant, or federal contractor ever been revoked or suspended? 11G. Is the applicant or a control affiliate now the subject of any regulatory proceeding that could result in a “yes” answer to any part of 11C, D, or E?


One event may result in more than one affirmative answer to Items 11C, 11D, 11E, 11F or 11G. Use only one DRP to report details related to the same event. If an event gives rise to actions by more than one regulator, provide details for each action on a separate DRP.

It is not a requirement that documents be provided for each event or proceeding. Should they be provided, they will not be accepted as disclosure in lieu of answering the questions on this DRP.

If a control affiliate is an individual or organization registered through the CRD, such control affiliate need only complete Part I of the applicant’s appropriate DRP (BD). Details of the event must be submitted on the control affiliate’s appropriate DRP (BD) or DRP (U-4). If a control affiliate is an individual or organization not registered through the CRD, provide complete answers to all the items on the applicant’s appropriate DRP (BD). The completion of this DRP does not relieve the control affiliate of its obligation to update its CRD records.

PART lRT I


The Applicant Applicant and one or more control affiliate(s) One or more control affiliate(s)


If the control affiliate is registered with the CRD, provide the CRD number. If not, indicate “non-registered’’ by checking the appropriate checkbox.




Registered: Yes No



B. If the control affiliate is registered through the CRD, has the control affiliate submitted a DRP (with Form U-4) or BD DRP to the CRD System for the event? If the answer; “Yes,” no other information on this DRP must be provided.

Yes No

NOTE: The completion of this form does not relieve the control affiliate of its obligation to update its CRD records.

(continued)

___________________________________________________________________________________________________________________

_____________________________________________________________________________________________________________________

_____________________________________________________________________________________________________________________

_____________________________________________________________________________________________________________________

____________________________________________________________________________________________________________________

REGULATORY ACTION DISCLOSURE REPORTING PAGE (BD) (continuation)

PART ll

1. Regulatory Action initiated by: SEC Other Federal State SRO Foreign

(Full name of regulator, foreign financial regulatory authority, federal, state or SRO)

2. Principal Sanction: (check appropriate item)

Civil and Administrative Penalty(ies)/Fine(s) Bar Cease and Desist Censure Denial

Disgorgement Expulsion Injunction Prohibition Reprimand

Restitution Revocation Suspension Undertaking Other _____________________________

Other Sanctions:

_____________________________________________________________________________________________________________________

_____________________________________________________________________________________________________________________

_____________________________________________________________________________________________________________________

3. Date Initiated (MM/DD/YYYY): Exact Explanation

If not exact, provide explanation: ____________________________________________________________________________________

4. Docket/Case Number:

5. Control Affiliate Employing Firm when activity occurred which led to the regulatory action (if applicable):

6. Principal Product Type: (check appropriate item)

Annuity(ies) - Fixed Derivative(s) Investment Contract(s) Annuity(ies) - Variable Direct Investment(s) - DPP & LP Interest(s) Money Market Fund(s) CD(s) Equity - OTC Mutual Fund(s) Commodity Option(s) Equity Listed (Common & Preferred Stock) No Product Debt - Asset Backed Futures - Commodity Options

Debt - Corporate Futures - Financial Penny Stock(s) Debt - Government Index Option(s) Unit Investment Trust(s)

Debt - Municipal Insurance Other ________________________________ Other Product Types:

_____________________________________________________________________________________________________________________

7. Describe the allegations related to this regulatory action. (The information must fit within the space provided.):

_____________________________________________________________________________________________________________________

_____________________________________________________________________________________________________________________

_____________________________________________________________________________________________________________________

8. Current Status? Pending On Appeal Final 9. If on appeal, regulatory action appealed to: (SEC, SRO, Federal or State Court) and Date Appeal Filed:

(continued)

REGULATORY ACTION DISCLOSURE REPORTING PAGE (BD) (continuation)

If Final or On Appeal, complete all items below. For Pending Actions, complete Item 13 only.

10. How was matter resolved: (check appropriate item)

Acceptance, Waiver & Consent (AWC)

Consent

Decision

Decision & Order of Offer of Settlement

Dismissed

Order

Settled

Stipulation and Consent

Vacated

11. Resolution Date (MM/DD/YYYY): Exact Explanation

If not exact, provide explanation:

12. A. Were any of the following Sanctions Ordered? (Check all appropriate items):

Monetary/Fine Revocation/Expulsion/Denial Disgorgement/Restitution

Amount: $ Censure Cease and Desist/Injunction Bar Suspension

B. Other Sanctions Ordered:

________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________

C. Sanction detail: If suspended, enjoined or barred, provide duration including start date and capacities affected (General Securities Principal, Financial Operations Principal, etc.). If requalification by exam/retraining was a condition of the sanction, provide length of time given to requalify/retrain, type of exam required and whether condition has been satisfied. If disposition resulted in a fine, penalty, restitution, disgorgement or monetary compensation, provide total amount, portion levied against applicant or control affiliate, date paid and if any portion of penalty was waived:

________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________

13. Provide a brief summary of details related to the action status and (or) disposition and include relevant terms, conditions and dates. (The information must fit within the space provided.)

________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________________________________

CIVIL JUDICIAL ACTION DISCLOSURE REPORTING PAGE (BD)


This Disclosure Reporting Page (DRP BD ) is an INITIAL OR AMENDED response used to report details for affirmative responses to Item 11H of Form BD;

Check ;;;;; item(s) being responded to:

11H(1) Has any domestic or foreign court: (a) in the past ten years, enjoined the applicant or a control affiliate in connection with any investmenf-related activity? (b) ever found that the applicant or a control affiliate was involved in a violation of investment-related statutes or regulations? (c) ever dismissed, pursuant to a settlement agreement, an investment-related civil action brought against the applicant

or a control affiliate by a state or foreign financial regulatory authority? 11H(2) Is the applicant or a control affiliate now the subject of any civil proceeding that could result in a “yes” answer to any part

of 11H?


One event may result in more than one affirmative answer to Item 11H. Use only one DRP to report details related to the same event. Unrelated civil judicial actions must be reported on separate DRPs.



PART I


The Applicant Applicant and one or more control affiliate(s) One or more control affiliate(s)






Registered: Yes No



B. If the control affiliate is registered through the CRD, has the control affiliate submitted a DRP (with Form U-4) or BD DRP to the CRD System for the event? If the answer is “Yes,’’ no other information on this DRP must be provided.

Yes No NOTE: The completion of this Form does not relieve the control affiliate of its obligation to update its CRD records.

PART ll

1. Court Action initiated by: (Name of regulator, foreign financial regulatory authority, SRO, commodities exchange, agency, firm, private plaintiff, etc.)

________________________________________________________________________________________________________________________

(continued)

CIVIL JUDICIAL ACTION DISCLOSURE REPORTING PAGE (BD) (continuation)

2. Principal Relief Sought: (check appropriate item)

Cease and Desist Disgorgement Money Damages (Private/Civil Complaint) Restraining Order Civil Penalty(ies)/Fine(s) Injunction Restitution Other _______________

Other Relief Sought:

________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________

3. Filing Date of Court Action (MM/DD/YYYY): Exact Explanation

If not exact, provide explanation: ________________________________________________________________________________________

4. Principal Product Type: (check appropriate item)

Annuity(ies) - Fixed Derivative(s) Investment Contract(s) Annuity(ies) - Variable Direct Investment(s) - DPP & LP Interest(s) Money Market Fund(s) CD(s) Equity - OTC Mutual Fund(s) Commodity Option(s) Equity Listed (Common & Preferred Stock) No Product Debt - Asset Backed Futures - Commodity Options Debt - Corporate Futures - Financial Penny Stock(s) Debt - Government Index Option(s) Unit Investment Trust(s) Debt - Municipal Insurance Other ____________________________________

Other Product Types:

________________________________________________________________________________________________________________________

5. Formal Action was brought in (include name of Federal, State or Foreign Court, Location of Court - City or County and State or Country, Docket/Case Number):

________________________________________________________________________________________________________________________

6. Control Affiliate Employing Firm when activity occurred which led to the civil judicial action (if applicable):

7. Describe the allegations related to this civil action. (The information must fit within the space provided.):

________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________

8. Current Status? Pending On Appeal Final

9. If on appeal, action appealed to (provide name of court): Date Appeal Filed (MM/DD/YYYY):

________________________________________________________________________________________________________________________

10. If pending, date notice/process was served (MM/DD/YYYY): Exact Explanation

If not exact, provide explanation: ___________________________________________________________________________________________

(continued)

CIVIL JUDICIAL ACTION DISCLOSURE REPORTING PAGE (BD) (continuation)

If Final or On Appeal, complete all items below. For Pending Actions, complete Item 14 only.

11. How was matter resolved: (check appropriate item)

Consent

Dismissed

Judgment Rendered

Opinion

Settled

Withdrawn Other ___________________________

12. Resolution Date (MM/DD/YYYY): Exact Explanation

If not exact, provide explanation: ____________________________________________________________________________

13. Resolution Detail:

A. Were any of the following Sanctions Ordered or Relief Granted? (Check appropriate items): Monetary/Fine Revocation/Expulsion/Denial Disgorgement/Restitution

Amount $ Censure Cease and Desist/injunction Bar Suspension

B. Other Sanctions:

____________________________________________________________________________________________________________________

____________________________________________________________________________________________________________________

____________________________________________________________________________________________________________________

C . Sanction detail: if suspended, enjoined or barred, provide duration including start date and capacities affected (General Securities Principal, Financial Operations Principal, etc.). If requalification by exam/retraining was a condition of the sanction, provide length of time given to requalify/retrain, type of exam required and whether condition has been satisfied. If disposition resulted in a fine, penalty, restitution, disgorgement or monetary compensation, provide total amount, portion levied against applicant or control affiliate, date paid and if any portion of penalty was waived:

____________________________________________________________________________________________________________________

____________________________________________________________________________________________________________________

____________________________________________________________________________________________________________________

____________________________________________________________________________________________________________________

14. Provide a brief summary of circumstances related to action(s), allegation(s), disposition(s) and/or finding(s) disclosed above. (The information must fit within the space provided.):

________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________

________________________________________________________________________________________________________________________

BANKRUPTCY / SIPC DISCLOSURE REPORTING PAGE (BD)

G E N E R A L I N S T R U C T I O N S

This Disclosure Reporting Page (DRP BD) is an INITIAL OR AMENDED response used to report details for affirmative responses to Item 11I of Form BD;

Check ;;;;; item(s) being responded to:

11I In the past ten years has the applicant or a control affiliate of the applicant ever been a securities firm or a control affiliate of a securities firm that:

(1) has been the subject of a bankruptcy petition?

(2) has had a trustee appointed or a direct payment procedure initiated under the Securities Investor Protection Act?




PART I


The Applicant Applicant and one or more control affiliate(s)

One or more control affiliate(s)






Registered: Yes No


This DRP should be removed from the BD record because the control affilliate(s) are no longer associated with the BD. B. If the control affiliate is registered through the CRD, has the control affiliate submitted a DRP (with Form U-4) or BD DRP to the CRD

System for the event? If the answer is “Yes,’’ no other information on this DRP must be provided.

Yes No NOTE: The completion of this Form does not relieve the control affiliate of its obligation to update its CRD records.

PART ll

1. Action Type: (check appropriate item) Bankruptcy Declaration Receivership

Compromise Liquidated Other ________________________

2. Action Date (MM/DD/YYYY): Exact Explanation


(continued)

BANKRUPTCY / SIPC DISCLOSURE REPORTING PAGE (BD) (continuation)

3. If the financial action relates to an organization over which the applicant or control affiliate exercise(d) control, enter organization name and the applicant’s or control affiliate’s position, title or relationship:

________________________________________________________________________________________________________________________

Was the Organization investment-related? Yes No 4. Court action brought in (Name of Federal, State or Foreign Court), Location of Court (City or County and State or Country), Docket/Case

Number and Bankruptcy Chapter Number (if Federal Bankruptcy Filing):

________________________________________________________________________________________________________________________

5. Is action currently pending? Yes No

6. If not pending, provide Disposition Type: (check appropriate item)

Direct Payment Procedure Dismissed Satisfied/Released

Discharged Dissolved SIPA Trustee Appointed Other ____________________________

7. Disposition Date (MM/DD/YYYY): Exact Explanation


8. Provide a brief summary of events leading to the action and if not discharged, explain. (The information must fit within the space provided.):

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

9. If a SIPA trustee was appointed or a direct payment procedure was begun, enter the amount paid or agreed to be paid by you; or the name of the trustee:

Currently Open? Yes No

Date Direct Payment Initiated/Filed or Trustee Appointed (MM/DD/YYYY): Exact Explanation


10. Provide details to any status/disposition. Include details as to creditors, terms, conditions, amounts due and settlement schedule (if applicable). (The information must fit within the space provided.)

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

BOND DISCLOSURE REPORTING PAGE (BD)


This Disclosure Reporting Page (DRP BD) is an INITIAL OR AMENDED response used to report details for affirmative responses to Item 11J of Form BD;

Check ;;;;; item(s) being responded to: 11J Has a bonding company ever denied, paid out on, or revoked a bond for the applicant?




1. Firm Name: (Policy Holder)

2. Bonding Company Name:

3. Disposition Type: (check appropriate item)

Denied Payout Revoked

4. Disposition Date (MM/DD/YYYY): Exact Explanation


_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

5. If disposition resulted in Payout, list Payout Amount and Date Paid:

6. Summarize the details of circumstances leading to the necessity of the bonding company action: (The information must fit within the space provided.)

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________

JUDGMENT / LIEN DISCLOSURE REPORTING PAGE (BD)


This Disclosure Reporting Page (DRP BD) is an INITIAL OR AMENDED response used to report details for affirmative responses to Item 11K of Form BD; Check ; item(s) being responded to:

11K Does the applicant have any unsatisfied judgments or liens against it?




1. Judgment/Lien Amount:

2. Judgment/Lien Holder:

3. Judgment/Lien Type: (check appropriate item)

Civil Default Tax

4. Date Filed (MM/DD/YYYY): Exact Explanation


5. Is Judgment/Lien outstanding? Yes No

If No, provide status date (MM/DD/YYYY): Exact Explanation


If No, how was matter resolved? (check appropriate item)

Discharged Released Removed Satisfied

6. Court (Name of Federal, State or Foreign Court), Location of Court (City or County and State or Country) and Docket/Case Number:

7. Provide a brief summary of events leading to the action and any payment schedule details including current status (if applicable). (The information must fit within the space provided.):

©2017. FINRA. All rights reserved. Materials may not be reprinted or republished without the express permission of FINRA. Individuals, firms, and data mentioned in these materials are fictitious and are presented exclusively for purposes of illustration or example.

Questions on Web CRD? Call the FINRA Gateway Call Center at 301-869-6699

8 A.M. - 8 P.M., ET, Monday through Friday.

Organization Form Filing: Form BD Web CRD

Contents:

Creating a Form BD Filing (pg. 2)

Form BD Filing Types (pg. 3)

Schedule A - Direct Owners/Executive Officers (pg. 4)

Schedule B - Indirect Owners (pg. 5)

Completing a Form BD Disclosure Reporting Page (DRP) (pg. 6)

Printing Form BD (pg. 9)

Submitting Form BD (pg. 10)

Retrieving Pending Forms BD and BDW (pg. 12)

Viewing Historical Forms BD and BDW (pg. 14)

Tips for Submitting Forms BD and BDW (pg. 15)

About Form BD The Form BD (Uniform Application for Broker-Dealer Registration) is used to register a broker-dealer with the SEC, SROs and jurisdictions. Firms can create and submit Form BD Initial and Amendment fil-ings electronically through Web CRD. Defined terms are italicized throughout the Form BD. When the cursor is positioned over any part of an italicized word or phrase, the definition of that word or phrase appears in a small pop-up box. If the defi-nition is too large to display in the pop-up, click the More hyperlink to open a second browser with the complete definition from the Explanation of Terms.

Form BD

Copyright 2017. FINRA Release 2017.12 (December) 2

Creating a Form BD Filing Web CRD can be accessed (2) ways:

1. FINRA Firm Gateway at —> https://firms.finra.org, or

2. Directly at —> https://crd.finra.org. Enter your User ID and Password. (If you access via FINRA Firm Gateway, click on the Web CRD tab.) There are two ways to access a Form BD filing: 1. From the CRD Site Map, click the Initial or Amendment hyperlink OR 2. Click the Forms Tab from the Tool Bar, choose BD Form from the Sub-menu and then select the filing type on the next screen.

https://firms.finra.org

https://crd.finra.org

Form BD


Form BD Filing Types

The Form BD is the Uniform Application for Broker-Dealer registration with the SEC, SROs and jurisdictions. It provides background information on the applicant and the nature of its business. It includes lists of the executive officers and general partners of the company. It also contains information on any securities violations.

There are two (2) Form BD filing types:

1. Initial – This form is used by new broker-dealer firms to apply with the SEC, SROs and jurisdictions.

The form can now be submitted electronically through CRD. See the Register a New Firm page for more information on FINRA membership.

2. Amendments – Amendments are used to add or change information on an existing Form BD. The applicant must update the Form BD information by submitting amendments whenever the information on file becomes inaccurate or incomplete for any reason.

Once the appropriate filing type is created, additional form instructions will display.

http://www.finra.org/industry/new-bd-firm-registration

Form BD


Schedule A - Direct Owners/Executive Officers

To access Schedule A during a Form BD filing, click Direct Owners/Executive Officers from the Naviga-tion Bar.

To create a new Direct Owner/Executive Officer, click the Create New Direct Owner/Executive Officer button and complete the required fields.

Tip: When adding an individual that is not registered with the firm, firms must first submit the Page 2 Initial U4 to associate the person with the firm. After the Page 2 is submitted, the firm can then add the person to Schedule A.

OR

To update an existing Direct Owner/Executive Officer, click the Name hyperlink and type new infor-mation in the appropriate fields.

OR

To terminate a Direct Owner/Executive Officer, click the Name hyperlink and click the Check here to terminate this Owner box.

To delete a Direct Owner/Executive Officer from a current filing that has not yet been submitted, click the Name hyperlink, click the Delete button and choose OK.

Click the Save button.

Form BD


Schedule B - Indirect Owners

To access Schedule B during a Form BD filing, click Indirect Owners from the Navigation Bar.

To create a new Indirect Owner, click the Create New Indirect Owner button and complete the required fields.

Tip: When adding an individual that is not registered with the firm, firms must first submit the Page 2 Initial U4 to associate the person with the firm. After the Page 2 is submitted, the firm can then add the person to Schedule B.

OR

To update an existing Indirect Owner, click the Name hyperlink and type new information in the appropri-ate fields.

OR

To terminate an Indirect Owner, click the Name hyperlink and click the Check here to terminate this Owner box.

OR

To delete an Indirect Owner from a current filing that has not yet been submitted, click the Name hyper-link, click the Delete button and choose OK.

Click the Save button.

Form BD


Completing a Form BD Disclosure Reporting Page (DRP)

Access a DRP during a Form BD filing,

NOTE: Disclosure Reporting Pages must be completed to provide information on a Yes answer to a Disclosure Question.

Click DRPs from the main Navigation Bar.

NOTE: The new Navigation Bar provides access to the various types of DRPs.

Click the applicable DRP type from the Navigation Bar.

NOTE: The DRP questions vary based on the corresponding disclosure section (i.e. Bankruptcy/SIPC, Bond, Civil Judicial, Criminal, Judgment/Lien or Regulatory Action); this page serves to assist you in determining which DRP you should complete. The following is an example of a Regulatory Action DRP: To revise or update an existing DRP, click the Edit hyperlink. Filing Tip To delete a new DRP that was created on a filing that has not yet been submitted, click the Edit hyperlink, and then click the Delete button at the bottom of the DRP.

Form BD


To report a new DRP, click the Create New button, located at the bottom of the screen.

Click the box next to the Disclosure Question that received a Yes response. The Click here to view question text hyperlink displays the question.

NOTE: The Initial or Amended radio buttons are automatically pre-populated by the form and can-not be edited.

PART I:

Click The Applicant, Applicant and One or more control affiliates or One or more control affiliates radio button. If The Applicant radio button is selected, go to Part II to continue with the DRP.

If Applicant and One or more control affiliates or One or more control affiliates radio button is selected: click the Create New Control Affiliate button and add the affiliate. If the affiliate has already reported the event on their own filing, Part II is not required.

PART II:

Only complete this section if the event applies to only The Applicant, or if it applies to an affiliate that is not registered in CRD/IARD and has not already reported the event on their own filings.

Completing a Form BD Disclosure Reporting Page (DRP) (continued)

Form BD


Removing an existing DRP:

If the DRP should be removed from the BD record because the control affiliate(s) are no longer

associated with the BD, click the box and continue as needed.

Completing a Form BD Disclosure Reporting Page (DRP) (continued)

Form BD


Printing a Form BD Filing

Create a new filing or access a Pending Form BD filing,

Select Print Preview from the Submissions Menu. For best results, click the Printer Friendly icon in the top right of the screen. (Note: The exact format of the printout will depend largely on your browser’s print settings.)

NOTE: A paper copy of the form, with original manual signatures, is required to be retained by the filing firm and made available for inspection upon regulatory request. Please review the General Instructions for specific retention requirements.

Form BD


Click the Error Location hyperlink(s) and complete the necessary fields until all errors have been corrected.

Submitting a Form BD Filing

Click the Completeness Check hyperlink from the Submissions Menu.

NOTE: You can perform a Completeness Check at any time during the Form Filing process by selecting Completeness Check. In addition, attempting to submit the form filing with incomplete fields will open the Completeness Check error screen. If the filing passes a Completeness you can submit the fil-ing.

Form BD


Click the Submit Filing button.

Click the OK button.

Submitting a Form BD Filing (continued)

Click Submit Filing from the Submissions Menu when ready to submit the filing to CRD.

NOTE: When Submit Filing is selected prior to running a Completeness Check, CRD will automat-ically run a Completeness Check to verify that all required information has been provided. If information has not been completed in the required fields, the Completeness Check will display the error screen with links to the required fields to be completed.

Form BD


Retrieving Pending BD and BDW Filings

CRD automatically deletes pending filings after 180 days if the filing is not submitted. There are two ways to access pending filings: From the Site Map, click the Pending BD Filings or Pending BDW Filings hyperlink.

OR

Click the Forms Tab from the Tool Bar, choose Form BD or Form BDW from the Sub-menu and click Pending Filings from the Navigation Bar.

Select the Ascending or Descending radio button and click the Search button. To continue with a Pending filing, click the Filing ID hyperlink.

OR

To delete a Pending filing, click the Delete hyperlink.

Form BD


Click each section of the Pending filing from the Navigation Bar, type the appropriate information and click the Save button.

NOTE: To view sections changed from the previous filing while the filing is in Pending, Click Print Preview on the Navigation Panel and select View Only Sections Changed. If a section was not changed "No Information Filed" message will display.

Retrieving Pending BD and BDW Filings (continued)

Form BD


Viewing Historical Forms BD and BDW Filings

There are two ways to access historical filings: From the Site Map, click the Historical BD Filings or Historical BDW Filings hyperlink.

OR

Click the Forms Tab from the Tool Bar, choose BD Form, BDW Form or BR Form from the Sub-menu and click Historical Filings from the Navigation Bar.

Click the Filing Date hyperlink to display the filing.

NOTE: The type of Historical Filing will be displayed under the Historical Filing Search Results Header (e.g., BD or BDW)

Click View Changes on Filing to see the modifications made on that filing in red. OR Click View Only Sections Changed to see just the sections changed on that amendment. OR Click each page from the Navigation Bar to view the filing by page. OR Click All Pages to view the filing in its entirety.

Form BD


Tips for Submitting Forms BD and BDW

Pending BD filings can remain pending for up to 180 days, and Pending BDW filings can remain pending for up to 60 days. Pending filings that are not submitted prior to the cutoff will be deleted from the system and cannot be recovered.

If any part of the firm’s CRD record is updated while a filing is pending, the pending filing will be set to read-only and will have to be restarted.

For the Applicant Information Section of BD Amendment filing, the “Business” telephone number entered in item 1G is released through FINRA’s BrokerCheck program.

When changing a firm’s name, be sure to reserve the name by written request to FINRA’s Registra-tion and Disclosure Department using the Firm Name Reservation Request Form.

If deleting existing listings on Schedule D of the Form BD (Items 7, 8A-C, 9A-B, and/or 10A-B), you must enter a Termination Date. The Delete button only deletes information that has not yet been submitted on a filing.

Be sure that you click the Edit hyperlink when updating a DRP (do not create a new DRP, as this will create duplicate occurrences).

When filing a DRP involving a Control Affiliate, the name of that Control Affiliate must be listed in Part IA of the DRP.

If an individual acts in several capacities with the firm, do not list the individual multiple times on Schedule A or Schedule B. List the individual once on the appropriate schedule(s) and indicate all statuses held by that individual (e.g., FINOP/President/COO). In the Date Status Acquired field, en-ter the most recent effective date, i.e., the date the individual acquired his newest status.

A paper copy of the form, with original manual signatures, is required to be retained by the filing firm and made available for inspection upon regulatory request. Please review the General Instructions for specific record retention requirements.

http://www.finra.org/sites/default/files/firm-name-reservation-request-form.pdf

Rev. Form U4 (05/2009) UNIFORM APPLICATION FOR SECURITIES INDUSTRY REGISTRATION OR TRANSFER

INDIVIDUAL NAME: INDIVIDUAL CRD #:

FIRM NAME: FIRM CRD #:

Page 1 of 39

1. GENERAL INFORMATION

FIRST NAME: MIDDLE NAME:

LAST NAME: SUFFIX:

FIRM CRD #:

FIRM NAME: EMPLOYMENT DATE(MM/DD/YYYY):

FIRM Billing Code: INDIVIDUAL CRD #:

INDIVIDUAL SSN:

Do you have an independent contractor relationship with the above named firm?: O Yes O No Office of Employment Address:

ORegistered

ONon-Registered

CRD BRANCH #: NYSE BRANCH CODE#: FIRM BILLING CODE: O Located At O Supervised From

START DATE: END DATE:

OFFICE OF EMPLOYMENT ADDRESS STREET 1:

CITY: STATE:


COUNTRY: POSTAL CODE:

Private Residence Check Box: If the Office of Employment address is a private residence, check this box.

ORegistered

ONon-Registered




CITY: STATE:




ORegistered

ONon-Registered




CITY: STATE:




2. FINGERPRINT INFORMATION Electronic Filing Representation O By selecting this option, I represent that I am submitting, have submitted, or promptly will submit to the appropriate SRO

a fingerprint card as required under applicable SRO rules; or Fingerprint card barcode __________________________________________________

O By selecting this option, I represent that I have been employed continuously by the filing firm since the last submission of a fingerprint card to CRD and am not required to resubmit a fingerprint card at this time; or,

O By selecting this option, I represent that I have been employed continuously by the filing firm and my fingerprints have been processed by an SRO other than FINRA. I am submitting, have submitted, or promptly will submit the processed results for posting to CRD.

Exceptions to the Fingerprint Requirement O By selecting one or more of the following two options, I affirm that I am exempt from the federal fingerprint requirement because

I/filing firm currently satisfy(ies) the requirements of at least one of the permissive exemptions indicated below pursuant to Rule 17f-2 under the Securities Exchange Act of 1934, including any notice or application requirements specified therein:

Rule 17f-2(a)(1)(i)

Rule 17f-2(a)(1)(iii)

Investment Adviser Representative Only Applicants O I affirm that I am applying only as an investment adviser representative and that I am not also applying or have not also

applied with this firm to become a broker-dealer representative. If this radio button/box is selected, continue below. O I am applying for registration only in jurisdictions that do not have fingerprint card filing requirements, or O I am applying for registration in jurisdictions that have fingerprint card filing requirements and I am submitting, have

submitted, or promptly will submit the appropriate fingerprint card directly to the jurisdictions for processing pursuant to applicable jurisdiction rules.




Page 2 of 39

3. REGISTRATION WITH UNAFFILIATED FIRMS

Some jurisdictions prohibit "dual registration," which occurs when an individual chooses to maintain a concurrent registration as a representative/agent with two or more firms (either BD or IA firms) that are not affiliated. Jurisdictions that prohibit dual registration would not, for example, permit a broker-dealer agent working with brokerage firm A to maintain a registration with brokerage firm B if firms A and B are not owned or controlled by a common parent. Before seeking a dual registration status, you should consult the applicable rules or statutes of the jurisdictions with which you seek registration for prohibitions on dual registrations or any liability provisions.

Please indicate whether the individual will maintain a "dual registration" status by answering the questions in this section. (Note: An individual should answer 'yes' only if the individual is currently registered and is seeking registration with a firm (either BD or IA) that is not affiliated with the individual's current employing firm. If this is an initial application, an individual must answer 'no' to these questions; a "dual registration" may be initiated only after an initial registration has been established).

Answer "yes" or "no" to the following questions:

A. Will applicant maintain registration with a broker-dealer that is not affiliated with the filing firm? If you answer "yes," list the firm(s) in Section 12 (Employment History).

B. Will applicant maintain registration with an investment adviser that is not affiliated with the filing firm? If you answer "yes," list the firm(s) in Section 12 (Employment History).

Yes

O

O

No

O

O




Page 3 of 39

4. SRO REGISTRATIONS

Select appropriate SRO Registration requests.

Qualifying examinations will be automatically scheduled if needed. If you are only scheduling or rescheduling an exam, skip this section and complete section 7

(EXAMINATION REQUESTS).

REPRESENTATIVE LEVEL REGISTRATION CATEGORIES

PRINCIPAL LEVEL REGISTRATION CATEGORIES

REGISTRATION CATEGORIES

FIN

RA

NYS

E

NYS

E-A

MER

NYS

E-A

RC

A

NYS

E-C

HI

NYS

E-N

AT

CB

OE

CB

OE

C2

CB

OE

BYX

CB

OE

BZX

CB

OE

EDG

A

CB

OE

EDG

X

NQ

X

BX

ISE

ISE

GEM

X

ISE

MR

X

PHLX

MIA

X EM

ERR

ALD

MIA

X O

PTIO

NS

MIA

X PE

AR

L

BO

X

IEX

LTSE

OP – Registered Options Principal (S4) SU – General Securities Sales Supervisor (S9 and S10) CO – Compliance Official (S14) CR – Compliance Officer (S14)


FIN

RA

NYS

E

NYS

E-A

MER

NYS

E-A

RC

A

NYS

E-C

HI

NYS

E-N

AT

CB

OE

CB

OE

C2

CB

OE

BYX

CB

OE

BZX

CB

OE

EDG

A

CB

OE

EDG

X

NQ

X

BX

ISE

ISE

GEM

X

ISE

MR

X

PHLX

MIA

X EM

ERA

LD

MIA

X O

PTIO

NS

MIA

X PE

AR

L

BO

X

IEX

LTSE

IR - Investment Company and Variable Contracts Products Rep. (S6TO)

GS - Full Registration/General Securities Representative (S7TO)

DR – Direct Participation Program Representative (S22TO) MR – Municipal Securities Representative (S52TO) TD – Securities Trader (S57TO) IB – Investment Banking Representative (S79TO) PR – Limited Representative – Private Securities Offerings (S82TO)

RS – Research Analyst (S86 and S87) OS – Operations Professional (S99TO) Other__________________________________ (Paper Form Only)

RETIRED REGISTRATION CATEGORIES AR – Assistant Representative/Order Processing CD – Canada-Limited General Securities Registered Representative

CN – Canada-Limited General Securities Registered Representative

CS – Corporate Securities Representative FA - Foreign Associate IE – United Kingdom - Limited General Securities Registered Representative

OR – Options Representative RG – Government Securities Representative




Page 4 of 39


FIN

RA

NYS

E

NYS

E-A

MER

NYS

E-A

RC

A

NYS

E-C

HI

NYS

E-N

AT

CB

OE

CB

OE

C2

CB

OE

BYX

CB

OE

BZX

CB

OE

EDG

A

CB

OE

EDG

X

NQ

X

BX

ISE

ISE

GEM

X

ISE

MR

X

PHLX

MIA

X EM

ERR

ALD

MIA

X O

PTIO

NS

MIA

X PE

AR

L

BO

X

IEX

LTSE

SA – Supervisory Analyst (S16) GP – General Securities Principal (S24) RP – Research Principal (S24) BP – Investment Banking Principal (S24) TP – Securities Trader Principal (S24) PO – Private Securities Offerings Principal (S24) IP – Investment Company and Variable Contracts Products Principal (S26)

FN – Financial and Operations Principal (S27) FI – Introducing Broker-Dealer/Financial and Operations Principal (S28)

DP – Direct Participation Program Principal (S39) FP – Municipal Fund (S51) MP – Municipal Securities Principal (S53) PG – Government Securities Principal Other__________________________________ (Paper Form Only)

RETIRED REGISTRATION CATEGORIES SM – Securities Manager

EXCHANGE-SPECIFIC REGISTRATION CATEGORIES


FIN

RA

NYS

E

NYS

E-A

MER

NYS

E-A

RC

A

NYS

E-C

HI

NYS

E-N

AT

CB

OE

CB

OE

C2

CB

OE

BYX

CB

OE

BZX

CB

OE

EDG

A

CB

OE

EDG

X

NQ

X

BX

ISE

ISE

GEM

X

ISE

MR

X

PHLX

MIA

X EM

ERA

LD

MIA

X O

PTIO

NS

MIA

X PE

AR

L

BO

X

IEX

LTSE

AP – Approved Person CF – Compliance Official Specialist FE – Floor Employee

LE – Securities Lending Representative

LS – Securities Lending Supervisor

ME - Member Exchange

MT – Market Maker Authorized Trader-Equities

OM – Options Member (S57TO)

CT – Securities Trader Compliance Officer (S14)

FL – Floor Clerk – Equities (S19)




Page 5 of 39

5. JURISDICTION REGISTRATIONS Check appropriate jurisdiction(s) for broker-dealer agent (AG) and/or investment adviser representative (RA) registration requests.

JURISDICTION AG RA JURISDICTION AG RA JURISDICTION AG RA JURISDICTION AG RA Alabama Illinois Montana Puerto Rico

Alaska Indiana Nebraska Rhode Island

Arizona Iowa Nevada South Carolina

Arkansas Kansas New Hampshire South Dakota

California Kentucky New Jersey Tennessee

Colorado Louisiana New Mexico Texas

Connecticut Maine New York Utah

Delaware Maryland North Carolina Vermont

District of Columbia Massachusetts North Dakota Virgin Islands

Florida Michigan Ohio Virginia

Georgia Minnesota Oklahoma Washington

Hawaii Mississippi Oregon West Virginia

Idaho Missouri Pennsylvania Wisconsin

Wyoming

AGENT OF THE ISSUER REGISTRATION (AI) Indicate 2 letter jurisdiction code(s):___________


INDIVIDUAL NAME: INDIVIDUAL CRD #: FIRM NAME: FIRM CRD #:

Page 6 of 39

6. REGISTRATION REQUESTS WITH AFFILIATED FIRMS

Will applicant maintain registration with firm(s) under common ownership or control with the filing firm? O Yes O No If "yes", fill in the details to indicate a request for registration with additional firm(s). If the individual seeks registration with firm(s) affiliated with the filing firm, complete the following to make a request for registration with the additional affiliated firm(s) other than the filing firm. AFFILIATED FIRM CRD #: AFFILIATED FIRM NAME:

EMPLOYMENT DATE: Do you have an independent contractor relationship with the above named firm?: O Yes O No

AFFILIATED FIRM BILLING CODE: Office of Employment Address:

ORegistered

ONon-Registered




CITY: STATE:




ORegistered

ONon-Registered




CITY: STATE:




ORegistered

ONon-Registered




CITY: STATE:




Check here to request the same SRO and jurisdiction registrations for this affiliated firm that are requested on this application for the filing firm. Check here to request different SRO and jurisdiction registrations than requested on this application for your filing firm.



Page 7 of 39

AFFILIATED FIRM FINGERPRINT INFORMATION Electronic Filing Representation O By selecting this option, I represent that I am submitting, have submitted, or promptly will submit to the appropriate SRO

a fingerprint card as required under applicable SRO rules; or Fingerprint card barcode __________________________________________________

O By selecting this option, I represent that I have been employed continuously by the affiliated firm since the last submission of a fingerprint card to CRD and am not required to resubmit a fingerprint card at this time; or,

O O

I am not required to submit a fingerprint card at this time because the fingerprint card submitted by the filing firm applies; or, By selecting this option, I represent that I have been employed continuously by the affiliated firm and my fingerprints have been processed by an SRO other than FINRA. I am submitting, have submitted, or promptly will submit the processed results for posting to CRD.

Exceptions to the Fingerprint Requirement O By selecting one or more of the following two options, I affirm that I am exempt from the federal fingerprint requirement because

I/filing firm currently satisfy(ies) the requirements of at least one of the permissive exemptions indicated below pursuant to Rule 17f-2 under the Securities Exchange Act of 1934, including any notice or application requirements specified therein:

Rule 17f-2(a)(1)(i)

Rule 17f-2(a)(1)(iii)

Investment Adviser Representative Only Applicants O I affirm that I am applying only as an investment adviser representative and that I am not also applying or have not also

applied with this firm to become a broker-dealer representative. If this radio button/box is selected, continue below. O I am applying for registration only in jurisdictions that do not have fingerprint card filing requirements, or O I am applying for registration in jurisdictions that have fingerprint card filing requirements and I am submitting, have

submitted, or promptly will submit the appropriate fingerprint card directly to the jurisdictions for processing pursuant to applicable jurisdiction rules.

7. EXAMINATION REQUESTS

Scheduling or Rescheduling Examinations. Complete this section only if you are scheduling or rescheduling an examination or continuing education session. Do not select the Series 63 (S63) or Series 65 (S65) examinations in this section if you have completed Section 5 (JURISDICTION REGISTRATION) and have selected registration in a jurisdiction. If you have completed Section 5 (JURISDICTION REGISTRATION), and requested an AG registration in a jurisdiction that requires that you pass the S63 examination, an S63 examination will be automatically scheduled for you upon submission of this Form U4. If you have completed Section 5 (JURISDICTION REGISTRATION), and requested an RA registration in a jurisdiction that requires that you pass the S65 examination, an S65 examination will be automatically scheduled for you upon submission of this Form U4. SIE S16 S30 S52TO S79TO

S3 S22TO S31 S53 S82TO

S4 S23 S32 S54 S86 S6TO S24 S34 S57TO S87

S7TO S26 S39 S63 S99TO

S9 S27 S50 S65 S101

S10 S28 S51 S66 S201

S14 Other______________________________________ (Paper Form Only) OPTIONAL: Foreign Exam City______________________________ Date (MM/DD/YYYY) __________________________ If you have taken an exam prior to registering through the CRD system enter the exam type and date taken. Exam type:___________________________________________ Date taken (MM/DD/YYYY):____________________________

8. PROFESSIONAL DESIGNATIONS

Select each designation you currently maintain.

Certified Financial Planner Chartered Financial Consultant (ChFC) Personal Financial Specialist (PFS) Chartered Financial Analyst (CFA) Chartered Investment Counselor (CIC)



Page 8 of 39

9. IDENTIFYING INFORMATION/NAME CHANGE FIRST NAME:

MIDDLE NAME: LAST NAME: SUFFIX:

DATE OF BIRTH (MM/DD/YYYY):

STATE/PROVINCE OF BIRTH: COUNTRY OF BIRTH: SEX: O Male O Female

HEIGHT (FT):

HEIGHT (IN): WEIGHT (LBS): HAIR COLOR: EYE COLOR:

10. OTHER NAMES Enter all other names that you have used or are using, or by which you are known or have been known, other than your legal name, since the age of 18. This field should include, for example, nicknames, aliases, and names used before or after marriage. FIRST NAME:


FIRST NAME:




Page 9 of 39

11. RESIDENTIAL HISTORY

Starting with the current address, give all addresses for the past 5 years. Report changes as they occur. FROM (MM/YYYY): TO (MM/YYYY): STREET ADDRESS 1: STREET ADDRESS 2: CITY: STATE: COUNTRY: POSTAL CODE: FROM (MM/YYYY): TO (MM/YYYY): STREET ADDRESS 1: STREET ADDRESS 2: CITY: STATE: COUNTRY: POSTAL CODE: FROM (MM/YYYY): TO (MM/YYYY): STREET ADDRESS 1: STREET ADDRESS 2: CITY: STATE: COUNTRY: POSTAL CODE: FROM (MM/YYYY): TO (MM/YYYY): STREET ADDRESS 1: STREET ADDRESS 2: CITY: STATE: COUNTRY: POSTAL CODE: FROM (MM/YYYY): TO (MM/YYYY): STREET ADDRESS 1: STREET ADDRESS 2: CITY: STATE: COUNTRY: POSTAL CODE: FROM (MM/YYYY): TO (MM/YYYY): STREET ADDRESS 1: STREET ADDRESS 2: CITY: STATE: COUNTRY: POSTAL CODE: FROM (MM/YYYY): TO (MM/YYYY): STREET ADDRESS 1: STREET ADDRESS 2: CITY: STATE: COUNTRY: POSTAL CODE: FROM (MM/YYYY): TO (MM/YYYY): STREET ADDRESS 1: STREET ADDRESS 2: CITY: STATE: COUNTRY: POSTAL CODE: FROM (MM/YYYY): TO (MM/YYYY): STREET ADDRESS 1: STREET ADDRESS 2: CITY: STATE: COUNTRY: POSTAL CODE: FROM (MM/YYYY): TO (MM/YYYY): STREET ADDRESS 1: STREET ADDRESS 2: CITY: STATE: COUNTRY: POSTAL CODE: FROM (MM/YYYY): TO (MM/YYYY): STREET ADDRESS 1: STREET ADDRESS 2: CITY: STATE: COUNTRY: POSTAL CODE: FROM (MM/YYYY): TO (MM/YYYY): STREET ADDRESS 1: STREET ADDRESS 2: CITY: STATE: COUNTRY: POSTAL CODE: FROM (MM/YYYY): TO (MM/YYYY): STREET ADDRESS 1: STREET ADDRESS 2: CITY: STATE: COUNTRY: POSTAL CODE: FROM (MM/YYYY): TO (MM/YYYY): STREET ADDRESS 1: STREET ADDRESS 2: CITY: STATE: COUNTRY: POSTAL CODE: FROM (MM/YYYY): TO (MM/YYYY): STREET ADDRESS 1: STREET ADDRESS 2: CITY: STATE: COUNTRY: POSTAL CODE:



Page 10 of 39

12. EMPLOYMENT HISTORY

Provide complete employment history for the past 10 years. Include the firm(s) noted in Section 1 (GENERAL INFORMATION) and Section 6 (REGISTRATION REQUESTS WITH AFFILIATED FIRMS). Include all firm(s) from Section 3 (REGISTRATION WITH UNAFFILIATED FIRMS). Account for all time including full and part-time employments, self-employment, military service, and homemaking. Also include statuses such as unemployed, full-time education, extended travel, or other similar statuses. Report changes as they occur. FROM (MM/YYYY): TO (MM/YYYY): NAME OF FIRM OR COMPANY: CITY: STATE: COUNTRY: INVESTMENT-RELATED BUSINESS?

O Yes O No POSITION HELD:

FROM (MM/YYYY): TO (MM/YYYY): NAME OF FIRM OR COMPANY: CITY:

STATE: COUNTRY: INVESTMENT-RELATED BUSINESS?





































Page 11 of 39

13. OTHER BUSINESS Are you currently engaged in any other business either as a proprietor, partner, officer, director, employee, trustee, agent or otherwise? (Please exclude non investment-related activity that is exclusively charitable, civic, religious or fraternal and is recognized as tax exempt.) If YES, please provide the following details: the name of the other business, whether the business is investment-related, the address of the other business, the nature of the other business, your position, title, or relationship with the other business, the start date of your relationship, the approximate number of hours/month you devote to the other business, the number of hours you devote to the other business during securities trading hours, and briefly describe your duties relating to the other business. O Yes O No If "Yes," please enter details below.



Page 12 of 39

14. DISCLOSURE QUESTIONS IF THE ANSWER TO ANY OF THE FOLLOWING QUESTIONS IS 'YES',

COMPLETE DETAILS OF ALL EVENTS OR PROCEEDINGS ON APPROPRIATE DRP(S)

REFER TO THE EXPLANATION OF TERMS SECTION OF FORM U4 INSTRUCTIONS FOR EXPLANATIONS OF ITALICIZED TERMS.

YES NO Criminal Disclosure

14A. (1) Have you ever: (a) been convicted of or pled guilty or nolo contendere ("no contest") in a domestic, foreign, or military

court to any felony? O O

(b) been charged with any felony? O O (2) Based upon activities that occurred while you exercised control over it, has an organization ever:

(a) been convicted of or pled guilty or nolo contendere ("no contest") in a domestic or foreign court to any felony?

O O (b) been charged with any felony? O O

14B. (1) Have you ever: (a) been convicted of or pled guilty or nolo contendere ("no contest") in a domestic, foreign or military

court to a misdemeanor involving: investments or an investment-related business or any fraud, false statements or omissions, wrongful taking of property, bribery, perjury, forgery, counterfeiting, extortion, or a conspiracy to commit any of these offenses?

O O

(b) been charged with a misdemeanor specified in 14B(1)(a)? O O (2) Based upon activities that occurred while you exercised control over it, has an organization ever:

(a) been convicted of or pled guilty or nolo contendere ("no contest") in a domestic or foreign court to a misdemeanor specified in 14B(1)(a)?

O O (b) been charged with a misdemeanor specified in 14B(1)(a)? O O

Regulatory Action Disclosure YES NO 14C. Has the U.S. Securities and Exchange Commission or the Commodity Futures Trading Commission ever:

(1) found you to have made a false statement or omission? O O (2) found you to have been involved in a violation of its regulations or statutes? O O (3) found you to have been a cause of an investment-related business having its authorization to do business

denied, suspended, revoked, or restricted? O O

(4) entered an order against you in connection with investment-related activity? O O (5) imposed a civil money penalty on you, or ordered you to cease and desist from any activity? O O (6) found you to have willfully violated any provision of the Securities Act of 1933, the Securities Exchange Act of

1934, the Investment Advisers Act of 1940, the Investment Company Act of 1940, the Commodity Exchange Act, or any rule or regulation under any of such Acts, or any of the rules of the Municipal Securities Rulemaking Board, or found you to have been unable to comply with any provision of such Act, rule or regulation?

O O

(7) found you to have willfully aided, abetted, counseled, commanded, induced, or procured the violation by any

person of any provision of the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, the Investment Company Act of 1940, the Commodity Exchange Act, or any rule or regulation under any of such Acts, or any of the rules of the Municipal Securities Rulemaking Board?

O O

(8) found you to have failed reasonably to supervise another person subject to your supervision, with a view to

preventing the violation of any provision of the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, the Investment Company Act of 1940, the Commodity Exchange Act, or any rule or regulation under any of such Acts, or any of the rules of the Municipal Securities Rulemaking Board?

O O

14D. (1) Has any other Federal regulatory agency or any state regulatory agency or foreign financial regulatory authority ever:

(a) found you to have made a false statement or omission or been dishonest, unfair or unethical? O O (b) found you to have been involved in a violation of investment-related regulation(s) or statute(s)? O O (c) found you to have been a cause of an investment-related business having its authorization to do

business denied, suspended, revoked or restricted? O O

(d) entered an order against you in connection with an investment-related activity? O O (e) denied, suspended, or revoked your registration or license or otherwise, by order, prevented you

from associating with an investment-related business or restricted your activities? O O



Page 13 of 39

14. DISCLOSURE QUESTIONS (CONTINUED) YES NO (2) Have you been subject to any final order of a state securities commission (or any agency or office

performing like functions), state authority that supervises or examines banks, savings associations, or credit unions, state insurance commission (or any agency or office performing like functions), an appropriate federal banking agency, or the National Credit Union Administration, that:

(a) bars you from association with an entity regulated by such commission, authority, agency, or officer, or from engaging in the business of securities, insurance, banking, savings association activities, or credit union activities; or

O O

(b) constitutes a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct?

O O

14E. Has any self-regulatory organization ever: (1) found you to have made a false statement or omission? O O (2) found you to have been involved in a violation of its rules (other than a violation designated as a "minor rule

violation" under a plan approved by the U.S. Securities and Exchange Commission)? O O

(3) found you to have been the cause of an investment-related business having its authorization to do business denied, suspended, revoked or restricted?

O O (4) disciplined you by expelling or suspending you from membership, barring or suspending your association with its

members, or restricting your activities? O O

(5) found you to have willfully violated any provision of the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, the Investment Company Act of 1940, the Commodity Exchange Act, or any rule or regulation under any of such Acts, or any of the rules of the Municipal Securities Rulemaking Board, or found you to have been unable to comply with any provision of such Act, rule or regulation?

O O

(6) found you to have willfully aided, abetted, counseled, commanded, induced, or procured the violation by any person of any provision of the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, the Investment Company Act of 1940, the Commodity Exchange Act, or any rule or regulation under any of such Acts, or any of the rules of the Municipal Securities Rulemaking Board?

O O

(7) found you to have failed reasonably to supervise another person subject to your supervision, with a view to preventing the violation of any provision of the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, the Investment Company Act of 1940, the Commodity Exchange Act, or any rule or regulation under any of such Acts, or any of the rules of the Municipal Securities Rulemaking Board?

O O

14F. Have you ever had an authorization to act as an attorney, accountant or federal contractor that was revoked or suspended?

O O

14G. Have you been notified, in writing, that you are now the subject of any: (1) regulatory complaint or proceeding that could result in a "yes" answer to any part of 14C, D or E? (If "yes",

complete the Regulatory Action Disclosure Reporting Page.) O O

(2) investigation that could result in a "yes" answer to any part of 14A, B, C, D or E? (If "yes", complete the Investigation Disclosure Reporting Page.)

O O

Civil Judicial Disclosure YES NO 14H. (1) Has any domestic or foreign court ever:

(a) enjoined you in connection with any investment-related activity? O O (b) found that you were involved in a violation of any investment-related statute(s) or regulation(s)? O O (c) dismissed, pursuant to a settlement agreement, an investment-related civil action brought against you by

a state or foreign financial regulatory authority? O O

(2) Are you named in any pending investment-related civil action that could result in a "yes" answer to any part of 14H(1)?

O O

Customer Complaint/Arbitration/Civil Litigation Disclosure YES NO 14I. (1) Have you ever been named as a respondent/defendant in an investment-related, consumer-initiated

arbitration or civil litigation which alleged that you were involved in one or more sales practice violations and which:

(a) is still pending, or; O O (b) resulted in an arbitration award or civil judgment against you, regardless of amount, or; O O (c) was settled, prior to 05/18/2009, for an amount of $10,000 or more, or; O O (d) was settled, on or after 05/18/2009, for an amount of $15,000 or more? O O



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14. DISCLOSURE QUESTIONS (CONTINUED) YES NO (2) Have you ever been the subject of an investment-related, consumer-initiated (written or oral) complaint,

which alleged that you were involved in one or more sales practice violations, and which:

(a) was settled, prior to 05/18/2009, for an amount of $10,000 or more, or; O O (b) was settled, on or after 05/18/2009, for an amount of $15,000 or more? O O

(3) Within the past twenty four (24) months, have you been the subject of an investment-related, consumer-initiated, written complaint, not otherwise reported under question 14I(2) above, which: (a) alleged that you were involved in one or more sales practice violations and contained a claim for

compensatory damages of $5,000 or more (if no damage amount is alleged, the complaint must be reported unless the firm has made a good faith determination that the damages from the alleged conduct would be less than $5,000), or;

O O

(b) alleged that you were involved in forgery, theft, misappropriation or conversion of funds or securities? O O Answer questions (4) and (5) below only for arbitration claims or civil litigation filed on or after 05/18/2009. (4) Have you ever been the subject of an investment-related, consumer-initiated arbitration claim or civil

litigation which alleged that you were involved in one or more sales practice violations, and which:

(a) was settled for an amount of $15,000 or more, or; O O (b) resulted in an arbitration award or civil judgment against any named respondent(s)/defendant(s),

regardless of amount? O O

(5) Within the past twenty four (24) months, have you been the subject of an investment-related, consumer-initiated arbitration claim or civil litigation not otherwise reported under question 14I(4) above, which:

(a) alleged that you were involved in one or more sales practice violations and contained a claim for compensatory damages of $5,000 or more (if no damage amount is alleged, the arbitration claim or civil litigation must be reported unless the firm has made a good faith determination that the damages from the alleged conduct would be less than $5,000), or;

O O

(b) alleged that you were involved in forgery, theft, misappropriation or conversion of funds or securities? O O Termination Disclosure YES NO 14J. Have you ever voluntarily resigned, been discharged or permitted to resign after allegations were made that

accused you of: (1) violating investment-related statutes, regulations, rules, or industry standards of conduct? O O

(2) fraud or the wrongful taking of property? O O (3) failure to supervise in connection with investment-related statutes, regulations, rules or industry standards of

conduct? O O

Financial Disclosure YES NO 14K. Within the past 10 years:

(1) have you made a compromise with creditors, filed a bankruptcy petition or been the subject of an involuntary bankruptcy petition?

O O (2) based upon events that occurred while you exercised control over it, has an organization made a compromise

with creditors, filed a bankruptcy petition or been the subject of an involuntary bankruptcy petition? O O

(3) based upon events that occurred while you exercised control over it, has a broker or dealer been the subject of an involuntary bankruptcy petition, or had a trustee appointed, or had a direct payment procedure initiated under the Securities Investor Protection Act?

O O

14L. Has a bonding company ever denied, paid out on, or revoked a bond for you? O O 14M. Do you have any unsatisfied judgments or liens against you? O O



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15. SIGNATURES

Please Read Carefully. All signatures required on this Form U4 filing must be made in this section. A "signature" includes a manual signature or an electronically transmitted equivalent. For purposes of an electronic form filing, a signature is effected by typing a name in the designated signature field. By typing a name in this field, the signatory acknowledges and represents that the entry constitutes in every way, use, or aspect, his or her legally binding signature.

15A. INDIVIDUAL/APPLICANT'S ACKNOWLEDGMENT AND CONSENT This section must be completed on all initial or Temporary Registration form filings. 15B. FIRM/APPROPRIATE SIGNATORY REPRESENTATIONS This section must be completed on all initial or Temporary Registration form filings. 15C. TEMPORARY REGISTRATION ACKNOWLEDGMENT This section must be completed on Temporary Registration form filings to be able to receive

Temporary Registration. 15D. INDIVIDUAL/APPLICANT'S AMENDMENT ACKNOWLEDGMENT AND CONSENT This section must be completed on any amendment filing that amends

any information in Section 14 (Disclosure Questions) or any Disclosure Reporting Page (DRP). 15E. FIRM/APPROPRIATE SIGNATORY AMENDMENT REPRESENTATIONS This section must be completed on all amendment form filings. 15F. FIRM/APPROPRIATE SIGNATORY CONCURRENCE This section must be completed to concur with a U4 filing made by another firm (IA/BD) on behalf of

an individual that is also registered with that other firm (IA/BD). 15A. INDIVIDUAL/APPLICANT'S ACKNOWLEDGEMENT AND CONSENT

1. I swear or affirm that I have read and understand the items and instructions on this form and that my answers (including attachments) are true and complete to the best of my knowledge. I understand that I am subject to administrative, civil or criminal penalties if I give false or misleading answers. 2. I apply for registration with the jurisdictions and SROs indicated in Section 4 (SRO REGISTRATION) and Section 5 (JURISDICTION REGISTRATION) as may be amended from time to time and, in consideration of the jurisdictions and SROs receiving and considering my application, I submit to the authority of the jurisdictions and SROs and agree to comply with all provisions, conditions and covenants of the statutes, constitutions, certificates of incorporation, by-laws and rules and regulations of the jurisdictions and SROs as they are or may be adopted, or amended from time to time. I further agree to be subject to and comply with all requirements, rulings, orders, directives and decisions of, and penalties, prohibitions and limitations imposed by the jurisdictions and SROs, subject to right of appeal or review as provided by law. 3. I agree that neither the jurisdictions or SROs nor any person acting on their behalf shall be liable to me for action taken or omitted to be taken in official capacity or in the scope of employment, except as otherwise provided in the statutes, constitutions, certificates of incorporation, by-laws or the rules and regulations of the jurisdictions and SROs. 4. I authorize the jurisdictions, SROs, and the designated entity to give any information they may have concerning me to any employer or prospective employer, any federal, state or municipal agency, or any other SRO and I release the jurisdictions, SROs, and the designated entity, and any person acting on their behalf from any and all liability of whatever nature by reason of furnishing such information. 5. I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or by-laws of the SROs indicated in Section 4 (SRO REGISTRATION) as may be amended from time to time and that any arbitration award rendered against me may be entered as a judgment in any court of competent jurisdiction. 6. For the purpose of complying with the laws relating to the offer or sale of securities or commodities or investment advisory activities, I irrevocably appoint the administrator of each jurisdiction indicated in Section 5 (JURISDICTION REGISTRATION) as may be amended from time to time, or such other person designated by law, and the successors in such office, my attorney upon whom may be served any notice, process, pleading, subpoena or other document in any action or proceeding against me arising out of or in connection with the offer or sale of securities or commodities, or investment advisory activities or out of the violation or alleged violation of the laws of such jurisdictions. I consent that any such action or proceeding against me may be commenced in any court of competent jurisdiction and proper venue by service of process upon the appointee as if I were a resident of, and had been lawfully served with process in the jurisdiction. I request that a copy of any notice, process, pleading, subpoena or other document served hereunder be mailed to my current residential address as reflected in this form or any amendment thereto. 7. I consent that the service of any process, pleading, subpoena, or other document in any investigation or administrative proceeding conducted by the SEC, CFTC or a jurisdiction or in any civil action in which the SEC, CFTC or a jurisdiction are plaintiffs, or the notice of any investigation or proceeding by any SRO against the applicant, may be made by personal service or by regular, registered or certified mail or confirmed telegram to me at my most recent business or home address as reflected in this Form U4, or any amendment thereto,

by leaving such documents or notice at such address, or by any other legally permissible means. I further stipulate and agree that any civil action or administrative proceeding instituted by the SEC, CFTC or a jurisdiction may be commenced by the service of process as described herein, and that service of an administrative subpoena shall be effected by such service, and that service as aforesaid shall be taken and held in all courts and administrative tribunals to be valid and binding as if personal service thereof had been made. 8. I authorize all my employers and any other person to furnish to any jurisdiction, SRO, designated entity, employer, prospective employer, or any agent acting on its behalf, any information they have, including without limitation my creditworthiness, character, ability, business activities, educational background, general reputation, history of my employment and, in the case of former employers, complete reasons for my termination. Moreover, I release each employer, former employer and each other person from any and all liability, of whatever nature, by reason of furnishing any of the above information, including that information reported on the Uniform Termination Notice for Securities Industry Registration (Form U5). I recognize that I may be the subject of an investigative consumer report and waive any requirement of notification with respect to any investigative consumer report ordered by any jurisdiction, SRO, designated entity, employer, or prospective employer. I understand that I have the right to request complete and accurate disclosure by the jurisdiction, SRO, designated entity, employer or prospective employer of the nature and scope of the requested investigative consumer report. 9. I understand and certify that the representations in this form apply to all employers with whom I seek registration as indicated in Section 1 (GENERAL INFORMATION) or Section 6 (REGISTRATION REQUESTS WITH AFFILIATED FIRMS) of this form. I agree to update this form by causing an amendment to be filed on a timely basis whenever changes occur to answers previously reported. Further, I represent that, to the extent any information previously submitted is not amended, the information provided in this form is currently accurate and complete. 10. I authorize any employer or prospective employer to file electronically on my behalf any information required in this form or any amendment thereto; I certify that I have reviewed and approved the information to be submitted to any jurisdiction or SRO on this Form U4 Application; I agree that I will review and approve all disclosure information that will be filed electronically on my behalf; I further agree to waive any objection to the admissibility of the electronically filed records in any criminal, civil, or administrative proceeding. Applicant or applicant's agent has typed applicant's name under this section to attest to the completeness and accuracy of this record. The applicant recognizes that this typed name constitutes, in every way, use or aspect, his or her legally binding signature.

Date (MM/DD/YYYY) _____________________________

_______________________________________ Signature of Applicant

_______________________________________ Printed Name



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15B. FIRM/APPROPRIATE SIGNATORY REPRESENTATIONS THE FIRM MUST COMPLETE THE FOLLOWING: To the best of my knowledge and belief, the applicant is currently bonded where required, and, at the time of approval, will be familiar with the statutes, constitution(s), rules and by-laws of the agency, jurisdiction or SRO with which this application is being filed, and the rules governing registered persons, and will be fully qualified for the position for which application is being made herein. I agree that, notwithstanding the approval of such agency, jurisdiction or SRO which hereby is requested, I will not employ the applicant in the capacity stated herein without first receiving the approval of any authority that may be required by law. This firm has communicated with all of the applicant's previous employers for the past three years and has documentation on file with the names of the persons contacted and the date of contact. In addition, I have taken appropriate steps to verify the accuracy and completeness of the information contained in and with this application. I have provided the applicant an opportunity to review the information contained herein and the applicant has approved this information and signed the Form U4. _______________________________________ Date (MM/DD/YYYY) _______________________________________ _______________________________________ Printed Name Signature of Appropriate Signatory

15C. TEMPORARY REGISTRATION ACKNOWLEDGEMENT If an applicant has been registered in a jurisdiction or self regulatory organization (SRO) in the 30 days prior to the date an application for registration is filed with the Central Registration Depository or Investment Adviser Registration Depository, he or she may qualify for a Temporary Registration to conduct securities business in that jurisdiction or SRO if this acknowledgment is executed and filed with the Form U4 at the applicant's firm.

This acknowledgment must be signed only if the applicant intends to apply for a Temporary Registration while the application for registration is under review.

I request a Temporary Registration in each jurisdiction and/or SRO requested on this Form U4, while my registration with the jurisdiction(s) and/or SRO(s) requested is under review;

I am requesting a Temporary Registration with the firm filing on my behalf for the jurisdiction(s) and/or SRO(s) noted in Section 4 (SRO REGISTRATION) and/or Section 5 (JURISDICTION REGISTRATION) of this Form U4;

I understand that I may request a Temporary Registration only in those jurisdiction(s) and/or SRO(s) in which I have been registered with my prior firm within the previous 30 days;

I understand that I may not engage in any securities activities requiring registration in a jurisdiction and/or SRO until I have received notice from the CRD or IARD that I have been granted a Temporary Registration in that jurisdiction and/or SRO;

I agree that until the Temporary Registration has been replaced by a registration, any jurisdiction and/or SRO in which I have applied for registration may withdraw the Temporary Registration;

If a jurisdiction or SRO withdraws my Temporary Registration, my application will then be held pending in that jurisdiction and/or SRO until its review is complete and the registration is granted or denied, or the application is withdrawn;

I understand and agree that, in the event my Temporary Registration is withdrawn by a jurisdiction and/or SRO, I must immediately cease any securities activities requiring a registration in that jurisdiction and/or SRO until it grants my registration;

I understand that by executing this Acknowledgment I am agreeing not to challenge the withdrawal of a Temporary Registration; however, I do not waive any right I may have in any jurisdiction and/or SRO with respect to any decision by that jurisdiction and/or SRO to deny my application for registration.

_______________________________________ Date (MM/DD/YYYY)

_______________________________________________________ Signature of Applicant

___________________________________________________________________ Printed Name

15D. AMENDMENT INDIVIDUAL/APPLICANT'S ACKNOWLEDGEMENT AND CONSENT _______________________________________ Date (MM/DD/YYYY)

_______________________________________________________ Signature of Applicant

___________________________________________________________________ Printed Name



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15E. FIRM/APPROPRIATE SIGNATORY AMENDMENT REPRESENTATIONS

THE FIRM MUST COMPLETE THE FOLLOWING: _______________________________________ Date (MM/DD/YYYY)

_______________________________________________________ Signature of Appropriate Signatory

______________________________________________________________________ Printed Name

15F. FIRM/APPROPRIATE SIGNATORY CONCURRENCE

By typing an appropriate signatory's name in this field, I swear or affirm that I have reviewed and that I concur with this filing: _______________________________________ Date (MM/DD/YYYY)

_______________________________________________________ Signature of Appropriate Signatory

______________________________________________________________________ Printed Name



Page 18 of 39

ATTACHMENT SHEET Use this attachment to report continued information. SECTION NUMBER ANSWER



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DISCLOSURE REPORTING PAGES

U4 - BANKRUPTCY/SIPC/COMPROMISE WITH CREDITORS DRP Rev. DRP (05/2009) This Disclosure Reporting Page is an INITIAL or AMENDED response to report details for affirmative response(s) to Question(s) 14K on Form U4; Check the question(s) you are responding to, regardless of whether you are answering the question(s) "yes" or amending the answer(s) to "no":

14K(1) 14K(2) 14K(3) If events result in affirmative answers to both 14K(1) and 14K(2), details to each must be provided on separate DRPs. 1. Action Type (select appropriate item):

O Bankruptcy [Circle one: Chapter 7, Chapter 11, Chapter 13, Other]

O Compromise O Declaration O Liquidation O Receivership O Other:_________________________ 2. Action Date (MM/DD/YYYY) (Provide date bankruptcy was filed, or date SIPC was

initiated, or date of compromise with creditor):_____________________________ O Exact O Explanation If not exact, provide explanation:

3. If the financial action relates to an organization over which you exercise(d) control, provide:

A. Organization Name:____________________________________________________________________ B. Position, title or relationship:____________________________________________________________________

C. Investment-related business? O Yes O No

4. Court action brought in: O Federal Court O State Court O Foreign Court O Other:_________________________ A. Name of Court:____________________________________________________________________ B. Location of Court (City or County and State or Country):______________________________________________________________ C. Docket/Case#:______________ Check this box if the Docket/Case# is your SSN, a Bank Card number, or a Personal Identification Number.

5. Is action currently pending? O Yes O No 6. If not pending, provide Disposition Type (select appropriate item):

O Direct Payment Procedure O Discharged O Dismissed O Dissolved O SIPA Trustee Appointed O Satisfied/Released O Other:__________________________

7. Disposition Date (MM/DD/YYYY):________________________________ O Exact O Explanation If not exact, provide explanation:

8. If a compromise with creditors, provide: A. Name of Creditor:____________________________________________________________________ B. Original amount owed: $____________ C. Terms/Compromise reached with creditor:

9. If a SIPA trustee was appointed or a direct payment procedure was begun: A. Provide the amount paid or agreed to be paid by you: $____________ ; or

The name of the Trustee:____________________________________________________________________ B. Currently Open? O Yes O No

C. Date Direct Payment Initiated/Filed or Trustee Appointed

(MM/DD/YYYY):_________________________ O Exact O Explanation If not exact, provide explanation:



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U4 - BANKRUPTCY/SIPC/COMPROMISE WITH CREDITORS DRP (CONTINUED) Rev. DRP (05/2009) 10. Comment (Optional). You may use this field to provide a brief summary of the circumstances leading to the action as well as the

current status or final disposition. Your information must fit within the space provided.



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U4 - BOND DRP Rev. DRP (05/2009) This Disclosure Reporting Page is an INITIAL or AMENDED response to report details for affirmative response(s) to Question(s) 14L

on Form U4; Check the question(s) you are responding to, regardless of whether you are answering the question(s) "yes" or amending the answer(s) to "no": 14L If multiple, unrelated events result in the same affirmative answer, details must be provided on separate DRPs. 1. Firm Name (Policy Holder): _________________________________________________________ 2. Bonding Company Name: __________________________________________________________

3. Disposition Type: O Denied O Payout O Revoked 4. Disposition Date (MM/DD/YYYY):________________________________ O Exact O Explanation


5. If disposition resulted in Payout:

A. Payout Amount: $_____________

B. Date Paid (MM/DD/YYYY):________________________________ O Exact O Explanation

If not exact, provide explanation: 6. Comment (Optional). You may use this field to provide a brief summary of the circumstances leading to the action as well as the current

status or final disposition. Your information must fit within the space provided.

U4 - CIVIL JUDICIAL DRP Rev. DRP (05/2009)

This Disclosure Reporting Page is an INITIAL or AMENDED response to report details for affirmative response(s) to Question(s)



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14H on Form U4; Check the question(s) you are responding to, regardless of whether you are answering the question(s) "yes" or amending the answer(s) to "no":

14H(1)(a) 14H(1)(b) 14H(1)(c) 14H(2) One event may result in more than one affirmative answer to the above items. Use only one DRP to report details related to the same event. Unrelated civil judicial actions must be reported on separate DRPs. 1. Court Action initiated by:

A. (Select appropriate item): O SEC O Other Federal Agency O Jurisdiction O Foreign Financial Regulatory Authority O Firm O Private Plaintiff B. Name of party initiating the proceeding:___________________________________________

2. Relief Sought: (select all that apply):

Cease and Desist Injunction Restraining Order Civil and Administrative Penalty(ies)/Fine(s) Monetary Penalty other than Fines Other:______________________ Disgorgement Restitution

3. A. Filing Date of Court Action (MM/DD/YYYY):_________________ O Exact O Explanation If not exact, provide explanation:

B. Date notice/process was served (MM/DD/YYYY):_________________ O Exact O Explanation If not exact, provide explanation:

4. Product Type(s): (select all that apply) No Product Derivative Mutual Fund Annuity-Charitable Direct Investment-DPP & LP Interest Oil & Gas Annuity-Fixed Equipment Leasing Options Annuity-Variable Equity Listed (Common & Preferred Stock) Penny Stock Banking Product (other than CD) Equity-OTC Prime Bank Instrument CD Futures Commodity Promissory Note Commodity Option Futures-Financial Real Estate Security Debt-Asset Backed Index Option Security Futures Debt-Corporate Insurance Unit Investment Trust Debt-Government Investment Contract Viatical Settlement Debt-Municipal Money Market Fund Other:________________________

5. Formal Action was brought in: O Federal Court O State Court O Foreign Court O Military Court O Other:________________________________ A. Name of Court:____________________________________________________________________ B. Location of Court (City or County and State or Country):___________________________________________________________ C. Docket/Case#:______________

6. Employing Firm when activity occurred which led to the civil judicial action:________________________________________________ 7. Describe the allegations related to this civil action. (Your information must fit within the space provided.):

8. Current Status? O Pending O On Appeal O Final 9. If pending and any limitations or restrictions are currently in effect, provide details:

U4 - CIVIL JUDICIAL DRP (CONTINUED) Rev. DRP (05/2009)



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10. If on appeal: A. Action appealed to (provide name of court):____________________________________________________ B. Court Location:_______________________________________________________________ C. Docket/Case#:______________ D. Date appeal filed (MM/DD/YYYY):_____________________ O Exact O Explanation If not exact, provide explanation:

E. Appeal details (including status):

F. If on Appeal and any limitations or restrictions are currently in effect, provide details:

If Final or On Appeal, complete all items below. For Pending Actions, complete Item 13 only. 11. Resolution Detail:

A. How was matter resolved? (select appropriate item): O Consent O Judgment Rendered O Settled O Vacated O Vacated Nunc Pro Tunc / ab initio O Dismissed O Withdrawn O Other:______________________

B. Resolution Date (MM/DD/YYYY):_____________________ O Exact O Explanation If not exact, provide explanation:

12. Sanction Detail:

A. Were any of the following Sanctions Ordered or Relief Granted? (select all that apply):

Civil and Administrative Penalty(ies)/Fine(s) Injunction

Cease and Desist Monetary Penalty other than fines

Disgorgement Restitution

B. Other Sanctions:___________________________________________________________________________________ C. If enjoined, provide:

Injunction Details Registration Capacities Affected (e.g., General Securities Principal, Financial Operations Principal, All Capacities, etc.):

Duration (length of time):_____________________ O Exact O Explanation If not exact, provide explanation:

Start Date (MM/DD/YYYY):_____________________ O Exact O Explanation If not exact, provide explanation:

End Date (MM/DD/YYYY):_____________________ O Exact O Explanation If not exact, provide explanation:



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D. If disposition resulted in a fine, penalty, restitution, disgorgement or monetary compensation, provide: Monetary Related Sanction Details

Monetary Related Sanction Type: O Monetary Fine O Disgorgement O Restitution O Other (requires explanation) Explanation:

Total Amount: $_________________ Portion levied against you: $_________________

Date Paid by You (MM/DD/YYYY):_____________________ O Exact O Explanation If not exact, provide explanation:

Was any portion of penalty waived? O Yes O No If yes, amount: $_________________



Page 25 of 39


Monetary Related Sanction Details


Total Amount: $_________________ Portion levied against you: $_________________ Date Paid by You (MM/DD/YYYY):_____________________ O Exact O Explanation



Monetary Related Sanction Details


Total Amount: $_________________ Portion levied against you: $_________________ Date Paid by You (MM/DD/YYYY):_____________________ O Exact O Explanation If not exact, provide explanation:


13. Comment (Optional). You may use this field to provide a brief summary of the circumstances leading to the action, as well as the current status or disposition and/or finding(s). Your information must fit within the space provided.



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U4 - CRIMINAL DRP Rev. DRP (05/2009) This Disclosure Reporting Page is an INITIAL or AMENDED response to report details for affirmative response(s to Question(s) 14A and 14B on Form U4; Check the question(s) you are responding to, regardless of whether you are answering the question(s) "yes" or amending the answer(s) to "no":

14A(1)(a) 14A(2)(a) 14B(1)(a) 14B(2)(a) 14A(1)(b) 14A(2)(b) 14B(1)(b) 14B(2)(b)

Use this DRP to report all charges arising out of the same event. One event may result in more than one affirmative answer to the above items. Multiple counts of the same charge arising out of the same event should be reported on the same DRP. Unrelated criminal actions, including separate cases arising out of the same event, must be reported on separate DRPs. Applicable court documents (i.e., criminal complaint, information or indictment as well as judgment of conviction or sentencing documents) must be provided to the CRD if not previously submitted. 1. If charge(s) were brought against an organization over which you exercise(d) control:

A. Organization Name:____________________________________________________________________ B. Investment-related business? O Yes O No C. Position, title or relationship:_________________________________________________________________

2. Formal action was brought in: O Federal Court O State Court O Foreign Court O Military Court O Other:________________________ A. Name of Court:____________________________________________________________________ B. Location of Court (City or County and State or Country):______________________________________________________________ C. Docket/Case#:______________

3. Event Status:

A. Current status of the Event? O Pending O On Appeal O Final B. Event Status Date (complete unless status is pending) (MM/DD/YYYY):_________________ O Exact O Explanation If not exact, provide explanation:

4. Event and Disposition Disclosure Detail (Use this for both organizational and individual charges.):

A. Date First Charged (MM/DD/YYYY):___________________________ O Exact O Explanation If not exact, provide explanation:

B. Event and Disposition Detail:

Charge Details (complete every field for each charge.) Formal Charge/Description:

No. of Counts:________ Felony or Misdemeanor: O Felony O Misdemeanor Plea for each Charge:__________________________________________ Disposition of Charge:

O Acquitted O Dismissed O Pre-trial Intervention O Amended O Found not guilty O Reduced O Convicted O Pled guilty O Other (requires explanation) O Deferred Adjudication O Pled not guilty Explanation:

Date of Amended Charge, if applicable:_________________



Page 27 of 39

U4 - CRIMINAL DRP (CONTINUED) Rev. DRP (05/2009) If original charge was amended or reduced, specify new charge (i.e., list amended charge or reduced charge): No. of Counts (for amended or reduced charge):________

Specify if amended or reduced charge is a Felony or Misdemeanor: O Felony O Misdemeanor O Other:_______________ Plea for each amended or reduced charge:__________________________________________ Disposition of amended or reduced charge:


Charge Details (complete every field for each charge.) Formal Charge/Description:


O Acquitted O Dismissed O Pre-trial Intervention O Amended O Found not guilty O Reduced O Convicted O Pled guilty O Other (requires explanation) O Deferred Adjudication O Pled not guilty

Explanation:

Date of Amended Charge, if applicable:_________________

If original charge was amended or reduced, specify new charge (i.e., list amended charge or reduced charge): No. of Counts (for amended or reduced charge):________

Specify if amended or reduced charge is a Felony or Misdemeanor: O Felony O Misdemeanor O Other:________________ Plea for each amended or reduced charge:__________________________________________ Disposition of amended or reduced charge:




Page 28 of 39

U4 - CRIMINAL DRP (CONTINUED) Rev. DRP (05/2009) Charge Details (complete every field for each charge.)

Formal Charge/Description:


O Acquitted O Dismissed O Pre-trial Intervention O Amended O Found not guilty O Reduced O Convicted O Pled guilty O Other (requires explanation) O Deferred Adjudication O Pled not guilty

Explanation:

Date of Amended Charge, if applicable:_________________ If original charge was amended or reduced, specify new charge (i.e., list amended charge or reduced charge): No. of Counts (for amended or reduced charge):________

Specify if amended or reduced charge is a Felony or Misdemeanor: O Felony O Misdemeanor O Other:________________ Plea for each amended or reduced charge:__________________________________________ Disposition of amended or reduced charge:


C. Date of Disposition (MM/DD/YYYY):___________________________

O Exact O Explanation


D. Sentence/Penalty; Duration (if suspension, probation, etc): Start Date of Penalty: (MM/DD/YYYY); End date of Penalty: (MM/DD/YYYY); If Monetary penalty/fine - Amount paid; Date monetary/penalty fine paid: (MM/DD/YYYY) if not exact, provide explanation.

5. Comment (Optional). You may use this field to provide a brief summary of the circumstances leading to the charge(s) as well as the current status or final disposition. Your information must fit within the space provided.



Page 29 of 39

U4 - CUSTOMER COMPLAINT/ARBITRATION/CIVIL LITIGATION DRP Rev. DRP (05/2009)

This Disclosure Reporting Page is an INITIAL or AMENDED response to report details for affirmative response(s) to Question(s) 14I on Form U4; Check the question(s) you are responding to, regardless of whether you are answering the question(s) "yes" or amending the answer(s) to "no":

14I(1)(a) 14I(2)(a) 14I(3)(a) 14I(4)(a) 14I(5)(a) 14I(1)(b) 14I(2)(b) 14I(3)(b) 14I(4)(b) 14I(5)(b) 14I(1)(c) 14I(1)(d)

One matter may result in more than one affirmative answer to the above items. Use a single DRP to report details relating to a particular matter (i.e., a customer complaint/arbitration/CFTC reparation/civil litigation). Use a separate DRP for each matter.

DRP Instructions:

• Complete items 1-6 for all matters (i.e., customer complaints, arbitrations/CFTC reparations and civil litigation in which a customer alleges that you were involved in sales practice violations and you are not named as a party, as well as arbitrations/CFTC reparations and civil litigation in which you are named as a party).

• If the matter involves a customer complaint, or an arbitration/CFTC reparation or civil litigation in which a customer alleges that you were involved in sales practice violations and you are not named as a party, complete items 7-11 as appropriate.

• If a customer complaint has evolved into an arbitration/CFTC reparation or civil litigation, amend the existing DRP by completing items 9 and 10.

• If the matter involves an arbitration/CFTC reparation in which you are a named party, complete items 12-16, as appropriate. If the matter involves a civil litigation in which you are a named party, complete items 17-23.

• Item 24 is an optional field and applies to all event types (i.e., customer complaint, arbitration/CFTC reparation, civil litigation). Complete items 1-6 for all matters (i.e., customer complaints, arbitrations/CFTC reparations, civil litigation). 1. Customer Name(s):________________________________________________________________________________________ 2. A. Customer(s) State of Residence (select "not on list" when the customer's residence is a foreign

address):______________________________________ B. Other state(s) of residence/detail:

3. Employing Firm when activities occurred which led to the customer complaint, arbitration, CFTC reparation or civil litigation: 4. Allegation(s) and a brief summary of events related to the allegation(s) including dates when activities leading to the allegation(s)

occurred:

5. Product Type(s): (select all that apply) No Product Derivative Mutual Fund Annuity-Charitable Direct Investment-DPP & LP Interest Oil & Gas Annuity-Fixed Equipment Leasing Options Annuity-Variable Equity Listed (Common & Preferred Stock) Penny Stock Banking Product (other than CD) Equity-OTC Prime Bank Instrument CD Futures Commodity Promissory Note Commodity Option Futures-Financial Real Estate Security Debt-Asset Backed Index Option Security Futures Debt-Corporate Insurance Unit Investment Trust Debt-Government Investment Contract Viatical Settlement Debt-Municipal Money Market Fund Other:____________________

6. Alleged Compensatory Damage Amount:$______________________ O Exact O Explanation (If no damage amount is alleged, the complaint must be reported unless the firm has made a good

faith determination that the damages from the alleged conduct would be less than $5,000):



Page 30 of 39

U4 - CUSTOMER COMPLAINT/ARBITRATION/CIVIL LITIGATION DRP (CONTINUED) Rev. DRP (05/2009)

If the matter involves a customer complaint, arbitration/CFTC reparation or civil litigation in which a customer alleges that you were involved in a sales practice violation and you are not named as a party, complete items 7-11 as appropriate. [Note: Report in Items 12-16, or 17-23, as appropriate, only arbitrations/CFTC reparations or civil litigation in which you are named as a party.] 7. A. Is this an oral complaint? O Yes O No

B. Is this a written complaint? O Yes O No C. Is this an arbitration/CFTC reparation or civil litigation? O Yes O No If yes, provide:

i. Arbitration/reparation forum or court name and location:___________________________________________________________ ii. Docket/Case#:______________________________ iii. Filing date of arbitration/CFTC reparation or civil litigation (MM/DD/YYYY):_______________

D. Date received by/served on firm (MM/DD/YYYY):_______________ O Exact O Explanation If not exact, provide explanation:

8. Is the complaint, arbitration/CFTC reparation or civil litigation pending? O Yes O No If "No", complete item 9.

9. If the complaint, arbitration/CFTC reparation or civil litigation is not pending, provide status: Closed/No Action Withdrawn Denied Settled Arbitration Award/Monetary Judgment (for claimants/plaintiffs) Arbitration Award/Monetary Judgment (for respondents/defendants) Evolved into Arbitration/CFTC reparation (you are a named party) Evolved into Civil litigation (you are a named party)

If status is arbitration/CFTC reparation in which you are not a named party, provide details in item 7C. If status is arbitration/CFTC reparation in which you are a named party, complete items 12-16. If status is civil litigation in which you are a named party, complete items 17-23.

10. Status Date (MM/DD/YYYY):_______________ O Exact O Explanation If not exact, provide explanation:

11. Settlement/Award/Monetary Judgment: A. Settlement/Award/Monetary Judgment amount: $_________________ B. Your Contribution Amount: $_________________

If the matter involves an arbitration or CFTC reparation in which you are a named respondent, complete items 12-16, as appropriate. 12. A. Arbitration/CFTC reparation claim filed with (FINRA, AAA, CFTC, etc.):_______________________________________________

B. Docket/Case#:______________________________ C. Date notice/process was served (MM/DD/YYYY):_______________ O Exact O Explanation


13. Is arbitration/ CFTC reparation pending? O Yes O No If "No", complete item 14.

14. If the arbitration/CFTC reparation is not pending, what was the disposition? Award to Applicant (Agent/Representative) Award to Customer Denied Dismissed Judgment (other than monetary) No Action Settled Withdrawn Other:______________________________

15. Disposition Date (MM/DD/YYYY):_______________ O Exact O Explanation If not exact, provide explanation:



Page 31 of 39

U4 - CUSTOMER COMPLAINT/ARBITRATION/CIVIL LITIGATION DRP (CONTINUED) Rev. DRP (05/2009)

16. Monetary Compensation Details (award, settlement, reparation amount): A. Total Amount: $_________________ B. Your Contribution Amount: $_________________

If the matter involves a civil litigation in which you are a defendant, complete items 17-23. 17. Court in which case was filed:

O Federal Court O State Court O Foreign Court O Military Court O Other:________________________

A. Name of Court:____________________________________________________________________ B. Location of Court (City or County and State or Country):___________________________________________________________ C. Docket/Case#:______________

18. Date received by/served on firm (MM/DD/YYYY):_______________ O Exact O Explanation If not exact, provide explanation:

19. Is the civil litigation pending? O Yes O No If "No", complete item 20.

20. If the civil litigation is not pending, what was the disposition? Denied Dismissed Judgment (other than monetary) Monetary Judgment to Applicant (Agent/Representative) Monetary Judgment to Customer No Action Settled Withdrawn Other:______________________________

21. Disposition Date (MM/DD/YYYY):_______________ O Exact O Explanation If not exact, provide explanation:

22. Monetary Compensation Details (judgment, restitution, settlement amount): A. Total Amount: $_________________ B. Your Contribution Amount: $_________________

23. If action is currently on appeal:

A. Enter date appeal filed (MM/DD/YYYY):_______________ O Exact O Explanation If not exact, provide explanation:

B. Court appeal filed in: O Federal Court O State Court O Foreign Court O Military Court O Other:________________________

i. Name of Court:____________________________________________________________________ ii. Location of Court (City or County and State or Country):___________________________________________________________ iii. Docket/Case#:______________

24. Comment (Optional). You may use this field to provide a brief summary of the circumstances leading to the customer complaint,

arbitration/CFTC reparation and/or civil litigation as well as the current status or final disposition(s). Your information must fit within the space provided.



Page 32 of 39

U4 - INVESTIGATION DRP Rev. DRP (05/2009)

This Disclosure Reporting Page is an INITIAL or AMENDED response to report details for affirmative response(s) to Question(s) 14G(2) on Form U4; Check the question(s) you are responding to, regardless of whether you are answering the question(s) "yes" or amending the answer(s) to "no":

14G(2) Complete this DRP only if you are answering "yes" to Item 14G(2). If you answered "yes" to Item 14G(1), complete the Regulatory Action DRP. If you have been notified that the investigation has been concluded without formal action, complete items 4 and 5 of this DRP to update. One event may result in more than one investigation. If more than one authority is investigating you, use a separate DRP to provide details. 1. Investigation initiated by:

A. Notice Received From (select appropriate item): O SRO O Foreign Financial Regulatory Authority O Jurisdiction O SEC O Other Federal Agency O Other:_________________________________ B. Full name of regulator (if other than the SEC) that initiated the investigation:__________________________________________

2. Notice Date (MM/DD/YYYY):________________________________ O Exact O Explanation


3. Describe briefly the nature of the investigation, if known. (Your information must fit within the space provided.):

4. Is investigation pending? O Yes O No If no, complete item 5. If yes, skip to item 6.

5. Resolution Details: A. Date Closed/Resolved (MM/DD/YYYY):________________________________ O Exact O Explanation


B. How was investigation resolved? (select appropriate item):

O Closed Without Further Action O Closed - Regulatory Action Initiated O Other:_________________________________ 6. Comment (Optional). You may use this field to provide a brief summary of the circumstances leading to the investigation, as well as the

current status or final disposition and/or finding(s). Your information must fit within the space provided.



Page 33 of 39

U4 - JUDGMENT/LIEN DRP Rev. DRP (05/2009)

This Disclosure Reporting Page is an INITIAL or AMENDED response to report details for affirmative response(s) to Question(s) 14M on Form U4; Check the question(s) you are responding to, regardless of whether you are answering the question "yes" or amending the answer(s) to "no":

14M If multiple, unrelated events result in the same affirmative answer, details must be provided on separate DRPs. 1. Judgment/Lien Amount:$_____________________________________ 2. Judgment/Lien Holder:_____________________________________

3. Judgment/Lien Type: O Civil O Tax

4. A. Date Filed with Court (MM/DD/YYYY):______________________ O Exact O Explanation If not exact, provide explanation: B. Date individual learned of the Judgment/Lien (MM/DD/YYYY): _____________________ O Exact O Explanation If not exact, provide explanation:

5. Court action brought in: O Federal Court O State Court O Foreign Court O Other:_______________________________ A. Name of Court:____________________________________________________________________ B. Location of Court (City or County and State or Country):_______________________________________________________________ C. Docket/Case#:______________

Check this box if the Docket/Case# is your SSN, a Bank Card number, or a Personal Identification Number. 6. Is Judgment/Lien outstanding? O Yes O No

If "No", complete item 7. If "Yes", skip to item 8. 7. If Judgment/Lien is not outstanding, provide:

A. Status Date (MM/DD/YYYY):________________________________ O Exact O Explanation If not exact, provide explanation:

B. How was matter resolved? (select appropriate item): O Discharged O Released O Removed O Satisfied 8. Comment (Optional). You may use this field to provide a brief summary of the circumstances leading to the action as well as the current

status or final disposition. Your information must fit within the space provided.



Page 34 of 39

U4 - REGULATORY ACTION DRP Rev. DRP (05/2009)

This Disclosure Reporting Page is an INITIAL or AMENDED response to report details for affirmative response(s) to Question(s) 14C, 14D, 14E, 14F and 14G(1) on Form U4; Check the question(s) you are responding to, regardless of whether you are answering the question(s) "yes" or amending the answer(s) to "no":

14C(1) 14D(1)(a) 14E(1) 14F 14C(2) 14D(1)(b) 14E(2) 14C(3) 14D(1)(c) 14E(3) 14G(1) 14C(4) 14D(1)(d) 14E(4) 14C(5) 14D(1)(e) 14E(5) 14C(6) 14D(2)(a) 14E(6) 14C(7) 14D(2)(b) 14E(7) 14C(8)

One event may result in more than one affirmative answer to the above items. Use only one DRP to report details to the same event. If an event gives rise to actions by more than one regulator, provide details to each action on a separate DRP. 1. Regulatory Action initiated by: A. (Select appropriate item):

O SEC O Other Federal Agency O Jurisdiction O SRO O CFTC O Foreign Financial Regulatory Authority O Federal Banking Agency O National Credit Union Administration O Other:_______________________________

B. Full name of regulator (if other than the SEC) that initiated the action:_________________________________________________ 2. Sanction(s) Sought (select all that apply):

Bar Cease and Desist Censure Civil and Administrative Penalty(ies)/Fine(s) Denial Disgorgement Expulsion Monetary Penalty other than Fines Prohibition Reprimand Requalification Rescission Restitution Revocation Suspension Undertaking Other:______________________________

3. Date Initiated (MM/DD/YYYY):_____________________ O Exact O Explanation If not exact, provide explanation:

4. Docket/Case#:________________________________________________

5. Employing Firm when activity occurred which led to the regulatory action:________________________________________________ 6. Product Type(s) (select all that apply):

No Product Derivative Mutual Fund Annuity-Charitable Direct Investment-DPP & LP Interest Oil & Gas Annuity-Fixed Equipment Leasing Options Annuity-Variable Equity Listed (Common & Preferred Stock) Penny Stock Banking Product (other than CD) Equity-OTC Prime Bank Instrument CD Futures Commodity Promissory Note Commodity Option Futures-Financial Real Estate Security Debt-Asset Backed Index Option Security Futures Debt-Corporate Insurance Unit Investment Trust Debt-Government Investment Contract Viatical Settlement Debt-Municipal Money Market Fund Other:____________________

7. Describe the allegations related to this regulatory action. (Your information must fit within the space provided.):

8. Current Status? O Pending O On Appeal O Final



Page 35 of 39

U4 - REGULATORY ACTION DRP (CONTINUED) Rev. DRP (05/2009)

9. If pending, are there any limitations or restrictions currently in effect? O Yes O No If the answer is 'yes', provide details:

10. If on appeal: A. Action appealed to:

O SEC O SRO O CFTC O Federal Court O State Agency or Commission O State Court

O Other:_________________________________

B. Date appeal filed (MM/DD/YYYY):_____________________ O Exact O Explanation


C. Are there any limitations or restrictions currently in effect while on appeal? O Yes O No

If the answer is 'yes', provide details:

If Final or On Appeal, complete all items below. For Pending Actions, complete Item 14 only. 11. Resolution Detail:

A. How was matter resolved? (select appropriate item): O Acceptance, Waiver & Consent (AWC) O Consent O Decision O Decision & Order of Offer of Settlement O Dismissed O Order O Settled O Stipulation and Consent O Vacated O Vacated Nunc Pro Tunc/ab initio O Withdrawn O Other:_____________________________

B. Resolution Date (MM/DD/YYYY):_____________________ O Exact O Explanation If not exact, provide explanation:

12. Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative or deceptive conduct? O Yes O No 13. Sanction Detail: A. Were any of the following sanctions ordered? (Select all appropriate items):

Bar (Permanent) Bar (Temporary/Time Limited) Cease and Desist Censure Civil and Administrative Penalty(ies)/Fine(s) Denial Disgorgement Expulsion Letter of Reprimand Monetary Penalty other than Fines Prohibition Requalification Rescission Restitution Revocation Suspension Undertaking

B. Other sanctions ordered:_____________________________________________________________________________________ C. If suspended or barred, provide:

Sanction Details

Sanction type: O Bar (Permanent) O Bar (Temporary/Time Limited) O Suspension Registration Capacities affected (e.g., General Securities Principal, Financial Operations Principal, All Capacities, etc.):

Duration (length of time):__________________ O Exact O Explanation If not exact, provide explanation:



Page 36 of 39


Start Date (MM/DD/YYYY):_____________________ O Exact O Explanation If not exact, provide explanation: End Date (MM/DD/YYYY):_____________________ O Exact O Explanation If not exact, provide explanation:

Sanction Details


Duration (length of time):__________________ O Exact O Explanation If not exact, provide explanation: Start Date (MM/DD/YYYY):_____________________ O Exact O Explanation If not exact, provide explanation: End Date (MM/DD/YYYY):_____________________ O Exact O Explanation If not exact, provide explanation:

Sanction Details


Duration (length of time):__________________ O Exact O Explanation If not exact, provide explanation: Start Date (MM/DD/YYYY):_____________________ O Exact O Explanation If not exact, provide explanation: End Date (MM/DD/YYYY):_____________________ O Exact O Explanation If not exact, provide explanation:



Page 37 of 39


D. If requalification by exam/retraining was a condition of the sanction, provide:

Requalification Details Requalification type: O Requalification by Exam O Re-Training O Other Length of time given to requalify/retrain:__________________ Type of Exam required:___________________________________________ Has condition been satisfied? O Yes O No Explanation:

Requalification Details

Requalification type: O Requalification by Exam O Re-Training O Other Length of time given to requalify/retrain:__________________ Type of Exam required:___________________________________________ Has condition been satisfied? O Yes O No Explanation:

Requalification Details

Requalification type: O Requalification by Exam O Re-Training O Other Length of time given to requalify/retrain:__________________ Type of Exam required:___________________________________________ Has condition been satisfied? O Yes O No Explanation:

E. If disposition resulted in a fine, penalty, restitution, disgorgement or monetary compensation, provide: Monetary Sanction Details

Monetary Related Sanction Type: O Civil and Administrative Penalty(ies)/Fine(s) O Disgorgement

O Monetary Penalty other than Fines O Restitution Total Amount: $_________________ Portion Levied against you: $_________________ Payment Plan:

Is Payment Plan Current? O Yes O No Date Paid by you (MM/DD/YYYY):__________________ O Exact O Explanation If not exact, provide explanation: Was any portion of penalty waived? O Yes O No If yes, amount: $_________________

Monetary Sanction Details

Monetary Related Sanction Type: O Civil and Administrative Penalty(ies)/Fine(s) O Disgorgement O Monetary Penalty other than Fines O Restitution

Total Amount: $_________________ Portion Levied against you: $_________________ Payment Plan:



Page 38 of 39



Monetary Sanction Details

Monetary Related Sanction Type: O Civil and Administrative Penalty(ies)/Fine(s) O Disgorgement O Monetary Penalty other than Fines O Restitution

Total Amount: $_________________ Portion Levied against you: $_________________ Payment Plan:


14. Comment (Optional). You may use this field to provide a brief summary of the circumstances leading to the action as well as the current status or disposition and/or finding(s). Your information must fit within the space provided.



Page 39 of 39

U4 - TERMINATION DRP Rev. DRP (05/2009)

This Disclosure Reporting Page is an INITIAL or AMENDED response to report details for affirmative response(s) to Question(s) 14J on Form U4; Check the question(s) you are responding to, regardless of whether you are answering the question(s) "yes" or amending the answer(s) to "no":

14J(1) 14J(2) 14J(3) One event may result in more than one affirmative answer to the above items. Use only one DRP to report details related to the same termination. Use a separate DRP for each termination reported. 1. Firm Name:__________________________________________________________________ 2. Termination Type:

O Discharged O Permitted to Resign O Voluntary Resignation 3. Termination Date (MM/DD/YYYY):_______________________ O Exact O Explanation


4. Allegation(s):

5. Product Type(s): (select all that apply) No Product Derivative Mutual Fund Annuity-Charitable Direct Investment-DPP & LP Interest Oil & Gas Annuity-Fixed Equipment Leasing Options Annuity-Variable Equity Listed (Common & Preferred Stock) Penny Stock Banking Product (other than CD) Equity-OTC Prime Bank Instrument CD Futures Commodity Promissory Note Commodity Option Futures-Financial Real Estate Security Debt-Asset Backed Index Option Security Futures Debt-Corporate Insurance Unit Investment Trust Debt-Government Investment Contract Viatical Settlement Debt-Municipal Money Market Fund Other:____________________

6. Comment (Optional). You may use this field to provide a brief summary of the circumstances leading to the termination. Your information must fit within the space provided.

70844 Federal Register / Vol. 63, No. 245 / Tuesday, December 22, 1998 / Rules and Regulations

SECURITIES AND EXCHANGECOMMISSION

17 CFR Parts 202, 240, 242 and 249

[Release No. 34–40760; File No. S7–12–98]

RIN 3235–AH41

Regulation of Exchanges andAlternative Trading Systems

AGENCY: Securities and ExchangeCommission.ACTION: Final rules.

SUMMARY: The Securities and ExchangeCommission today is adopting newrules and rule amendments to allowalternative trading systems to choosewhether to register as national securitiesexchanges, or to register as broker-dealers and comply with additionalrequirements under Regulation ATS,depending on their activities andtrading volume. The Commission is alsoadopting amendments to rules regardingregistration as a national securitiesexchange, repealing Rule 17a–23, andamending the books and records rulesby transferring the recordkeepingrequirements from Rule 17a–23 to Rules17a–3 and 17a–4 as they apply tobroker-dealer internal trading systems.Finally, the Commission is excludingfrom the rule filing requirements forself-regulatory organizations certainpilot trading systems operated bynational securities exchanges andnational securities associations. Theserules will more effectively integrate thegrowing number of alternative tradingsystems into the national market system,accommodate the registration ofproprietary alternative trading systemsas exchanges, and provide anopportunity for registered exchanges tobetter compete with alternative tradingsystems.DATES: Effective Date: April 21, 1999,except §§ 242.301(b)(5)(i)(D) and (E) and§§ 242.301(b)(6)(i) (D) and (E), whichshall become effective on April 1, 2000.

Compliance Date: Prior to April 21,1999, the Commission will publish aschedule of those securities with respectto which alternative trading systemsmust comply with § 242.301(b)(3) onApril 21, 1999 and those securities withrespect to which alternative tradingsystems must comply with§ 242.301(b)(3) on August 30, 1999. SeeSection VIII of this release.FOR FURTHER INFORMATION CONTACT:Elizabeth King, Senior Special Counsel,at (202) 942–0140, Marianne Duffy,Special Counsel, at (202) 942–4163,Constance Kiggins, Special Counsel, at(202) 942–0059, Kevin Ehrlich,Attorney, at (202) 942–0778, Denise

Landers, Attorney, at (202) 942–0137and John Roeser, Attorney, at (202) 942–0762, Division of Market Regulation,Securities and Exchange Commission,Stop 10–1, 450 Fifth Street, NW,Washington, DC 20549. For questions orcomments regarding securitiesregistration issues raised in this release,contact David Sirignano, AssociateDirector, at (202) 942–2870, Division ofCorporation Finance, Securities andExchange Commission, Stop 3–1, 450Fifth Street, NW, Washington, DC20549.SUPPLEMENTARY INFORMATION:

Table of Contents

I. IntroductionII. Executive Summary of Final Rules

A. New Interpretation of ‘‘Exchange’’B. Exemption for Regulated Alternative

Trading SystemsC. Regulation ATSD. For-Profit ExchangesE. Temporary Exemption from Rule Filing

Requirements for SROs’ Pilot TradingSystems

III. Rule 3b–16 under the Exchange ActA. Brings Together the Orders of Multiple

Buyers and Sellers1. To Bring Together2. Multiple Buyers and Sellers3. Definition of ‘‘Order’’B. Established, Non-Discretionary Methods1. Established, Non-Discretionary Methods

Provided by a Trading Facility2. Established, Non-Discretionary Methods

Provided by Setting RulesC. Systems Excluded From Rule 3b–161. Order Routing Systems2. Dealer SystemsD. Examples of Systems Illustrating

Application of Rule 3b–161. Examples of Systems Included Within

Rule 3b–162. Examples of Systems Not included

Within Rule 3b–16E. Exemption from the Definition of

‘‘Exchange’’F. Commission’s Authority to Require

Registration as an ExchangeIV. Regulation of Alternative Trading

SystemsA. Regulation ATS1. Scope of Regulation ATSa. Definition of Alternative Trading Systemb. Exclusion of Trading Systems Registered

as Exchanges or Operated by a NationalSecurities Association

c. Exclusion of Alternative TradingSystems Trading Solely Government andRelated Securities

(i) Discussion(ii) Response to Commentersd. Alternative Trading Systems Trading

Non-Government Debt Securities(i) Discussion(ii) Response to Commenterse. Exemptions from Certain Requirements

of Regulation ATS Pursuant toApplication to the Commission

2. Requirements for Alternative TradingSystems Subject to Regulation ATS

a. Membership in an SRO

b. Notice of Operation as an AlternativeTrading System and Amendments

c. Market Transparency(i) Importance of Market Transparency(ii) Integration of Orders into the Public

Quotation System(A) New Requirements for Alternative

Trading Systems(B) Response to Comments(iii) Access to Publicly Displayed Orders(A) Application of Access Requirements

under Regulation ATS(B) Response to Comments(iv) Execution Access Fees(A) Limitations on Alternative Trading

System Fees Charged to Non-Subscribers(B) Response to Comments(v) Amendment to Rule 11Ac1–1 under the

Exchange Actd. Fair Access(i) Importance of Fair Access(ii) Fair Access Requirement(iii) Response to Commentse. Capacity, Integrity, and Security

Standards(i) Application of Capacity, Integrity, and

Security Standards(ii) Response to Commentsf. Examination, Inspection, and

Investigations of Subscribersg. Recordkeepingh. Reporting and Form ATS–Ri. Procedures to Ensure Confidential

Treatment of Trading InformationB. Registration as a National Securities

Exchange1. Self-Regulatory Responsibilities2. Fair Representation(i) Public Directors(ii) Fair Representation of Exchange

Members3. Membership on a National Securities

Exchange4. Fair Access5. Compliance with ARP Guidelines6. Registration of Securities7. National Market System Participation8. Uniform Trading Standards9. Proposed Rule ChangesC. Application for Registration as an

Exchange1. Revisions to and Repeal of Form 1–A2. Amendments to Rules 6a–1, 6a–2, and

6a–3 under the Exchange Acta. Rule 6a–1 Application for Registration as

an Exchange or Exemption Based onLimited Volume of Transactions

b. Rule 6a–2 Periodic Amendmentsc. Rule 6a–3 Supplemental MaterialD. National Securities Exchanges Operating

Alternative Trading SystemsV. Broker-Dealer Recordkeeping and

Reporting ObligationsA. Elimination of Rule 17a–23B. Amendments to Rules 17a–3 and 17a–

4VI. Temporary Exemption of Pilot Trading

System Rule FilingsA. IntroductionB. Rule 19b–51. Types of Systems Eligible for Exemption

Under Rule 19b–5a. Definition of Pilot Trading Systemb. Response to Comments on the Proposed

Definition of Pilot Trading Systemc. Adopted Definition of Pilot Trading

System

70845Federal Register / Vol. 63, No. 245 / Tuesday, December 22, 1998 / Rules and Regulations

1 The term ‘‘alternative trading system’’ is definedin Rule 300(a), 17 CFR 242.300(a). This termencompasses some systems that previousCommission releases called proprietary tradingsystems, broker-dealer trading systems, andelectronic communication networks.

2 Securities Exchange Act Release No. 38672 (May23, 1997), 62 FR 30485 (June 4, 1997). The commentletters to the Concept Release and a summary ofthese comments have been placed in Public FileS7–16–97, which is available for inspection in theCommission’s Public Reference Room.

3 Securities Exchange Act Release No. 39884(Apr. 17, 1998), 63 FR 23504 (Apr. 29, 1998). Thecomment letters to the Proposing Release and asummary of those comments received as of August25, 1998 have been placed in Public File S7–12–98, which is available for inspection in theCommission’s Public Reference Room.

4 See SEC, Report Pursuant to Section 21(a) of theSecurities Exchange Act of 1934 Regarding theNASD and the Nasdaq Market (1996) (‘‘NASD 21(a)Report’’).

5 See In the Matter of Ian and Lawrence Fishman,Securities Exchange Act Release No. 40115 (June24, 1998) (finding that the Fishman brothersmanipulated the national best bid and offer inviolation of Section 10(b) and Rule 10b–5 under theExchange Act by coordinating the entry of ordersrouted to alternative trading systems).

2. Scope of Pilot Trading Rule Exemption3. SRO’s Continuing Obligations Regarding

Pilot Trading Systemsa. Notice and Filings to the Commissionb. Fair Accessc. Trading Rules and Proceduresd. Surveillancee. Clearance and Settlementf. Types of Securitiesg. Activities of Specialistsh. Inspections and Examinationsi. Public Availability of Pilot Trading

System RulesC. Rule Filing Under Section 19(b)(2) of the

Exchange Act Required Within TwoYears

VII. The Commission’s Interpretation of the‘‘Exchange’’ Definition

A. The Commission’s Interpretation inDelta

B. The Growing Significance of AlternativeTrading Systems in the National MarketSystem

C. The Revised Interpretation of‘‘Exchange’’

D. Other Practical Reasons for Revising theCurrent Interpretation

1. Additional Flexibility Provided by theNational Securities MarketsImprovement Act of 1996

2. No-action Approach to AlternativeTrading Systems is No Longer Workable

3. More Rational Treatment of RegulatedEntities

VIII. Effective Dates and Compliance DatesIX. Costs and Benefits of the Rules and

AmendmentsA. Costs and Benefits of the Rules and

Amendments Regarding AlternativeTrading Systems

1. Benefitsa. Improved Market Transparencyb. Improved Investor Protectionsc. Fair Accessd. Systems Capacity, Integrity, and

Security2. Costsa. Notice, Reporting, and Recordkeepingb. Public Display of Orders and Equal

Execution Accessc. Fair Accessd. Systems Capacity, Integrity, and

Securitye. Costs of Exchange RegistrationB. Amendments to Application and

Related Rules for Registration as anExchange

1. Benefits2. CostsC. Costs and Benefits of the Repeal of Rule

17a–23 and the Amendments to Rules17a–3 and 17a–4

D. SRO Pilot Trading SystemX. Effects on Competition, Efficiency and

Capital FormationXI. Summary of Final Regulatory

Flexibility AnalysisXII. Paperwork Reduction ActA. Form 1, Rules 6a–1 and 6a–2B. Rule 6a–3C. Rule 17a–3(a)(16)D. Rule 17a–4(b)(10)E. Rule 19b–5 and Form PILOTF. Rule 301, Form ATS and Form ATS–R1. Notice, Reporting, and Recordkeeping2. Fair Access

3. Systems Capacity, Integrity, and SecurityG. Rule 302H. Rule 303

XIII. Statutory Authority

I. IntroductionToday the Securities and Exchange

Commission (’’Commission’’ or ‘‘SEC’’)is adopting a regulatory framework foralternative trading systems,1 tostrengthen the public markets forsecurities, while encouraging innovativenew markets. During the past threeyears, the Commission has undertaken areevaluation of its regulatory frameworkfor markets because of substantialchanges in the way securities are traded.Market participants have incorporatedtechnology into their businesses toprovide investors with an increasingarray of services, and to furnish theseservices more efficiently, and often atlower prices. The current regulatoryframework, however, designed morethan six decades ago, did not envisionmany of these trading and businessfunctions. In particular, marketparticipants have developed a variety ofalternative trading systems that furnishservices traditionally provided solely byregistered exchanges.

To better understand the questionsraised by technological developments inthe U.S. markets, in May 1997, theCommission published a conceptrelease exploring ways to respond to therapid technological developmentsaffecting securities markets and, inparticular, the growing significance ofalternative trading systems (‘‘ConceptRelease’’).2 After taking intoconsideration the comments submittedin response to the Concept Release, inApril 1998, the Commission proposed anew regulatory framework foralternative trading systems (‘‘ProposingRelease’’).3

Alternative trading systems nowhandle more than twenty percent of theorders in securities listed on TheNasdaq Stock Market (‘‘Nasdaq’’), andalmost four percent of orders inexchange listed securities. These

systems operate markets similar to theregistered exchanges and Nasdaq. Overtime, an alternative trading system maybecome the primary market for somesecurities. Yet these markets are private,available only to chosen subscribers,and are regulated as broker-dealers, notin the way registered exchanges andNasdaq are regulated. This createsdisparities that affect investor protectionand the operation of the markets as awhole.

Our national market system, as it hasevolved since 1975, has sought thebenefits of both market centralization—deep, liquid markets—and competition.To achieve these benefits, the nationalmarket system has maintained equallyregulated, individual markets, which arelinked together to make their best pricespublicly known and accessible.Alternative trading systems haveremained largely outside the nationalmarket system. For example, theevidence in the Commission’s report onthe National Association of SecuritiesDealers, Inc. (‘‘NASD’’) and Nasdaqsuggested that widespread use ofInstinet by market makers as a privatemarket had a significant impact onpublic investors and the operation of theNasdaq market.4 Through Instinet,market makers were able to quote pricesbetter than those made available topublic investors. This private marketdeveloped only because the activity onalternative trading systems is not fullydisclosed, or accessible, to publicinvestors. Moreover, these tradingsystems have no obligation to provideinvestors a fair opportunity toparticipate in their systems or to treattheir participants fairly. These systemsmay also not be adequately surveilledfor market manipulation and fraud. Infact, market participants can manipulatethe prices in the public securitiesmarkets through the use of alternativetrading systems.5 In addition,alternative trading systems have noobligation to ensure that their systemsare sufficient to handle rapid increasesin trading volume as occurs in times ofmarket volatility, and at times they havefailed to do so. Because of theincreasingly important role ofalternative trading systems, thesedifferences are inconsistent with thenational market system goals set forth


6 Pub. L. 29, 89 Stat. 97 (1975). Congress grantedto the Commission authority in 1975 to adopt rulesthat promote (1) economically efficient execution ofsecurities transactions, (2) fair competition, (3)transparency, (4) investor access to the bestmarkets, and (5) the opportunity for investors’orders to be executed without the participation ofa dealer. See S. Rep. No. 75, 94th Cong., 1st Sess.8 (1975); H.R. Rep. No. 229, 94th Cong., 1st Sess92 (1975). See also section 11A(a)(1) of theExchange Act, 15 U.S.C. 78k-1(a)(1).

7 Section 36 of the Exchange Act, 15 U.S.C.78mm, was enacted as part of the NationalSecurities Markets Improvement Act of 1996, Pub.L. 104–290 (‘‘NSMIA’’). See infra Section VII.D.1.

8 See supra note 3.9 This is the number of comment letters received

by the Commission as of the close of business onDecember 1, 1998.

10 Some commenters, however, suggested that thebetter approach would be for the Commission toretain its present regulatory framework foralternative trading systems. See, e.g., Letter fromRobin Roger, Principal and Counsel, MorganStanley Dean Witter to Jonathan G. Katz, Secretary,SEC, dated Sept. 11, 1998 (‘‘MSDW Letter’’) at 3–4; Letter from Christopher J. Carroll and W. HalHinkle, Co-Chairs, ATS Task Force, The BondMarket Association to Jonathan G. Katz, Secretary,SEC, dated July 28, 1998 (‘‘TBMA Letter’’) at 2, 8–12; Letter from Lee B. Spencer, Jr., Chairman, SIAFederal Regulation Committee and Perry L. Taylor,Jr., Chairman, SIA Alternative Trading SystemSubcommittee, Securities Industry Association toJonathan G. Katz, Secretary, SEC, dated July 31,1998 (‘‘SIA Letter’’) at 2, 5. Another commentersuggested that the Commission solicit commentagain on the broader issues discussed in theConcept Release. See Letter from Louis C. Magill,

President, Corporate Capital Securities, Inc. toJonathan G. Katz, Secretary, SEC, dated July 27,1998 (‘‘Corporate Capital Letter’’) at 4.

11 See, e.g., Letter from Joanne Moffic-Silver,Secretary and General Counsel, Chicago BoardOptions Exchange to Jonathan G. Katz, Secretary,SEC, dated July 28, 1998 (‘‘CBOE Letter’’) at 3;Letter from John C. Katovich, Senior Vice Presidentand General Counsel, OptiMark Technologies Inc.to Jonathan G. Katz, Secretary, SEC, dated Aug. 13,1998 (‘‘OptiMark Letter’’) at 1.

12 See, e.g., CBOE Letter at 3.13 See, e.g., SIA Letter at 1, 5–6.14 See, e.g., Letter from Joan C. Conley, Corporate

Secretary, National Association of SecuritiesDealers, Inc. to Jonathan G. Katz, Secretary, SEC,dated Aug. 10, 1998 (‘‘NASD Letter’’) at 1–2.

15 See, e.g., Letter from Douglas M. Atkin, ChiefExecutive Officer, Instinet International to JonathanG. Katz, Secretary, SEC, dated Aug. 3, 1998(‘‘Instinet Letter’’) at 1, 7; Letter from Frederic W.Rittereiser, President and Chief Executive Officerand William W. Uchimoto, Executive VicePresident and General Counsel, Ashton TechnologyGroup, Inc. to Jonathan G. Katz, Secretary, SEC,dated July 28, 1998 (‘‘Ashton Letter’’) at 1; Letterfrom Mary Sue Fisher, Managing Director, Legaland Compliance, Chicago Board Brokerage, LLC toJonathan G. Katz, Secretary, SEC, dated July 29,1998 (‘‘CBB Letter’’) at 1–2.

16 See, e.g., TBMA Letter at 4; Letter from LarryE. Fondren, President, Integrated Bond Exchange,Inc. to Jonathan G. Katz, Secretary, SEC, dated July27, 1998 (‘‘IBEX Letter’’) at 13.

17 See, e.g., Letter from Craig S. Tyle, GeneralCounsel, Investment Company Institute to JonathanG. Katz, Secretary, SEC, dated July 28, 1998 (‘‘7/28/98 ICI Letter’’) at 5; Letter from James E. Buck,Senior Vice President and Secretary, New YorkStock Exchange, Inc. to Jonathan G. Katz, Secretary,SEC, dated July 28, 1998 (‘‘NYSE Letter’’) at 9;Letter from Robert H. Forney, President and ChiefExecutive Officer, Chicago Stock Exchange toJonathan G. Katz, Secretary, SEC, dated July 30,1998 (‘‘CHX Letter’’) at 11; Letter from T. EricKilcollin, President and Chief Executive Officer,Chicago Mercantile Exchange to Jonathan G. Katz,Secretary, SEC, dated Aug. 5, 1998 (‘‘CME Letter’’)at 4; Letter from James F. Duffy, Executive VicePresident and General Counsel, Legal andRegulatory Policy, American Stock Exchange, Inc.to Jonathan G. Katz, Secretary, SEC, dated Aug. 18,1998 (‘‘Amex Letter’’) at 1; Ashton Letter at 2; CBOELetter at 3, 8–9. See infra Section VI for a discussionof the temporary exemption for pilot tradingsystems.

by Congress in the 1975 amendments tothe Securities Exchange Act of 1934(‘‘1975 Amendments’’) 6 and call intoquestion the fairness of currentregulatory requirements.

In 1996, Congress provided theCommission with greater flexibility toregulate new trading systems by givingthe Commission broad authority toexempt any person from any of theprovisions of the Securities ExchangeAct of 1934 (‘‘Exchange Act’’) andimpose appropriate conditions on theiroperation.7 This new exemptiveauthority, combined with the ability tofacilitate a national market system,provides the Commission with the toolsit needs to adopt a regulatory frameworkthat addresses its concerns aboutalternative trading systems withoutjeopardizing the commercial viability ofthese markets. In the Proposing Release,the Commission proposed ways to usethese tools to adopt new rules and ruleamendments designed to resolve manyof the concerns raised by alternativetrading systems, better integrate thesesystems into our national market systemstructure, and make the benefits of thesesystems available to more investors.

In response to its Proposing Release,8the Commission received seventycomment letters.9 Commenters generallysupported the Commission’s proposalsand welcomed the regulatory flexibilitythese proposals offered.10 Many

commenters agreed with theCommission that the regulatorystructure needs to be modernized tobetter integrate alternative tradingsystems into the national marketsystem.11 For example, severalcommenters expressed the view that, onbalance, the proposed regulatoryframework for alternative tradingsystems represented a preferablealternative to the current regulation ofthese systems as broker-dealers, whichis not only inadequate for manyalternative trading systems, but alsoresults in disparate regulatory treatmentof exchange markets and theiralternative trading systemcompetitors.12 Other commentersbelieved that the Commission’s proposalwas a step in the right direction, bothfrom a competitive business perspectiveand from an investor protection and fairregulation perspective. While somecommenters thought that theCommission should continue thepresent framework for alternativetrading systems,13 most believed thatthe proposal provided a framework thatcould maintain a competitive balanceamong the markets offering services toinvestors.14 Other commenters werepleased by the Commission’sdetermination to allow marketparticipants to engage in businessdecisions regarding how to register withthe Commission.15 Commenters alsogenerally supported the Commission’sproposal to allow for-profit exchanges,16

and generally supported the proposed

temporary exemption for pilot tradingsystems.17

The Commission believes that itsregulation of markets should bothaccommodate traditional marketstructures and provide sufficientflexibility to ensure that new marketspromote fairness, efficiency, andtransparency. In adopting a newregulatory framework for alternativetrading systems today, the Commissionhas incorporated suggestions andresponded to requests for clarificationmade by commenters. The Commissionbelieves that this regulatory approacheffectively addresses commenters’concerns while carefully tailoring aregulatory framework that is flexibleenough to accommodate the evolvingtechnology of, and benefits provided by,alternative trading systems.

While the revised regulatory schemeimplemented today is designed toaddress changes in the way securitiesare traded, the Commission’sassessment of the impact that thesesystems may have on the trading ofunregistered securities (i.e. of bothdomestic and foreign issuers), and of theappropriate regulatory posture to thesedevelopments, is still ongoing. Thismatter and the broader issues involvingrecent trends and initiatives that giveU.S. investors greater and moreinstantaneous access to foreignsecurities markets create tensionsbetween competing Commission goals.The Commission, for example, wishes tofoster developments that enable U.S.investors to execute securities tradesmore efficiently, but it also desires thatforeign securities traded in U.S. marketshave full and fair disclosure. Thesetensions and issues will be addressed bythe Commission in the future.

II. Executive Summary of Final RulesThe final rules seek to establish a

regulatory framework that makes senseboth for current and future securities


18 17 CFR 242.300–303.19 15 U.S.C. 78c(a)(1).20 17 CFR 240.3b–16.21 15 U.S.C. 78c(a)(1).

22 Rule 3b–16(a), 17 CFR 240.3b–16(a).23 Rule 3b–16(b), 17 CFR 240.3b–16(b).24 15 U.S.C. 78s.

25 Rule 3a1–1(b)(1), 17 CFR 240.3a1–1(b)(1).26 Rule 301(b)(3), 17 CFR 240.301(b)(3).

Alternative trading systems will only have tocomply with this rule for fifty percent of securitieson April 21, 1999. By August 30, 1999, alternativetrading systems will have to comply with this rulefor all securities. Prior to April 21, 1999, theCommission will publish a schedule of thoseindividual securities for which alternative tradingsystems must comply with Rule 301(b)(3) on April21, 1999. See infra notes 192–193–and 216–217–and accompanying text.

27 This linkage requirement would not apply toalternative trading systems that do not displayparticipant orders to anyone, including othersystem participants. In addition, this requirementwould not apply to alternative trading systems to

Continued

markets. This regulatory frameworkshould encourage market innovationwhile ensuring basic investorprotections. The Commission continuesto believe that the approach outlined inthe Proposing Release will accomplishthese goals. In general, this approachgives securities markets a choice toregister as exchanges, or to register asbroker-dealers and comply withRegulation ATS.18 The Commissionbelieves the framework it is adoptingmeets the varying needs and structuresof market participants and is flexibleenough to accommodate the businessobjectives of, and the benefits providedby, alternative trading systems. Theprincipal components of this newframework are discussed below.

A. New Interpretation of ‘‘Exchange’’A fundamental component of the new

regulatory framework is new Rule 3b–16. This rule interprets key language inthe statutory definition of ‘‘exchange’’under section 3(a)(1) of the ExchangeAct.19 Rule 3b–16 reflects a morecomprehensive and meaningfulinterpretation of what an exchange is inlight of today’s markets. Until now, theCommission’s interpretation of theexchange definition reflected relativelyrigid regulatory requirements andclassifications for ‘‘exchange’’ and‘‘broker-dealers.’’ Advancing technologyhas increasingly blurred thesedistinctions, and alternative tradingsystems today are used by marketparticipants as functional equivalents ofexchanges. Accordingly, theCommission’s new interpretation ofexchange contained in Rule 3b–1620

encompasses these equivalent marketsand the Commission’s new generalexemptive authority enables it to craft anew regulatory framework.

The statutory definition of‘‘exchange’’ includes a ‘‘market place orfacilities for bringing togetherpurchasers and sellers of securities orfor otherwise performing with respect tosecurities the functions commonlyperformed by a stock exchange.’’21 Inresponse to commenters’ concerns andsuggestions, the Commission hascarefully revised Rule 3b–16 to definethese terms to mean any organization,association, or group of persons that: (1)Brings together the orders of multiplebuyers and sellers; and (2) usesestablished, non-discretionary methods(whether by providing a trading facilityor by setting rules) under which suchorders interact with each other, and the

buyers and sellers entering such ordersagree to the terms of a trade.22

Rule 3b–16 explicitly excludes thosesystems that the Commission believesperform only traditional broker-dealeractivities. The Commission modifiedthese exclusions to address issues raisedby commenters. Rule 3b–16 nowexpressly excludes the followingsystems from the revised interpretationof ‘‘exchange’’: (1) Systems that merelyroute orders to other facilities forexecution; (2) systems operated by asingle registered market maker todisplay its own bids and offers and thelimit orders of its customers, and toexecute trades against such orders; and(3) systems that allow persons to enterorders for execution against the bids andoffers of a single dealer.23

B. Exemption for Regulated AlternativeTrading Systems

The framework the Commissionadopts today uses the Commission’snew exemptive authority to allow mostalternative trading systems to choose tobe regulated either as exchanges or asbroker-dealers. Rule 3a1–1 exemptsmost alternative trading systems fromthe definition of ‘‘exchange,’’ andtherefore the requirement to register asan exchange, if they comply withRegulation ATS. However, any systemexercising self-regulatory powers, suchas regulating its members’ orsubscribers’ conduct when engaged inactivities outside of that trading system,must register as an exchange or beoperated by a national securitiesassociation. This is because self-regulatory activities in the securitiesmarkets must be subject to Commissionoversight under Section 19 of theExchange Act.24 Thus any systemexercising self-regulatory powers willnot be permitted the option ofregistering as a broker-dealer.

In addition, the Commission candetermine that a dominant alternativetrading system should be registered asan exchange. An alternative tradingsystem would first have to exceedcertain volume levels and theCommission, after notice and anopportunity for the alternative tradingsystem to respond, would have todetermine that an exemption fromexchange regulation is not necessary orappropriate in the public interest orconsistent with the protection ofinvestors, taking into account therequirements of exchange registrationand the objectives of the national market

system.25 At this time, however, theCommission does not believe that it isnecessary or appropriate under thisprovision that any alternative tradingsystem register as an exchange.

C. Regulation ATSThe Commission is adopting new

Regulation ATS, substantially in theform proposed, to impose essentialelements of market-oriented regulationon alternative trading systems. This newregulation addresses the concerns raisedby the market activities of alternativetrading systems that choose to registeras broker-dealers. To allow new marketsto start, without disproportionateburdens, a system with less than fivepercent of the trading volume in allsecurities it trades is required only to:(1) File with the Commission a notice ofoperation and quarterly reports; (2)maintain records, including an audittrail of transactions; and (3) refrain fromusing the words ‘‘exchange,’’ ‘‘stockmarket,’’ or similar terms in its name.

If, however, an alternative tradingsystem with five percent or more of thetrading volume in any national marketsystem security chooses to register as abroker-dealer—instead of as anexchange—the Commission believes itis in the public interest to integrate itsactivities into the national marketsystem. In addition to the requirementsfor smaller alternative trading systems,Regulation ATS requires alternativetrading systems that trade five percentor more of the volume in nationalmarket system securities to be linkedwith a registered market in order todisseminate the best priced orders inthose national market system securitiesdisplayed in their systems (includinginstitutional orders) into the publicquote stream.26 Such alternative tradingsystems must also comply with thesame market rules governing executionpriorities and obligations that apply tomembers of the registered exchange ornational securities association to whichthe alternative trading system islinked.27


the extent that they trade securities other thannational market system securities. See infra SectionIV.A.2.c.(ii).

28 See infra Section IV.B.2.29 See infra Section VI. The purpose of this new

rule is to provide registered exchanges and nationalsecurities associations with a greater opportunity to

compete with alternative trading systems registeredas broker-dealers and with foreign markets.

30 15 U.S.C. 78c(a)(1).31 Rule 3b–16(a), 17 CFR 240.3b–16(a). In the

Proposing Release, the Commission proposed todefine the terms in the definition of ‘‘exchange’’ tobe ‘‘any organization, association, or group ofpersons that: (1) Consolidates orders of multipleparties; and (2) sets non-discretionary materialconditions (whether by providing a trading facilityor by setting rules) under which parties enteringsuch orders agree to the terms of a trade.’’ SeeProposing Release, supra note 3.

32 See Securities Exchange Act Release No. 27611(Jan. 12, 1990), 55 FR 1980, 1900 (Jan. 19, 1990)(‘‘Delta Release’’). See infra Section VII for a furtherdiscussion of the Delta Release and the basis andpurpose of the revised interpretation.

33 See infra Section IV.B. (discussing registrationas a national securities exchange). Under Section 5of the Exchange Act, an exemption may be grantedto an exchange from registration as a nationalsecurities exchange on the basis of low volume, orexpected low volume. Currently, there is only oneexchange, the Arizona Stock Exchange (‘‘AZX’’),that is operating under a limited volume exemption.See Securities Exchange Act Release No. 28899(Feb. 20, 1991), 56 FR 8377 (Feb. 28, 1991). Inaddition, the Commission solicited comment onwhether Tradepoint Financial Networks, plc shouldbe granted a limited volume exemption. SeeSecurities Exchange Act Release No. 40161 (July 2,1998), 45 FR 41920 (July 9, 1998).

The Commission believes that the low volumeexemption continues to be appropriate for someexchanges, such as an exchange that, for example,disciplines its members (other than by excludingthem or limiting them from trading based onobjective criteria, such as creditworthiness), or hasother self-regulatory attributes that exclude it fromthe definition of alternative trading system, Rule300(a), and therefore preclude it from making thechoice to register as a broker-dealer. Any exchangeseeking a low volume exemption would, of course,have to have low volume. The Commission believesthat the low volume exemption would beinappropriate for any alternative trading system thatcan register as a broker-dealer and comply withRegulation ATS, and that the conditions underRegulation ATS should generally be met by anyalternative trading system falling within Rule 3b–16, including an alternative trading system that, forother reasons, seeks a low volume exemption.

34 NASD Letter at 3, n.4.35 See CME Letter at 2; IBEX Letter at 4.

In addition, alternative tradingsystems with twenty percent or more ofthe trading volume in any singlesecurity, whether equity or debt, wouldbe required to: (1) Grant or deny accessbased on objective standards establishedby the trading system and applied in anon-discriminatory manner; and (2)establish procedures to ensure adequatesystems capacity, integrity, andcontingency planning. The Commissionbelieves that these requirements willbetter integrate those significantalternative trading systems into nationalmarket system mechanisms. Moreover,because alternative trading systems thatchoose to register as broker-dealers arenot required to surveil activities on theirmarkets, the Commission intends towork with the self-regulatoryorganizations (‘‘SROs’’) to ensure thatthey can operate ongoing, real-timesurveillance for market manipulationand fraud and develop surveillance andexamination procedures specificallytargeted to alternative trading systemsthey oversee.

D. For-Profit ExchangesIn this release, the Commission also

expresses its view that registeredexchanges may structure themselves asfor-profit organizations. This will allowalternative trading systems, which aretypically proprietary, to choose toregister as exchanges without changingtheir organizational structure. Inaddition, currently registeredexchanges—which are all membershiporganizations—could choose todemutualize. This release providesguidance on ways for proprietarymarkets to meet their fair representationrequirements as non-membershipnational securities exchanges.28

E. Temporary Exemption From RuleFiling Requirements for SROs’ PilotTrading Systems

To help reduce competitiveimpediments to innovation by SROs, theCommission is allowing them to startnew trading systems withoutpreapproval by the Commission. TheCommission is adopting Rule 19b-5 topermit SROs, without filing for approvalwith the Commission, to operate newpilot trading systems for up to twoyears. These pilot trading systems willbe subject to specific conditions,including limitations on their tradingvolumes.29

III. Rule 3b–16 Under the Exchange Act

The Commission today is adoptingnew Rule 3b–16 under the ExchangeAct. This rule defines terms used in thestatutory definition of ‘‘exchange,’’found in section 3(a)(1) of the ExchangeAct.30 The statutory definition of‘‘exchange’’ includes a ‘‘market place orfacilities for bringing togetherpurchasers and sellers of securities orfor otherwise performing with respect tosecurities the functions commonlyperformed by a stock exchange.’’ Thenew rule interprets these terms toinclude any organization, association,or group of persons that: (1) Bringstogether the orders of multiple buyersand sellers; and (2) uses established,non-discretionary methods (whether byproviding a trading facility or by settingrules) under which such orders interactwith each other, and the buyers andsellers entering such orders agree to theterms of a trade.31 This rule revises thecurrent interpretation of the term‘‘exchange,’’ as set forth in the DeltaRelease.32

New Rule 3b–16 is an importantelement of the Commission’s newregulatory framework for alternativetrading systems. As discussed above, therapid growth and technologicaladvancements of alternative tradingsystems have eroded the distinctionsbetween the roles played by alternativetrading systems and by traditionalexchanges. Alternative trading systemstoday provide services more akin toexchange functions than broker-dealerfunctions, such as matchingcounterparties’ orders, executing trades,operating limit order books, andfacilitating active price discovery. Formany of these systems, regulation as amarket more appropriately fits theireconomic functions. Rule 3b–16 definesterms in the statutory definition ofexchange to include markets that engagein activities functionally equivalent tomarkets currently registered as nationalsecurities exchanges. Moreover, becausein some cases exchange regulation may

better meet these systems’ businessobjectives, the Commission believes thatalternative trading systems should havethe option to register as nationalsecurities exchanges.33 The rule helpsmodernize the Commission’s approachto these systems because it adapts theconcept of what is ‘‘generallyunderstood’’ to be an exchange to reflectchanges in the markets brought about byautomated trading. In addition, in lightof recent technological developments,Rule 3b–16 more closely reflects thestatutory concept of ‘‘bringing together’’buying and selling interests.

The Proposing Release soughtcomment on whether the proposeddefinition captures the fundamentalfeatures of an exchange as that term isgenerally understood today. TheCommission received several commentssupportive of its proposed revision tothe interpretation of ‘‘exchange.’’ Forexample, the NASD commented thatthis new definition ‘‘is notinappropriate, particularly with theexpress exclusion for internal broker-dealer systems.’’ 34 Other commentersalso supported broadening theCommission’s interpretation of whatconstitutes an exchange and agreed thatthe proposed rule accurately identifiedthe fundamental features of a securities‘‘exchange.’’ 35 On the other hand, somecommenters questioned the basis andneed for the Commission to move awayfrom its interpretation in Delta. The


36 Instinet Letter at 7.

37 A crossing system is, typically, one that allowsparticipants to enter unpriced orders to buy and sellsecurities. Orders are crossed at specified times ata price derived from another market.

38 Matching systems allow participants to enterpriced limit orders and match those orders withother orders in the system. Participants are able toview unmatched limit orders in the system’s book.The sponsor of a matching system typically acts asriskless principal or a dealer firm on behalf of thesystem acts as riskless principal, with respect tomatched orders, or contracts with another broker-dealer to perform this function.

39 Currently, debt markets are not centrallyorganized by a single entity, but are nonethelessinformally organized around interdealer brokers.Interdealer brokers (also called blind brokers andbrokers’ brokers) display, on an anonymous basis,the offers to buy and sell securities that are placedwith them by subscribers. In order to place a bidor offer, a subscriber typically telephones theinterdealer broker, which enters the order into itssystem and displays it to other subscribers. Someinterdealer brokers display all bids and offers;others display only the best bid and offer. Toexecute against an offer displayed on the computerscreen, a subscriber telephones the interdealerbroker, although sometimes execution may beelectronic. The identities of the counterparties are,generally, kept confidential through clearance andsettlement of the trade. Some interdealer brokers,however, reveal the names of each counterpartyafter execution. Traditionally interdealer brokersfacilitated trading only between dealers.Increasingly, however, interdealer brokers arepermitting non-dealers to participate in theirsystems.

40 But see infra notes 123–130 and accompanyingtext (discussing the exclusion from Regulation ATSfor alternative trading systems that tradeexclusively government, and other related,securities).

41 See Bruce Rule, PSA Panels Embrace Internetfor Institutional Trading; and Regulators Love theAudit Trail, Investment Dealers’ Digest, Nov. 18,1996 (discussing CP Direct). The conversesituation—i.e., where there is one buyer andmultiple sellers for a given instrument—would alsonot meet the ‘‘multiple buyers and sellers’’requirement. The Commission, however, is notaware of any system that currently operates thisway.

42 This type of system would also be expresslyexcluded from Rule 3b–16 under paragraph (b)(2).See infra Section III.C.2.

Commission responds to thesecomments below in Section VII.

Finally, one commenter expressedconcern that the proposed revision tothe Commission’s interpretation of‘‘exchange’’ would encompass everymarket participant providing electronicor other technologically advancedtrading service.36 The Commission doesnot intend for the distinction betweenexchanges and broker-dealers to turn onautomation, and does not believe that itsrevised interpretation of ‘‘exchange’’ hasthis effect. In particular, theCommission notes that paragraph (a) ofnew Rule 3b–16 does not contain theword automation, but is insteaddescriptive of those activities theCommission considers to be theactivities of a ‘‘market’’ where buyersand sellers meet and includes purelyfloor-based exchanges, as well as fullyautomated ones. Moreover, paragraph(b) clearly excludes certain systemsthat—even though automated—are notexchanges, such as automated singledealer systems.

The language of Rule 3b–16 theCommission is adopting today modifiesthe language the Commission proposedin response to commenters’ suggestionsand concerns, and their requests forclarification. The discussion below isintended to further explain how theCommission envisions that its newinterpretation of ‘‘exchange’’ will beapplied and responds to specificrequests for clarification bycommenters.

A. Brings Together the Orders ofMultiple Buyers and Sellers

In order to be covered by thedefinition in Rule 3b–16, a system mustsatisfy the first part of Rule 3b–16(a)—brings together the orders of multiplebuyers and sellers. This emphasizes theconcept of ‘‘bringing togetherpurchasers and sellers of securities’’ setforth in the definition of ‘‘exchange’’ insection 3(a)(1) of the Exchange Act.While the intent is the same, thelanguage in Rule 3b–16(a)(1) has beenmodified from the proposal to addressthe concerns of some of the commenterswho requested that the definition beclarified.

1. To Bring Together

The Commission is adopting thelanguage ‘‘brings together’’ in Rule 3b–16, rather than ‘‘consolidates’’ asoriginally proposed. While theCommission believes that‘‘consolidates’’ and ‘‘brings together’’have the same meaning, the latter more

closely mirrors the language in thestatute and is a plainer use of language.

A system brings together orders if itdisplays, or otherwise represents,trading interests entered on the systemto system users. These systems includeconsolidated quote screens, such as thesystem operated by Nasdaq. A systemalso brings together orders if it receivessubscribers’ orders centrally for futureprocessing and execution. For example,a limit order matching book that allowssubscribers to display buy and sellorders in particular securities and toobtain execution against matchingorders contemporaneously entered orstored in the system ‘‘brings togetherorders.’’ These activities are currentlyperformed by systems that bringtogether orders internally for crossing 37

or matching,38 as well as floor-basedmarkets that impose trading rules. Inaddition, interdealer brokers (‘‘IDBs’’) 39

bring together orders, regardless of theirlevel of automation.40 Accordingly, asystem ‘‘brings together orders’’ whenorders entered in the system for a givensecurity have the opportunity to interactwith other orders entered into thesystem for the same security.

2. Multiple Buyers and SellersIn addition, to satisfy paragraph (a)(1)

of Rule 3b–16, a system must bring

together orders of multiple buyers andmultiple sellers. The Commissionproposed to use the term ‘‘multipleparties’’ in paragraph (a)(1) of Rule 3b–16, rather than the term ‘‘multiplebuyers and sellers.’’ The Commissionbelieves that this modification to thelanguage proposed in Rule 3b–16addresses the concerns of thosecommenters who requested that theCommission clarify that systems inwhich there is only a single seller, suchas systems that permit issuers to selltheir own securities to investors, wouldnot be included within Rule 3b–16.While such systems have multiplebuyers (i.e., investors), they have onlyone seller for each security (i.e., issuers)and, therefore, do not meet the multiplebuyers and sellers test. An example ofthis type of system is CP Direct in whichan issuer can offer to sell its commercialpaper to the customers of CS FirstBoston.41 Another example of systemsthat do not meet the multiple buyersand sellers criteria are systems in whichsecurities are offered by a single sellerat successively lower prices. Inaddition, systems designed for thepurpose of executing orders against asingle counterparty, such as the dealeroperating a system, would not beconsidered to have multiple buyers andsellers. Thus a single counterparty thatbuys and sells securities through asystem, where other parties enteringorders only execute against the singledesignated counterparty, would notmeet the requirements of the first partof Rule 3b–16.42 However, the mereinterpositioning of a designatedcounterparty as riskless principal forsettlement purposes after the purchasingand selling counterparties to a tradehave been matched would not, by itself,mean that the system does not havemultiple buyers and sellers.

3. Definition of ‘‘Order’’Finally, the rule makes clear that, to

be included within the definition inRule 3b–16(a), a system must bringtogether participants’ ‘‘orders.’’ Theterm ‘‘order’’ is defined in paragraph (c)of Rule 3b–16 to include any firmindication of a willingness to buy or sella security, whether made on a principal


43 Rule 3b–16(c), 17 CFR 240.3b–16(c).44 TBMA Letter at 15–16 (stating that the bids and

offers associated with telephone-based IDBs aregenerally ‘‘subject,’’ i.e., the broker must check backwith the dealer client before finalizing thetransaction).

45: Rule 3b–16(c), 17 CFR 240.3b–16(c).

46 TBMA Letter at 15.47 These bulletin board types of systems were

described in no-action letters from the staff. SeeLetter dated June 24, 1996 from Catherine McGuire,Chief Counsel, Division of Market Regulation, SEC,Jack W. Murphy, Chief Counsel, Division ofInvestment Management, SEC, and Martin P. Dunn,Chief Counsel, Division of Corporate Finance, SECto Barry Reder, Coblentz, Cahen, McCabe andBreyer, LLP (counsel to Real Goods TradingCorporation); Letter dated Aug. 5, 1996 fromCatherine McGuire, Chief Counsel, Division ofMarket Regulation, SEC to: Bruce D. Stuart, Esq.(counsel to PerfectData Corporation); and Letterdated April 17, 1996 from Abigail Arms, Associate

Director, Division of Corporate Finance, SEC, andCatherine McGuire, Associate Director, Division ofMarket Regulation, SEC to Andrew Klein (Presidentand Chief Executive Officer of Spring StreetBrewing Company).

48 See Securities Exchange Act Release No. 39086(Sept. 17, 1997), 62 FR 50036 (Sept. 24, 1997). Inapproving OptiMark, the Commission stated thatOptiMark’s unique design warrants a non-traditional approach in determining whether torequire the dissemination of trading interestexpressed through operation of OptiMark.

49 See Rule 11Ac1–1(c), 17 CFR 240.11Ac1–1(c).

or agency basis.43 Firm indications ofbuying or selling interest specificallyinclude bid or offer quotations, marketorders, limit orders, and any otherpriced order.

Several commenters requested thatthe Commission clarify the proposeddefinition of ‘‘order.’’ One commenterexpressed concern that the proposeddefinition of ‘‘order’’ was too broad andrecommended that the revisedinterpretation of ‘‘exchange’’ be clarifiedto exclude trading systems thatbroadcast non-executable indicativequotations, and noted that IDBsfrequently communicate an indicativeprice to a customer, which is merely astarting point for a negotiation of thefinal transaction price.44 TheCommission notes that the term ‘‘order’’is defined as ‘‘any firm indication of awillingness to buy or sell a security,* * * including any bid or offerquotation, market order, limit order, orother priced order.’’45 Whether or not anindication of interest is ‘‘firm’’ willdepend on what actually takes placebetween the buyer and seller.

The label put on an order—‘‘firm’’ or‘‘not firm’’—is not dispositive. Forexample, a system claiming it displaysonly ‘‘indications of interest’’ that arenot orders, may be covered by the newinterpretation of ‘‘exchange’’ if thoseindications are, in fact, firm in practice.In general, the Commission intends toread the definition of ‘‘order’’ broadlyand will not consider systems to falloutside the definition in Rule 3b–16based solely on a system’s labeling ofindications of interest as ‘‘not firm.’’Instead, what actually takes placebetween the buyers and sellersinteracting in a particular system willdetermine whether indications ofinterest are ‘‘firm’’ or not. At aminimum, an indication of interest willbe considered firm if it can be executedwithout the further agreement of theperson entering the indication. Even ifthe person must give its subsequentassent to an execution, however, theindication will still be considered firmif this subsequent agreement is always,or almost always, granted so that theagreement is largely a formality. Forinstance, indications of interest wherethere is a clear or prevailingpresumption that a trade will take placeat the indicated price, based onunderstandings or past dealings, will beviewed as orders.

Generally, however, a system thatdisplays bona fide, non-firm indicationsof interest—including, but not limitedto, indications of interest to buy or sella particular security without eitherprices or quantities associated withthose indications—will not bedisplaying ‘‘orders’’ and, therefore, notfall within Rule 3b–16.

Nevertheless, the price or size of anindication of interest may be eitherexplicit or may be inferred from thefacts and circumstances accompanyingthe indication. For example, anindication of interest will be consideredto include a price if the system in whichthe indication of interest is entereddefaults automatically to a price peggedto another market, index, rate, or othervariable, or if the person entering suchindication indicates that such person isinterested in trading at a price pegged toanother market, index, rate, or othervariable, which includes ‘‘market’’orders.

The same commenter expressedconcern that the proposed definition oforder could have the effect of includingmarkets within the definition of‘‘exchange’’ that quote prices over thetelephone for a potential transaction.46

As discussed above, whether or not aparticular system is an exchange doesnot turn solely on the level ofautomation used: ‘‘orders’’ can be givenover the telephone, as well aselectronically.

The Commission emphasizes thatmerely because a system ‘‘bringstogether orders of multiple buyers andsellers,’’ does not mean that the systemis an exchange. In order to fall withinRule 3b–16, a system must also satisfythe requirements in paragraph (a)(2).Thus, whether or not an ‘‘order’’ is partof a system that falls within the newinterpretation of ‘‘exchange’’ dependsupon the activities of that system takenas a whole. For example, a system coulddisplay subscribers’ ‘‘orders’’ to othermarket participants, but would not beencompassed by Rule 3b–16 ifsubscribers contacted each other andagreed to the terms of their tradesoutside of the system.47 Unless a system

also establishes rules or operates atrading facility under which subscriberscan agree to the terms of their trades, thesystem will not be included within Rule3b–16, even if it brings together‘‘orders.’’

Finally, the NYSE commented thatthe Commission’s definition of ‘‘order’’appeared to cover trading interest that,in the Order approving the PacificExchange (‘‘PCX’’) Application of theOptiMark System (‘‘OptiMark Order’’),the Commission did not consider to bean order. In the OptiMark Order, theCommission took the position that theprofiles entered into OptiMark are notbids or offers under Rule 11Ac1–1(‘‘Firm Quote Rule’’).48 TheCommission’s definition of ‘‘order’’ inparagraph (c) of Rule 3b–16 is intendedto be broader than the terms bid andoffer in the Firm Quote Rule.49

Therefore, it is possible for anindication of interest to be an ‘‘order’’under Rule 3b–16, without being a bidor offer under the Firm Quote Rule.

B. Established, Non-DiscretionaryMethods

In addition to bringing together theorders of multiple parties, to beincluded within Rule 3b–16, a systemwould have to use established, non-discretionary methods * * * underwhich such orders interact with eachother and the buyers and sellersentering orders agree to the terms of thetrade. A system uses established non-discretionary methods either byproviding a trading facility or by settingrules governing trading amongsubscribers. The Commission intendsfor ‘‘established, non-discretionarymethods’’ to include any methods thatdictate the terms of trading among themultiple buyers and sellers enteringorders into the system. Such methodsinclude those that set procedures orpriorities under which open terms of atrade may be determined. For example,traditional exchanges’ rules of priority,parity, and precedence are ‘‘established,non-discretionary methods,’’ as are thetrading algorithms of electronic systems.Similarly, systems that determine thetrading price at some designated futuredate on the basis of pre-established


50 MSDW Letter at 11.

51 MSDW Letter, pp. 7–8.52 Proposed Rule 3b–12(b)(2).53 See NASD Letter at 3, n.4; TBMA Letter at 3,

14; SIA Letter at 3, 10; MSDW Letter at 5–6.54 See TBMA Letter at 3, 14–15; SIA Letter at 3,

10–11.

criteria (such as the weighted averagetrading price for the security on thespecified date in a specified market ormarkets) are using established, non-discretionary methods. A requirementthat the trade subsequently be ratifieddoes not avoid this element. Forexample, a system that trades limitedpartnership units might use established,non-discretionary methods even thoughapproval from the general partner isrequired prior to settlement. Rules thatmerely supply the means ofcommunication with a system (forexample, software or hardware toolsthat subscribers may use in accessing asystem), however, do not satisfy thiselement of Rule 3b–16.

In general, where customers of abroker-dealer exercise control over theirown orders in a trading system operatedby the broker-dealer, that broker-dealeris unlikely to be viewed as usingdiscretionary methods in handling theorder. An example of systems that theCommission believes do not useestablished, non-discretionary methodsare traditional block trading desks.Block trading desks generally retainsome discretion in determining how toexecute a customer’s order, andfrequently commit capital to satisfytheir customers’ needs. For example, ablock positioner may ‘‘shop’’ the orderaround in an attempt to find a contra-side interest with another investor. Insome cases, the block positioner maytake the other side of the order, keepingthe block as a proprietary position.While block trading desks do crosscustomers’ orders, these crosses are notdone according to fixed non-discretionary methods, but instead arebased on the block trading desks’ abilityto find a contra-side to the order. It maycross two customer orders, or it mayassemble a block of several customerorders with completion dependent onits willingness to take a proprietaryposition for part of the block. Executionprices, size of the proprietary positionand agency compensation may all bepart of a single negotiated deal.Consequently, the Commission wouldnot consider traditional block tradingdesks to be using established, non-discretionary methods and, therefore,they would not fall within Rule 3b–16.

In addition, systems that merelyprovide information to subscribersabout other subscribers’ trading interest,without facilities for execution, do notfall within paragraph (a) of Rule 3b–16.One commenter asked the Commissionto clarify that such systems would notbe viewed as exchanges.50 While suchvendors may allow buyers and sellers to

find each other, they do not provide afacility or set rules under which thoseorders interact with each other.Accordingly, the Commission agreeswith this commenter that such systemsare not exchanges.

In contrast, when a customer gives abroker-dealer flexibility in how tohandle an order, it relinquishes a degreeof control over that order. TheCommission recognizes that broker-dealers exercising discretion orjudgment over customer orders may useinternal systems to trade and managethese orders. The mere use of thesesystems does not make a broker anexchange, unless those systemsthemselves predetermine the handlingand execution practices for the order,replacing the broker-dealer’s judgmentand flexibility in working the order.

One commenter suggested that thelack of display of customer ordersoutside the broker-dealer should bedeterminative of whether the systemwas an exchange.51 The Commissionnotes that it is possible for a system touse established, non-discretionarymethods even if orders are notdisplayed. For example, the OptiMarkSystem—by design—does not displayparticipants’ indications of interest.There is, however, no discretionexercised by the operator of theOptiMark System; the tradeoptimization calculations areestablished, non-discretionary methods.

Finally, the Commission proposed toexplicitly exclude from the revisedinterpretation of ‘‘exchange’’ tradingsystems that allow a single broker-dealerto internally manage its customers’orders.52 The Commission wasconcerned that such systems mighttechnically be covered by paragraph (a)of Rule 3b–16 if they occasionallycrossed or matched customer orders.Because the Commission believes thatthese systems have generally automatedtraditional brokerage functions, itproposed to clearly exclude them fromthe revised interpretation of‘‘exchange.’’ Several commenters notedtheir agreement with the Commission’sproposed exclusion of these internalbroker-dealer systems from itsreinterpretation of ‘‘exchange,’’ 53 butrequested that the Commission clarify it.In particular, the Securities IndustryAssociation (‘‘SIA’’) and The BondMarket Association (‘‘TBMA’’)requested that the Commission clarifythe intended meaning of the terms‘‘predetermined procedures’’ and

‘‘communicated to customers’’ as usedin the proposed exclusion.54

The Commission intended to excludea number of different types of systemsunder this proposed exclusion. First,this exclusion was intended to coverinternal systems operated by marketmakers to automate the management oftheir customer orders, including thedisplay of customer limit orders, and tomatch those displayed orders with othercustomer orders. The Commission isnow adopting a more specific exclusionto cover these types of systems.

In addition, in large part, theCommission intended to excludesystems that automate the managementof customer orders that require a broker-dealer to use its discretion. These typesof systems would not be includedwithin paragraph (a) of Rule 3b–16because—like traditional block tradingdesks—they do not use established,non-discretionary methods. Thepurpose of the proposed exclusion forinternal broker-dealer systems was toexclude traditional internal systemscreated to increase efficiency rather thanto provide a non-discretionary tradingsystem for customers. In light of thecomments on the proposed exclusionfor internal broker-dealer systems andthe difficulty of distinguishing amonginternal systems on this basis, theCommission now believes it is better notto attempt to set specific requirementsthat internal broker-dealer systems mustmeet in order to be excluded from Rule3b–16. Instead, the Commission isclarifying that trading systems that donot use established, non-discretionarymethods fail to meet the two-part test inparagraph (a) and are, therefore, notincluded within the revisedinterpretation of ‘‘exchange.’’

1. Established, Non-DiscretionaryMethods Provided by a Trading Facility

As stated previously, a trading systemthat uses established, non-discretionarymethods would include a traditionalexchange floor where specialists areresponsible for executing orders. Itwould also include a computer system(whether comprised of software,hardware, protocols, or any combinationthereof) through which orders interact,or any other trading mechanism thatprovides a means or location for thebringing together and execution oforders. For example, the Commissionconsiders the use of an algorithm by anelectronic trading system that setstrading procedures and priorities to bea trading facility that uses established,non-discretionary methods.


55 Whether or not a bulletin board will beconsidered an exchange under the rule will alsodepend on whether it meets the other elements ofthe definition.

56 See Delta Release, supra note 32. TheCommission notes that the arrangement betweenthese entities no longer exists, and that Delta, in itscurrent form, would not fit the new interpretationof the definition of exchange.

57 See id., at 1897.58 15 U.S.C. 78k–1.59 15 U.S.C. 78o–3. The NASD, parent of Nasdaq,

is the self-regulatory organization. The NASDdelegates to NASD Regulation, Inc. (‘‘NASDR’’), thewholly owned regulatory subsidiary of the NASD,its SRO responsibilities to surveil tradingconducted on Nasdaq and the OTC Bulletin Boards,and to enforce compliance by its members (andpersons associated with its members) withapplicable laws and rules. Nasdaq also surveilstrading conducted on its market and refers potentialviolations to NASDR. See also infra note 342.

60 See infra notes 93–94 and accompanying text(discussing Rule 3a1–1(a)(1), which explicitlyexempts any system operated by a nationalsecurities association from the definition of theterm ‘‘exchange’’).

61 15 U.S.C. 78f. If Nasdaq registered as anexchange, it would have its own SROresponsibilities, but the Commission does notexpect this to increase Nasdaq’s current burden. Inview of the NASD’s SRO status the Commissioncould use its authority under Sections 17 and 19 ofthe Exchange Act, 15 U.S.C. 78q and 78s, todelegate any obligations Nasdaq would have as aregistered exchange to enforce compliance by itsmembers (and persons associated with its members)with the federal securities laws to NASDR.

62 See SIA Letter at 3, 10–11; DBSI Letter at 3;NASD Letter at 4; TBMA Letter at 3, 14.

63 See TBMA Letter at 14, n.26; SIA Letter at 10–11, n.18.

The Commission will attribute theactivities of a trading facility to a systemif that facility is offered by the systemdirectly or indirectly (such as where asystem arranges for a third party orparties to offer the trading facility).Thus, if a system that brings together theorders of multiple parties arranges for athird party vendor to distribute softwarethat establishes non-discretionarymethods under which orders interact,that system will fall within Rule 3b–16.Similarly, if a bulletin board operatorcontracted with another party to provideexecution facilities for the bulletinboard users, the bulletin board will bedeemed to have established a tradingfacility because it took affirmative stepsto arrange for the necessary exchangefunctions for its users.55 In addition, ifan organization arranges for separateentities to provide different pieces of atrading system, which together meet thedefinition contained in paragraph (a) ofRule 3b–16, the organizationresponsible for arranging the collectiveefforts will be deemed to haveestablished a trading facility. Forexample, the arrangement between theDelta Government Options Corporation(‘‘Delta’’), RMJ Options TradingCorporation, and Security PacificNational Trust Company, as describedin a 1990 Commission release,56 wouldtogether meet the definition set forth inRule 3b–16. Moreover, a trading systemthat falls within the Commission’sinterpretation of ‘‘exchange’’ in Rule3b–16 will still be considered an‘‘exchange,’’ even if it matches twotrades and routes them to anothersystem or exchange for execution.Whether or not the actual execution ofthe order takes place on the system isnot a determining factor of whether thesystem falls under Rule 3b–16.

2. Established, Non-DiscretionaryMethods Provided by Setting Rules

Alternatively, a system may useestablished, non-discretionary methodsthrough the imposition of rules underwhich parties entering orders on thesystem agree to the terms of a trade. Forexample, if a system imposes affirmativequote obligations on its subscribers,such as obligations to post two-sidedquotations or to post quotations noworse than the quotes subscribers poston other systems, the Commission will

consider it to be using established, non-discretionary methods.

In addition, rules imposing executionpriorities, such as time and pricepriority rules, would be ‘‘established,non-discretionary methods.’’ Similarly,a system that standardizes the materialterms of instruments traded on thesystem, such as the system operated byDelta at the time the Commissionpublished the Delta Release,57 will beconsidered to use established, non-discretionary methods.

Similarly, Nasdaq’s use of established,non-discretionary methods bring itwithin the revised interpretation of‘‘exchange’’ in Rule 3b–16. The NASDimposes basic rules by which securitiesare traded on Nasdaq. Specifically, itimposes affirmative obligations onmarket makers in Nasdaq NationalMarket (‘‘Nasdaq NM’’) and SmallCapsecurities, including obligations to postfirm and two-sided quotes. It alsooperates the Small Order ExecutionSystem (‘‘SOES’’) and SelectNetsystems, requiring market makers toaccept executions or orders forexecution in these securities. ThroughNasdaq, market participants act inconcert to centralize and disseminatetrading interest and establish the basicrules by which securities are traded.The Commission believes that Nasdaqperforms what today is generallyunderstood to be the functionscommonly performed by a stockexchange. Nasdaq, however, is currentlyregistered as a securities informationprocessor under section 11A of theExchange Act 58 and is operated by theNASD, a registered securitiesassociation under Section 15A of theExchange Act.59 Because therequirements currently applicable to aregistered securities association arevirtually identical to the requirementsapplicable to registered exchanges, theCommission does not believe it isnecessary or appropriate in the publicinterest to require Nasdaq to register asan exchange.60 Under the rules theCommission is adopting today,

however, Nasdaq could choose toregister under section 6 of the ExchangeAct as a national securities exchange.61

C. Systems Excluded From Rule 3b–16

The Proposing Release specificallyexcluded from the proposed, revisedinterpretation of ‘‘exchange’’ severaltypes of activities that could beconsidered traditional brokerageactivities: order routing systems, dealerquotation systems, and internal broker-dealer order management and executionsystems. Commenters widely agreedthat automated broker-dealer functionsshould not be encompassed in themeaning of ‘‘exchange.’’ 62 TheCommission agrees. Commenters did,however, ask for clarification about theapplication of the exclusions inparagraph (b). In particular, somecommenters appeared to misunderstandRule 3b–16 as requiring that a systemfall within one of the exclusions inparagraph (b) in order to be outside ofthe revised interpretation of‘‘exchange.’’ This was not theCommission’s intent. A system is notincluded within the revisedinterpretation of ‘‘exchange’’ if: (1) Itfails to meet the two-part test inparagraph (a) of Rule 3b–16; or (2) itfalls within one of the exclusions inparagraph (b).

The Commission has includedparagraph (b) of Rule 3b–16 to explicitlyexclude some systems that theCommission believes are not exchanges.Paragraph (b) of Rule 3b–16 expresslyexcludes: (1) Systems that merely routeorders to other execution facilities; and(2) systems that allow persons to enterorders for execution against the bids andoffers of a single dealer, and systemsthat automate the activities of registeredmarket markers.

Two commenters asked theCommission to exclude from the revisedinterpretation of ‘‘exchange’’ allcorrespondent clearing relationships, aswell as agreements among broker-dealers to handle their respective orderflow.63 The Commission has excludedrouting systems under Rule 3b–16(b)(1).Whether or not correspondent clearing


64 TBMA Letter at 14, n.25 (suggesting that theCommission expressly recognize the possibility thatsome IDBs may be able to rely on the exclusion forinternal broker-dealer systems).

65 SIA Letter at 3–4, 6–7, 9.

66 POSIT is an alternative trading system operatedby ITG Inc. Broker-dealers and institutions enterunpriced orders to buy and sell exchange listed andNasdaq securities into POSIT at any time prior toa pre-selected crossing time. At the crossing time,buy orders in the system for each security arecrossed, where possible, with sell orders andcrossed orders are executed at a price derived fromthe primary market where the security trades.

67 Letter from Timothy H. Hosking, GeneralCounsel, ITG Inc., to Jonathan G. Katz, Secretary,SEC dated Nov. 20, 1998 (‘‘ITG Letter’’) at 2–3.

68 The indications of interest entered into‘‘passive’’ or derivative pricing systems are‘‘orders,’’ under Rule 3b–16(c). While the orders areentered without a specified price, subscribers agreeto trade at a price based on the primary market,such as the mid-point of the bid and ask at the timeorders are matched or at the primary market’sopening price.

69 In addition, there exists the incentive forsubscribers to these ‘‘passive systems’’ tomanipulate the price in the market from which the‘‘passive system’’ derives its price in order to obtaina favorable execution on the passive system.

70 See Rules 301(b)(5)(iii) and 301(b)(6)(iii), 17CFR 242.301(b)(5)(iii) and 242.301(b)(6)(iii). Seeinfra notes 248, 278, 241–291 and accompanyingtext. Further, the Commission did not propose, noris it adopting, a requirement that alternative tradingsystems that register as broker-dealers publiclydisplay any orders that are not displayed to thatsystem’s subscribers. Thus, alternative tradingsystems—like most ‘‘passive’’ systems—that do notdisplay subscriber orders at all, are not subject tothe public display requirement if they register asbroker-dealers under Regulation ATS.

71 SIA Letter at 10.72 A similar system, also operated by the Amex,

is Automated Post Execution Reporting System, orAutoPERS.

73 BRASS is an order routing system operated byAutomated Securities Clearance, Ltd. (‘‘ASC’’). ASCprovides system users with software and hardwarethat enables users to enter orders into the systemwhich are then routed to an exchange or Nasdaq forexecution. BRASS software enables a market makerto execute orders against its inventory at the marketmaker’s quoted price, monitor compliance with theCommission’s Limit Order Display Rule, infra note76, route an order to another market maker ormarket, report executed transactions, and monitor,among other things, trading positions, and profit/loss margins. Separately, an entity affiliated withASC, the BRASS Utility, LLC (‘‘BRUT’’), operates anelectronic communications network (‘‘ECN’’) towhich orders can be routed through the use ofBRASS software. See infra note 178.

relationships are excluded, however,depends on the nature of the systemsused in that relationship. TheCommission does not believe thatsystems operated by clearing firmsshould be excluded simply becausetheir correspondents participate inthem. The Commission believes thatsuch an exclusion would be overlybroad.

One commenter questioned whetherIDBs are the functional equivalent ofinternal broker-dealer systems and,therefore, should be excluded from Rule3b–16.64 The Commission believes thatmost screen-based IDBs function bydisplaying, on an anonymous basis, theoffers to buy and sell securities that areplaced with them by subscribers. Whiletypically a subscriber uses a telephoneto place the orders and ordinarily usethe telephone to request execution,multiple buyers and sellers areinvolved, and generally customers viewsome or all orders on screens. Thus,IDBs bring together the orders ofmultiple buyers and sellers. Where anIDB has set procedures under which itexecutes subscriber orders againstdisplayed or retained orders in apredetermined fashion, the methods bywhich these orders are brought togetherlikely would be established and non-discretionary. The Commission believesthat IDBs that function in this fashionare covered by Rule 3b–16. If an IDBdoes not display orders or communicatethem verbally to customers, and doesnot execute orders according to pre-determined, well-understood rules, itmay not be covered by the rules theCommission is adopting today. As ageneral matter, however, theCommission believes that most IDBswould be covered by the definition inRule 3b–16(a) and not excluded by anyof its exclusions.

In addition, one commenterrecommended that any entity that hasthe discretion to commit capital to atrade be excluded from Rule 3b–16,because broker-dealers commit capital,but exchanges do not.65 TheCommission generally views thewillingness to predictably commitcapital as a traditional broker-dealeractivity. For this reason it is explicitlyexcluding registered market maker andsingle dealer systems, which commitcapital in all—or almost all—trades. Inaddition, broker-dealers frequentlycommit capital as part of their blocktrading desk activities. As discussed

above, the Commission does not believethat traditional block trading desks arecovered under paragraph (a) of Rule 3b–16. However, the Commission does notbelieve that a system engaging inactivities as a market should beexcluded from the scope of Rule 3b–16simply because the broker-dealeroperating the system may participate asa dealer in that system.

Finally, one commenter asserted that‘‘passive systems,’’ such as POSIT,66

should be excluded from theCommission’s revised interpretation of‘‘exchange,’’ because they do not have atraditional price discoverymechanism.67 The Commission,however, does not agree that systemslike POSIT are simply an automation oftraditional brokerage functions, butbelieves they are markets. Like othermarkets, ‘‘passive’’ or derivative pricingsystems bring together the orders ofmultiple buyers and sellers. Allsubscribers enter orders,68 whichinteract at pre-specified times. Inaddition, ‘‘passive systems’’ establishnon-discretionary methods under whichsubscribers agree to the terms of thetrade. Such systems cross orders at pre-established times during the dayaccording to specified priorities, such astime priority. While these orders aretraded at a price that is not known at thetime a subscriber enters an order, theparameters under which such price willbe determined are established and notsubject to discretion by the operator ofthe ‘‘passive system.’’ While thesesystems do not themselves havetraditional price discovery mechanisms,they have the potential to—andfrequently do—affect the markets fromwhich their prices are derived.69 TheCommission, however, agrees with thiscommenter that these systems do notraise the same concerns as alternative

trading systems with price discoverymechanisms and, therefore, even if suchsystems have significant tradingvolume, if they choose to register asbroker-dealers they are not required tomeet the fair access and systemscapacity requirements.70 TheCommission, however, will monitor theactivities of these passive systems and ifconcerns arise with regard to theiractivities will reconsider whether theserequirements should apply.

1. Order Routing SystemsThe Commission proposed to exclude

from proposed Rule 3b–16 those tradingsystems that merely route orders to anexchange or broker-dealer for execution.The only commenter to address thisprovision was the SIA, which expressedits support for this exclusion.71 TheCommission is adopting the exclusionas proposed in Rule 3b–16(b)(1).Examples of such systems include theNew York Stock Exchange’s (‘‘NYSE’s’’)and the American Stock Exchange’s(‘‘Amex’s’’) Common Message Switch 72

and BRASS.73 Nasdaq, however, is notmerely a routing system. In addition toSelectNet’s routing capabilities, Nasdaqis a quotation facility, permitsexecutions through its SOES system,and establishes rules for its membersregarding the firmness of their bids andoffers and how members deal with eachother.

The Commission does not believe thatthese routing systems meet the two-parttest in paragraph (a) of Rule 3b–16because they do not bring togetherorders of multiple buyers and sellers.


74 Third market firms are NASD member firmsthat execute orders for exchange-listed securities.

75 See Letter from David E. Rosedahl, ExecutiveVice President and Chief Regulatory Officer, PacificExchange, Inc. to Jonathan G. Katz, Secretary, SEC,dated Aug. 20, 1998 (‘‘PCX Letter’’) at 2–6; CHXLetter at 3–4.

76 Rule 11Ac1–4(b)(1)(i), 17 CFR 240.11Ac1–4(b)(1)(i).

77 Proposing Release, supra note 3, at n.9.78 Rule 3b–16(b)(2)(ii), 17 CFR 240.3b–16(b)(2)(ii).79 See SIA Letter at 10; DBSI Letter at 3.

80 DBSI Letter at 3.81 SIA Letter at 11.82 Rule 3b–16(b)(4), 17 CFR 240.3b–16(b)(4).83 Rule 3b–16(b)(2)(i), 17 CFR 240.3b–16(b)(2)(i).84 These systems may also implicate other

provisions of the federal securities laws.

Instead, all orders entered into a routingsystem are sent to another executionfacility. In addition, routing systems donot establish non-discretionary methodsunder which parties entering ordersinteract with each other.

2. Dealer SystemsIn the Proposing Release, the

Commission discussed the applicationof proposed Rule 3b–16 to single dealersystems. Such systems automate theorder routing and executionmechanisms of a single market makerand guarantee that the market makerwill execute orders submitted to it at itsown posted quotation for the securityor, for example, at the inside pricequoted on Nasdaq. Because singlemarket maker systems merely provide amore efficient means of executing thetrading interest of separate customerswith one dealer, the Commission statedthat they should not be consideredexchanges. Accordingly, theCommission proposed to explicitlyexclude from proposed Rule 3b–16those trading systems that display thequotations of a single dealer and allowpersons to enter orders for executionagainst the dealer’s proprietary account,usually at the dealer’s quote. Thisexclusion was intended to encompasssystems operated by third marketmakers,74 as well as those systemsoperated by dealers, primarily in debtsecurities, who display their ownquotations to customers and otherbroker-dealers on proprietary or vendorscreens.

The Commission is today adoptingparagraph (b)(2) of Rule 3b–16 toexclude systems that display quotes ofa single dealer and allow persons toenter orders for execution against thebids and offers of a single dealer. If amarket maker executes a customer orderat the National Best Bid or Offer(‘‘NBBO’’), rather than at its displayedbid or offer, the Commission willconsider the NBBO as the marketmaker’s quote for purposes of that trade.As in the proposal, paragraph (b)(2) isintended to exclude from Rule 3b–16 alldealers, including third market makers.

The Commission received twocomment letters asking the Commissionto reconsider its proposed exclusion ofthird market makers.75 Thesecommenters disagreed with theCommission’s distinction between thirdmarket makers and exchanges, and

stated that these systems competedirectly with the regional exchanges fororder flow. Consequently, thesecommenters suggested that theCommission include third marketmakers within its revised interpretationof ‘‘exchange.’’ As discussed in theProposing Release, however, theCommission does not believe that asingle dealer that automates its means ofcommunicating trading interest tocustomers is a market. Instead, suchsystems automate functionstraditionally performed by dealers.

Accordingly, the exclusion theCommission is adopting today inparagraph (b)(2) of Rule 3b–16 isintended to cover systems operated bythird market makers. Because of theCommission’s own rules and those ofthe SROs, a third market maker’s quotemay not always reflect its own bids andoffers, but may—at times—represent acustomer limit order. The Limit OrderDisplay Rule 76 requires third marketmakers (among others) to displaycustomer limit orders in a security thatare at a price that would improve thebid or offer of such market maker in thatsecurity. The Commission does notbelieve that a market maker engagingprincipally in the business of trading forits own account should be includedwithin Rule 3b–16 solely because it iscomplying with the Limit Order DisplayRule. Consequently, in the ProposingRelease the Commission stated that, forpurposes of this exclusion, if a dealerdisplayed a customer order to complywith a Commission or SRO rule, thatcustomer order would be considered tobe the ‘‘dealer’s quote.’’ 77 To ensurethat Rule 3b–16 clearly excludes suchdealers, the Commission is adoptingparagraph (b)(2)(ii) of Rule 3b–16.Paragraph (b)(2)(ii) excludes a registeredmarket maker that displays its ownquotes and customer limit orders, andallows its customers and other broker-dealers to enter orders for executionagainst the displayed orders. Theexclusion also allows such a registeredmarket maker, as an incidental activityresulting from its market maker status,to match or cross orders for securities inwhich it makes a market, even if thoseorders are not displayed.78

Two other commenters expressedtheir support for the single dealerexclusion.79 One of these commenters,however, suggested that theCommission modify the exclusion sothat trading systems that display the

quotes of a dealer and its affiliates andallow persons to execute against thosequotes be excluded from Rule 3b–16.80

The Commission is adopting theexclusion from Rule 3b–16 for singledealer systems, but does not agree withthis commenter that a dealer’s affiliatesshould be included in the exclusion.

In addition, one commenter requestedthat the Commission clarify whether theexclusion for dealer quotation systemswould apply to systems that allow otherbroker-dealers to execute against asingle dealer’s quotations.81 TheCommission intends for this exclusionto cover dealer quotation systems thatpermit other broker-dealers to executeagainst the dealer’s quotations andrealizes that its use of the term‘‘customer’’ in the proposal wouldpreclude this. Accordingly, theCommission is adopting the exclusionin paragraph (b)(2) so that itencompasses single dealer systems thatallow any person to enter orders forexecution against that dealer’s quotes.82

A single dealer system could also matchorders that are not displayed to anyperson other than the dealer and itsemployees, provided this matching isonly incidental to its primary activity asa dealer.83

D. Examples of Systems IllustratingApplication of Rule 3b–16

The following examples are providedto illustrate various applications of Rule3b–16.84 While these examples areintended to provide guidance, theapplication of Rule 3b–16 will be fact-specific.

1. Examples of Systems Included WithinRule 3b–16

a. System A is a trading floor thatmaintains a continuous two-sidedauction market under a unitaryspecialist system. Through the use of anelectronic communication system,orders are transmitted from memberfirms to the floor and execution reportsare transmitted from the floor to themember firms. System A also has anautomated routing and small orderexecution system. Price discoveryoccurs through the interaction of bidsand offers of market participants underthe application of System A’s rules ofpriority, parity, and precedence. Thespecialist’s dealings are subject tocompliance obligations established bySystem A. System A is included underRule 3b–16.


b. System B allows participants toenter, replace, or cancel limit ordersprior to a pre-established auction cutofftime. Bids and offers (including priceand size) are displayed in the SystemB’s order book, which participants canview on their screens. After the cutofftime, the system reviews all orders withrespect to each security and determinesthe price at which the volume of buyinginterest is closest to the volume ofselling interest. That price is the‘‘auction price.’’ Participants that haveentered bids at or above, and offers at orbelow, the auction price receive anexecution at the auction price on thebasis of time priority up to the availablesize. Matched orders are executed by aregistered broker-dealer. System B isincluded under Rule 3b–16.

c. System C allows participants toenter limit orders and matches thoseorders with other orders in System Cbased on internal parameters. System Cdisplays unmatched limit orders in thesystem’s book on an anonymous basis toall participants. The broker-dealeroperating System C acts as a risklessprincipal in executing all matchedorders. System C is included under Rule3b–16.

d. System D limits participation toinstitutional investors that trade illiquidrestricted securities. To offer a security,a seller notifies System D as to thesecurity, the price and the amountoffered. After System D accepts anorder, it enters it into the system whereit is posted anonymously. Prospectivepurchasers may accept a posted order orseek to negotiate a transaction bycontacting System D. System Dfacilitates the purchase and sale ofsecurities through the system on anagency basis. Participants enter a bid oroffer by calling a dedicated telephonenumber at System D. Once each side ofthe transaction agrees to the terms of thetrade, System D obtains necessarydocumentation from the participantsand reviews all the documentation.Once all the documentation has beenprocessed, System D notifies the partiessetting the transfer and settlement date,at which time System D will coordinatethe transfer of funds and the issuer isnotified to effect the transfer on itsbooks. System D is included under Rule3b–16.

e. System E allows participants toenter orders for securities by computer,facsimile, or telephone. Those orders arenot displayed to other participants.System E crosses orders at specifiedtimes at a price derived from anothermarket such as the closing price, avolume weighted average price, or themidpoint between the closing bid andask on the primary market. System E is

included under Rule 3b–16, but wouldbe exempt from the requirements ofRegulation ATS under Rule 301(a)(5) ifit is registered as a broker-dealer.

f. System F displays, on ananonymous basis, firm offers to buy andsell securities from its participants.Participants typically telephone anemployee of System F to place a bid oroffer, which the employee enters intothe system for display to otherparticipants. To execute against a bid oroffer displayed on the computer screen,a participant telephones an employee atSystem F. The employee is required toexecute the participant’s order againstthe displayed order if it matches.System F is included under Rule 3b–16.If System F allowed subscribers toexecute against a displayed order bysending a message electronically, itwould also be included under Rule 3b–16.

g. System G permits competingmarket makers to post continuous two-sided quotes in certain securities.Quotes are consolidated anddisseminated to subscriberselectronically. System G maintains andenforces rules setting standards for theposting of quotes and executions.Trades are executed by subscriberscalling market makers outside thesystem and executing trades based onquotes displayed in the system. SystemG is included under Rule 3b–16.

h. System H is owned and operated bya bank. System H permits registeredbroker-dealers to place orders to buy orsell securities at specified prices andsizes and have those orders displayed toall users on an anonymous basis.Registered broker-dealers may tradeboth for their own account or on anagency basis on behalf of theircustomers. System H automaticallyexecutes an order if it matches anexisting order. If no match isimmediately available, System Hdisplays the order on the system on ananonymous basis to all users. System His included under Rule 3b–16.

i. System I permits participants toenter a range of ranked contingent buyand sell orders at which they are willingto trade securities. These orders arematched based on a mathematicalalgorithm whose priorities are designedto achieve the participants’ objectives.System I does not display orders to anyparticipants. System I is included underRule 3b–16.

2. Examples of Systems Not IncludedWithin Rule 3b–16

a. System J routes orders from broker-dealers to registered exchanges or toother broker-dealers for execution.System J also routes execution reports

back to the broker-dealers that enteredthe orders. System J provides no facilityfor execution, but rather only acts as acommunications system for thetransmission of orders and executionreports. System J falls within theexclusion in paragraph (b)(1) of Rule3b–16.

b. System K displays a registeredmarket maker’s quotes in exchange-listed securities and permits subscribersto submit orders for those securities tothe market maker. Limit orders aredisplayed in the market maker’s quotepursuant to requirements under theCommission’s order execution rules.Market orders are executed against themarket maker’s quote or at the NBBO orat a price better than the NBBO. Limitorders are held until marketable. SystemK falls within the exclusion inparagraph (b)(2) of Rule 3b–16.

c. System L allows a dealer todisseminate its proprietary quotations toits customers and permits customers totransmit orders to buy from or sell tothat dealer at those quoted prices.System L is not included under Rule3b–16 because it falls within theexclusion in paragraph (b)(2) of Rule3b–16.

d. System M is operated by a broker-dealer that makes markets in Nasdaqsecurities. System M permits the broker-dealer’s customers, as well as otherbroker-dealers (including correspondentbroker-dealers with whom it has aclearing arrangement) to send orderselectronically or by telephone to thebroker-dealer. An order transmittedelectronically goes directly to thesystem server. An order transmitted byphone is received by an employee of thebroker-dealer, who enters it into theSystem M. If it is a market order for aNasdaq security in which the broker-dealer makes a market, System Mchecks to see if the order can be crossedagainst a customer limit order held bythe broker-dealer. If two customerorders cannot be crossed, System Mautomatically executes the market orderagainst the firm’s inventory if the ordersize is at or below certain parameters. Ifthe order size exceeds those parameters,the market order will be routed to atrader for manual execution against thefirm’s inventory, or other handling asthe trader determines. If the order is fora security in which the broker-dealerdoes not make a market, System Msends the order to a market maker in thesecurity or to another market forexecution. System M falls within theexclusions in paragraph (b)(1) and (b)(2)of Rule 3b–16.

e. System N allows participants topost the names of securities they wishto buy or sell. Other participants view


85 In some cases, however, the systems operatedby the interdealer brokers may fall within Rule 3b–16. See supra System F.

86 15 U.S.C. 78mm.87 17 CFR 240.3a1–1.88 17 CFR 240.3a1–1(a)(2). See infra note and

accompanying text for the definition of analternative trading system.

89 17 CFR 240.3a1–1(a)(3). See notes—andaccompanying text.

90 17 CFR 240.3a1–1(a)(1).

91 See infra Section III.F.92 Rule 3a1–1(b), 17 CFR 240.3a1–1(b).93 Registration as a national securities association

under section 15A of the Exchange Act is voluntary.15 U.S.C. 78o–3. Currently the only nationalsecurities association is the NASD, which operatesNasdaq.

94 Rule 3a1–1(a)(1). See also Rule 301(a)(3)(excluding alternative trading systems operated bya national securities association from the scope ofproposed Regulation ATS).

95 Instinet Letter at 8, n.11.

this ‘‘bids wanted list’’ or ‘‘offerswanted list’’ and place bids or offers forthe specified securities during a definedauction period. The participant whoposted the security on the ‘‘bids wantedlist’’ or ‘‘offers wanted list’’ may eitheraccept or reject the best bid or offer atthe close of the auction. System N is notincluded under Rule 3b–16 becausethere is only one seller.

f. System O permits correspondentfirms of a broker-dealer to send orderselectronically to that broker-dealer. Thebroker-dealer executes the ordersagainst its own inventory. System Ofalls within the exclusion in paragraph(b)(2)(i) of Rule 3b–16.

g. System P is an Internet web site setup by an issuer. Through this web site,the issuer provides information toprospective buyers and sellers of itscommon stock. Prospective buyers andsellers post their identities, contactinformation, and the number of sharesoffered or sought at a given price. Theissuer makes that information, alongwith the date the information wassubmitted, available to prospectivebuyers and sellers. The participantscontact each other outside of the website to execute trades. System P is notincluded under Rule 3b–16 because itdoes not establish non-discretionarymethods under which buyers and sellersinteract.

h. System Q is a screen-based systemon which broker-dealers postindications of interest to institutionalcustomers in the securities the broker-dealers wish to trade and advertisetrades they have recently conducted.System R sets no requirements andprovides no procedures regardingwhether or how posted quantities andprices of securities can be executed.System Q is not included under Rule3b–16 because it does not establish non-discretionary methods under whichbuyers and sellers interact.

i. System R is an internal systemoperated by a broker-dealer to displayonly to its registered representatives theprices and sizes of securities offered forsale by the firm in its capacity as adealer. A registered representative canenter a buy order, specifying price andsize, on behalf of its customer. If theterms of the customer’s order match thedealer’s posted offer, System Rautomatically executes the order. If theterms are different, System R places thecustomer’s order on the screen for latermatching. Assuming the matches ofcustomer orders are merely incidentalrelative to the dealer’s own trades,System R falls within the exclusion inparagraph (b)(2)(i) of Rule 3b–16.

j. System S permits an issuer to postprices to sell its own securities to a

broker-dealer’s customers. The issuer isunder no obligation to post prices on thesystem and may choose to do so at anytime. If a customer accepts the postedprice and size, System S routes theorder to the issuer who retainsdiscretion to accept or reject the trade.If the posted price or size is notaccepted as posted, System Sautomatically alerts the issuer thatfurther negotiation is necessary. SystemS is not included under Rule 3b–16because it has only one seller and,therefore, fails to meet the ‘‘multiplebuyers and sellers requirement.’’

k. System T facilitates the clearanceand settlement of securities products.Participating IDBs disseminate andmatch trading interest through theirown proprietary trading screens to theirown customers. The participating IDBsthen submit matched transactionsbetween their customers to System T forclearance and settlement. The IDBs’screens are not linked together and theIDBs interact only with those dealersusing the system. The customers’ ordersinteract only with the quote of the IDBof which they are a customer and do notinteract with the other customer ordersof that IDB. Dissemination andexecution of orders by the IDBs isgoverned solely by their rules and notby System T.85 System T is not includedunder Rule 3b–16.

E. Exemption From the Definition of‘‘Exchange’’

Section 36 of the Exchange Act 86

gives the Commission broad authority toexempt any person, security, ortransaction from provisions of theExchange Act and the rules thereunder.Such an exemption may be subject toconditions. Using this authority, theCommission is adopting Rule 3a1–1.87

This rule exempts from the definition of‘‘exchange’’: (1) Any alternative tradingsystem that compies with RegulationsATS 88 (2) any alternative trading systemthat under Rule 301(a) of RegulationATS is not required to comply withregulation ATS and alternative tradingsystem operated by a national securitiesassociation,89 and (3) any alternativetrading system operated by a nationalsecurities association.90 Finally, as

described more fully below,91 paragraph(b)(1) of Rule 3a1–1 also conditions analternative trading system’s exemptionon the absence of a Commissiondetermination that the exemption in aparticular case is not ‘‘necessary orappropriate in the public interest orconsistent with the protection ofinvestors.’’ 92

The Commission has determined thatthis exemption is in the public interestand will promote efficiency,competition, and capital formationbecause it has the effect of providingalternative trading systems with theoption of positioning themselves in themarketplace as either registeredexchanges or as broker-dealers. TheCommission believes that allowingalternative trading systems to make abusiness decision about how to registerwith the Commission will continue toencourage the development of new andinnovative trading facilities. TheCommission has also determined thatthis exemption is consistent with theprotection of investors because investorswill benefit from conditions governingan alternative trading system, inparticular Regulation ATS’s enhancedtransparency, market access, systemintegrity, and audit trail provisions.

Moreover, because national securitiesassociations are subject to requirementsvirtually identical to those applicable tonational securities exchanges,93 Rule3a1–1 also exempts from the definitionof ‘‘exchange’’ any alternative tradingsystem operated by a national securitiesassociation.94 The Commission believesthat the regulation of alternative tradingsystems operated by a nationalsecurities association is adequate, andtherefore, that such systems should notbe required to register either asexchanges, or as broker-dealers andcomply with Regulation ATS.Consequently, trading systems operatedby national securities associations maycontinue to operate as they do now.

Finally, in response to a commenter’srequest that the Commission clarify thatthe exemption from the definition of‘‘exchange’’ provided in Rule 3a1–1(a)(2) includes broker-dealers that areexcluded from the scope of RegulationATS by Rule 301(a),95 the Commissionis adding paragraph (a)(3) to Rule 3a1–


96 17 CFR 240.3a1–1(a)(3).97 See TBMA Letter at 12–13 (expressing concern

that foreign regulators might be influenced by theCommission’s categorization of a system as an‘‘exchange,’’ even if that system chose to beregulated in the U.S. as a broker-dealer); InstinetLetter at 3, 6–7, 13–14 and 6–7, n.9 (stating thatclassifying a securities firm as an exchange in theU.S. could significantly impair a firm’s ability toparticipate in foreign markets * * * because anumber of foreign regulators may regard all broker-dealers covered by the expanded ‘exchange’definition as ‘exchanges’). See also CBB Letter at 3.

98 TBMA Letter at 12.99 See Letter from Mike Cormack, Manager,

Equity Trading, American Century to Jonathan G.Katz, Secretary, SEC, dated Aug. 12, 1998(‘‘American Century Letter’’) at 1–2 (supporting theCommission’s proposal to permit alternative tradingsystems to register as exchanges because it wouldprovide an option for innovators, and notingalternative trading systems’ objection to the NASD’sproposed central limit order book based on thebelief that an SRO regulating alternative tradingsystems should not operate a competing system);NASD Letter at 3 (commenting that both registrationas an exchange and Regulation ATS ‘‘generallyappear to ensure that alternative trading systemsoperate with the appropriate levels of investorprotection, while affording alternative tradingsystems the necessary flexibility to choose betweendifferent models of regulation’’); CME Letter at 3(generally supporting the additional requirementsfor alternative trading systems because they willimprove investor protection and lessen theregulatory disparity that currently exists betweenalternative trading systems and traditionalexchanges); Instinet Letter at 7, n.10 (stating that theCommission should modify the exemption in Rule3a1–1 from exchange registration so that alternativetrading systems that, while acting in good faith, failto comply fully with each of the technicalrequirements of Regulation ATS do not violateSections 5 and 6 of the Exchange Act); ICI Letterat 2; IBEX Letter at 4.

100 CHX Letter at 6 (questioning why traditionalexchanges should not have the opportunity to makethe same choice as alternative trading systems, andcommenting that SROs should be permitted to formsubsidiaries that were alternative trading systemsregistered as broker-dealers).

101 In making this significant decision, a nationalsecurities exchange would have to follow itsconstitution and by-laws (including provisionsconcerning membership votes), and any applicablestate law requirements.

102 Section 15(b)(8) of the Exchange Act requiresany broker-dealer engaging in transactions otherthan solely on a national securities exchange ofwhich it is a member, to become a member of anational securities association. 15 U.S.C. 78o(b)(8).

103 The Commission does not mean to imply thatnational securities exchanges cannot make thischoice. The Commission is merely pointing out thatif a national securities exchange does so, it cannotcontinue to act as its own SRO.

104 Rule 3a1–1(b), 17 CFR 240.3a1–1(b)(1).

1. The Commission intended for broker-dealers that perform only activitiesdelineated in Rule 301(a) to be exemptfrom the definition of exchange underRule 3a1–1, and is making this clear byadding this new paragraph.96

The Commission intends for theexemption provided by Rule 3a1–1 tomake clear that alternative tradingsystems that register as broker-dealersand comply with Regulation ATS not beregulated as national securitiesexchanges. The Commission believesthat the requirements in Regulation ATSas adopted will address the market-likefunctions of alternative trading systemswithout imposing requirementsapplicable to exchanges that might notfit comfortably with certain alternativetrading systems’ structures andbusinesses.

In the Proposing Release, theCommission requested comment onwhether an exclusion from thedefinition in Rule 3b–16 for alternativetrading systems that register as broker-dealers and comply with the provisionsof Regulation ATS would be preferableto the exemption under Rule 3a1–1.Several commenters expressed apreference for an exclusion, rather thanan exemption.97 Most of thesecommenters were concerned thatforeign regulators would view thesesystems, currently registered as broker-dealers, as exchanges if they were nowexempted from the definition ofexchange rather than excluded from it.The Commission believes that its newframework being adopted todayrepresents a carefully balancedapproach to the regulation of marketsthat is grounded in the particularstatutory structure of the Exchange Act.First, the Commission notes that itsexemption for alternative tradingsystems applies to the definition of anexchange. By exempting alternativetrading systems from this definition, theCommission is making clear its viewthat these systems should not be treatedas exchanges under the Exchange Act orin any other context. Moreover, theCommission does not intend itsinterpretation of exchange to be usedoutside of the Exchange Act context.The Commission strongly cautions

against applying this interpretation inother contexts where its effects willdiffer from those under the ExchangeAct. The Commission also believes thatapplication in another context of onlyone element of the structure adoptedtoday would be inappropriate andwould seriously call into question thevalidity of the interpretation in thatcontext.

Another concern raised by at least onecommenter was that investors could beinfluenced in how they view a tradingsystem, if such trading system isincluded within the Commission’sinterpretation of ‘‘exchange.’’ 98 TheCommission believes that investors’views of systems are shaped more by thefunctions those systems perform than bythe way they are classified. TheCommission also believes that theenhanced regulation of alternativetrading systems that choose to remainregistered as broker-dealers that isprovided by Regulation ATS providesmore protection for the investors whouse these systems.

In the Proposing Release, theCommission also requested comment onthe scope, form, and conditions of theexemption in Rule 3a1–1. Commentersgenerally approved of the Commission’sproposal to allow alternative tradingsystems the choice to register asexchanges or be exempt from thedefinition of ‘‘exchange’’ by registeringas broker-dealers and complying withRegulation ATS.99 One commenterquestioned whether national securitiesexchanges would have the choice toregister as alternative trading systems,in effect ceasing to act as SROs and

electing instead to be regulated as abroker-dealer under Regulation ATS.100

The Commission believes that, as ageneral matter, national securitiesexchanges do have this choice under therules the Commission is adoptingtoday.101 Any national securitiesexchange making this choice would, ofcourse, be required to give up its SROfunctions and privileges, and to registeras a broker-dealer and become a memberof a national securities association orother SRO.102 That organization wouldthen act as the SRO for this alternativetrading system. If a national securitiesexchange chose, as part of thisrestructuring, to allow its members toform their own national securitiesassociation to operate this newalternative trading system, thatalternative trading system would be rundirectly by a national securitiesassociation, and, as stated above, wouldbe regulated in a manner that wasequivalent to being regulated as anational securities exchange.103

F. Commission’s Authority To RequireRegistration as an Exchange

Rule 3a1–1(b) contains an exceptionto the exemption from the exchangedefinition. Under this exception, theCommission effectively may require atrading system that is a substantialmarket (as set forth in the rule) toregister as a national securities exchangeif it finds in a particular case that it isnecessary or appropriate in the publicinterest or consistent with theprotection of investors.104 In particular,the Commission could deny or withholdexemptive status from a trading systemthat otherwise meets the exemptiveconditions under Rule 3a1–1(a).Although the standard for denying orwithholding the exemption is based onobjective factors, the Commission hasdiscretion whether to initiate anyprocess to consider whether to revoke a


105 The Commission does not mean to imply thatthe NASD will be required to register Nasdaq as anational securities exchange. As stated above,because Nasdaq is operated by a national securitiesassociation, it is currently subject to requirementsvirtually identical to those applicable to nationalsecurities exchanges. Any alternative tradingsystem, however, currently operated by a nationalsecurities association could choose to register as anexchange.

106 15 U.S.C. 78s(c)(3).107 See S. Rep. No. 75, 94th Cong., 1st Sess. 8

(1975) at 2, 8; H.R. Rep. No. 229, 94th Cong., 1stSess 92 (1975).

108 See supra note 6.109 See S. Rep. No. 75. supra note 107. ‘‘(T)he

increasing tempo and magnitude of the changes that

are occurring in our domestic and internationaleconomy make it clear that the securities marketsare due to be tested as never before,’’ and that itwas, therefore, important to assure ‘‘that thesecurities markets and the regulations of thesecurities industry remain strong and capable offostering (the) fundamental goals (of the ExchangeAct) under changing economic and technologicalconditions.’’ Id. at 3.

110 S. Rep. No. 75 supra note 107, at 8–9.111 S. Rep. No. 75 supra note 107, at 7; see Section

11A(a)(1)(C) of the Exchange Act, 15 U.S.C. 78k–1(a)(1)(C).

112 See S. Rep. No. 75 supra note 107, at 104–05.113 Section 11A(a)(1)(C)(ii) of the Exchange Act,

15 U.S.C. 78k–1(a)(1)(C)(ii). A fundamental goal ofa national market system was to ‘‘achieve a marketcharacterized by economically efficient executions,fair competition, (and the) broad dissemination ofbasic market information.’’ S. Rep. No. 75 supranote 107, at 101.

114 See Section 11A(c)(1) of the Exchange Act, 15U.S.C. 78k–1(c)(1).

particular entity’s exemption under therule.

Specifically, under Rule 3a1–1(b), ifan organization, association, or group ofpersons meets certain, specified volumelevels, the Commission could considerwhether registration as an exchange isnecessary. The Commission will notconsider making an assessment whethera particular system should register as anexchange unless that system, duringthree of preceding four calendarquarters had: (1) Fifty percent or moreof the average daily dollar tradingvolume in any security and five percentor more of the average daily dollartrading volume in any class of security;or (2) Forty percent or more of theaverage daily dollar trading volume inany class of securities. The Commissionwould also provide such a system withnotice and an opportunity to respondbefore determining that exemption fromregistration as an exchange is notappropriate in the public interest. Inmaking that determination, theCommission would take into accountthe requirements for exchangeregistration under section 6 of theExchange Act and the objectives of thenational market system under section11A of the Exchange Act. For example,it may not be consistent with theprotection of investors or in the publicinterest for a trading system that is thedominant market, in some importantsegment of the securities market, to beexempt from registration as an exchangeif competition cannot be relied upon toensure fair and efficient tradingstructures in that case. In that case itmay be necessary for the Commission’sgreater oversight authority overregistered exchanges to apply.105 Asanother example, if the Commissionbelieved that an exemption under Rule3a1–1 for a particular trading systemthat meets the volume thresholds wouldcreate systemic risk or lead to instabilityin the securities markets’ infrastructure,it could determine that an exemptionfrom registration as an exchange was notappropriate in the public interest orconsistent with the protection ofinvestors.

The Commission believes that thereare alternative trading systems operatingtoday that exceed the volume levels inparagraph (b)(1) of Rule 3a1–1.However, the Commission does not

believe at this time that there are anyalternative trading systems—given theircurrent operations—for which theexemption from the definition ofexchange in paragraph (a) of Rule 3a1–1 is not appropriate.

In addition, under section 19(c)(3) ofthe Exchange Act,106 the Commissionhas the authority to promulgate rules forthe de-registration of an exchange. Inorder to ensure a smooth transition forexchanges that wish to de-register andbecome registered broker-dealers subjectto Regulation ATS, the Commission willconsider promulgating de-registrationrules. Such rules would also give theCommission the opportunity to formallyconsider whether certain exchangesshould be prohibited from de-registering, just as Rule 3a1–1(b) givesthe Commission the opportunity toconsider whether certain alternativetrading systems registered as broker-dealers should be compelled to registeras exchanges.

IV. Regulation of Alternative TradingSystems

Securities markets have becomeincreasingly interdependent. The use oftechnology permits market participantsto link products, implement complexhedging strategies across markets andacross products, and trade on multiplemarkets simultaneously. While theseopportunities benefit many investors,they may also create misallocations ofcapital, widespread inefficiency, andtrading fragmentation if markets are notcoordinated. In addition, a lack ofcoordination among markets has thepotential to increase system-wide risks.Congress adopted the 1975Amendments, in part, to address thesenegative effects of potentiallyfragmented markets.107 The Commissionbelieves that it is consistent withCongress’ goals to integrate significantalternative trading systems into thenational market system.

In the 1975 Amendments, Congressspecifically endorsed the developmentof an national market system, andsought to clarify and strengthen theCommission’s authority to promote theachievement of such a system.108

Because of uncertainty as to howtechnological and economic changeswould affect the securities markets,Congress explicitly rejected mandatingspecific components of an nationalmarket system.109 Instead, Congress

recognized that the securities marketsdynamically change and, accordingly,granted the Commission broad authorityto oversee the implementation,operation, and regulation of the nationalmarket system in accordance withCongressional goals and objectives.110

Congress identified two paramountobjectives in the development of annational market system: themaintenance of stable and orderlymarkets with maximum capacity, andthe centralization of all buying andselling interest so that each investor hasthe opportunity for the best possibleexecution of his or her order, regardlessof where the investor places theorder.111 In addition, Congress directedthe Commission to remove present andfuture competitive restrictions on accessto market information and ordersystems, and to assure the equalregulation of markets, exchangemembers, and broker-dealers effectingtransactions in the national marketsystem.112 In particular, Congress foundthat it was in the public interest toassure ‘‘fair competition * * * betweenexchange markets and markets otherthan exchange markets.’’ 113

To further national market systemgoals, Congress granted the Commissionbroad authority to make rules, includingthose to: (1) Prevent the use andpublication of deceptive trade and orderinformation; (2) assure the prompt,accurate, and reliable distribution ofquotation and transaction information;(3) enable non-discriminatory access tosuch information; and (4) assure that allbroker-dealers transmit and directorders for securities in a mannerconsistent with the operation of anational market system.114 Moreover,Congress recognized that in order toimplement national market systemgoals, the Commission would need toclassify markets, firms, and securitiesand facilitate the development of


115 S. Rep. No. 75 supra note 107, at 7.116 In addition to its authority under section 11A

of the Exchange Act, 15 U.S.C. 78k–1, theCommission is adopting Regulation ATS pursuantto its rulemaking power under other parts of theExchange Act, including sections 3(b) (power todefine terms), 15(b)(1) (registration and regulationof broker-dealers), 15(c)(2) (prescribing meansreasonably designed to prevent fraud), 17(a) (booksand records requirements), 17(b) (inspection ofrecords), 23(a)(1) (general power to make rules andclassify persons, securities, and other matters), and36 (general exemptive authority). 15 U.S.C. 78c(b),78o(b)(1), 78o(c)(2), 78q(a), 78q(b), 78w(a)(1), and78mm, respectively. For a discussion on the generalexemptive authority in section 36 of the ExchangeAct, 15 U.S.C. 78mm, see infra Section VII.D.1.

117 See supra Section III (discussing Rule 3b–16).118 Rule 300(a), 17 CFR 242.300(a).119 See supra note and accompanying text. The

Commission has the authority to require significantmarkets to remain registered as exchanges. Seesupra Section III.F.

120 PCX Letter at 3.121 Rule 3a1–1(a)(2), 17 CFR 240.3a1–1(a)(2).

122 See supra note 33.123 The term ‘‘government security’’ is defined in

section 3(a)(42) of the Exchange Act, 15 U.S.C.78c(a)(42).

‘‘subsystems within the national marketsystem.’’ 115

The Commission believes the rules itis adopting today advance nationalmarket system goals. At present,alternative trading systems are not fullyintegrated into the national marketsystem, leaving gaps in market accessand fairness, systems capacity,transparency, and surveillance. Theseconcerns, together with the increasingsignificance of alternative tradingsystems, call into question the fairnessof current regulatory requirements, theeffectiveness of existing national marketsystem mechanisms, and the quality ofpublic secondary markets. Under therules the Commission is adopting today,alternative trading systems that have themost significant effect on our marketswill be required to integrate theirtrading into national market systemmechanisms. Alternative tradingsystems may choose to register either asnational securities exchanges or asbroker-dealers. Systems that electbroker-dealer regulation will beintegrated into the national marketsystem under Regulation ATS if theyhave significant trading volume.116

Discussed in Section IV.A. below are therequirements for alternative tradingsystems that choose to register asbroker-dealers and comply withRegulation ATS. Any alternative tradingsystem that registers as a nationalsecurities exchange will be obligated—as currently registered exchanges are—to participate in the national marketsystem mechanisms. Section IV.B.contains a discussion of therequirements applicable to alternativetrading systems that choose to registeras exchanges.

A. Regulation ATS

1. Scope of Regulation ATS

a. Definition of Alternative TradingSystem

The Commission proposed to definethe term ‘‘alternative trading system’’ asany system that: (1) Constitutes,maintains, or provides a marketplace or

facilities for bringing togetherpurchasers and sellers of securities orfor otherwise performing with respect tosecurities the functions commonlyperformed by a stock exchange underExchange Act Rule 3b–16; 117 and (2)does not set rules governing the conductof subscribers other than the conduct ofsuch subscribers’ trading on suchorganization, association, person, groupof persons, or system, or disciplinesubscribers other than by exclusionfrom trading.118 This proposeddefinition would have the effect ofprecluding any trading system thatperforms self-regulatory functions fromopting to register as a broker-dealer,rather than as an exchange. Such asystem would consequently be requiredto register as an exchange or be operatedby a national securities association.Nothing, however, would prevent aregistered exchange from giving up itsself-regulatory functions and choosinginstead to comply with RegulationATS.119

The Commission received only onecomment on this proposed definition.This commenter suggested that theproposed definition for alternativetrading systems was too complex andshould instead, simply be defined as anexchange that does not set conduct rulesor discipline subscribers.120 Under theframework the Commission is adoptingtoday, an alternative trading system isexempt from the definition of anexchange if it registers as a broker-dealerand complies with Regulation ATS.121

Because the Commission continues tobelieve that any system that uses itsmarket power to regulate its participantsshould be regulated as an SRO, theCommission is adopting the definitionof alternative trading system asproposed. The Commission wouldconsider a trading system to be‘‘governing the conduct of subscribers’’outside the trading system if it imposedon subscribers, as conditions ofparticipation in trading, anyrequirements for which the tradingsystem had to examine subscribers forcompliance. In addition, if a tradingsystem imposed as conditions ofparticipation, directly or indirectly,restrictions on subscribers’ activitiesoutside of the trading system, theCommission believes that such a tradingsystem should be a registered exchangeor operated by a national securities

association. For example, theCommission would not consider atrading system to be an alternativetrading system, as defined in Rule300(a), if that trading system prohibitedsubscribers from placing orders on itssystem at prices inferior to thosesubscribers place on other systems. TheCommission believes such rules shouldonly be imposed and enforced byregulatory bodies because of thepotential that they may be applied foranti-competitive purposes. TheCommission does not intend for thislimitation to preclude an alternativetrading system from imposing creditconditions on subscribers or requiringsubscribers to submit financialinformation to the alternative tradingsystem.

b. Exclusion of Trading SystemsRegistered as Exchanges or Operated bya National Securities Association

The Commission proposed to excludefrom the scope of Regulation ATScertain alternative trading systems thatare subject to other appropriateregulations. In particular, Rule 301(a)would exclude alternative tradingsystems (1) registered as exchanges, (2)exempt from exchange registrationbased on limited volume,122 or (3)operated by a national securitiesassociation. These systems are subject toregulation as markets under otherprovisions of the Exchange Act. TheCommission is adopting theseexclusions as proposed.

c. Exclusion of Alternative TradingSystems Trading Solely Governmentand Related Securities

(i) DiscussionIn addition, the Commission proposed

that any alternative trading system thattrades only government securities,123

Brady Bonds, and repurchase andreverse repurchase agreementsinvolving government securities orBrady Bonds be excluded from thescope of Regulation ATS, as long as thealternative trading system is registeredas a broker-dealer. The Commissionbelieves that alternative trading systemstrading only government securities raiseseveral of the structural issues raised byalternative trading systems tradingequity and other debt securities.Nevertheless, the Commissionrecognizes that government securitiesare subject to other forms of regulationthat help to ensure that those marketsare fair and orderly. In particular,


124 See generally Department of the Treasury,Securities and Exchange Commission, and Board ofGovernors of the Federal Reserve System, JointStudy of the Regulatory System for GovernmentSecurities (March 1998); Department of theTreasury, Report of the Secretary of the Treasury onSpecialized Government Securities Brokers andDealers (July 1995) (‘‘1995 Treasury Report’’).

The Government Securities Act of 1986 (‘‘GSA’’)amended the Exchange Act to incorporate newsection 15C, which, among other things, establishedregistration and notice requirements for governmentsecurities brokers and dealers. Section 15Cgenerally requires government securities brokersand dealers (i.e., 15C firms or specializedgovernment securities brokers and dealers) toregister with the Commission and to becomemembers of an SRO (twenty-two firms as of March1998). Firms that are registered with theCommission as general securities brokers or dealers(i.e., traditional broker-dealers registered undersection 15(b) of the Exchange Act) are required tofile notice with the Commission of theirgovernment securities business (3,023 firms as ofApril 1998). In addition, financial institutions thatengage in government securities broker or dealeractivities are required to file notice of suchactivities with their appropriate regulatory agency(120 institutions as of March 1998).

Under the regulatory structure established by theGSA, the Treasury was granted authority to adoptregulations for all government securities brokersand dealers concerning financial responsibility,protection of investors’ funds and securities,recordkeeping, reporting, and audit requirements,and to adopt regulations governing the custody ofgovernment securities held by depositoryinstitutions. The Government Securities ActAmendments of 1993 (‘‘GSAA’’) expanded theauthority of the federal regulators and the SROsover government securities transactions. The GSAA,among other things, reauthorized the Treasury’srulemaking responsibilities, granted the Treasuryauthority to prescribe large position recordkeepingand reporting rules, extended the Commission’santifraud and antimanipulation authority to allgovernment securities brokers and dealers, requiredgovernment securities brokers and dealers toprovide to the Commission on request records ofgovernment securities transactions to reconstructtrading in the course of a particular inquiry orinvestigation, removed the statutory restrictions onthe authority of the NASD to extend sales practicerules to its members’ transactions in governmentsecurities, and provided the bank regulatoryagencies with the authority to issue sales practicerules for financial institutions engaged ingovernment securities broker or dealer activities.

The GSA also strengthened the ability of federalregulators to examine, and to bring enforcementactions against, government securities brokers anddealers. The Commission and the SROs haveexamination and enforcement authority overgovernment securities brokers and dealersregistered under section 15C and over thegovernment securities activities of general securitiesbrokers and dealers. The Commission’s enforcementauthority includes the power to censure, placelimitations on the activities, functions, oroperations of, suspend for a period not exceeding12 months, or revoke the registration of the entity.For financial institutions that are governmentsecurities brokers or dealers, the institution’sappropriate regulatory agency has examination and

enforcement authority over the institution. Theappropriate regulatory agency must notify theCommission of any sanctions imposed on suchinstitutions, and the Commission must maintain arecord of the sanctions.

125 Although all marketable Treasury notes,bonds, and zero-coupon securities are listed on theNYSE, exchange trading volume is a small fractionof the total over-the-counter volume in theseinstruments. See U.S. Department of the Treasury,U.S. Securities and Exchange Commission, andBoard of Governors of the Federal Reserve System,Joint Report on the Government Securities Market26 (1992).

126 In other words, these systems are not requiredto register as either an exchange or to comply withthe requirements of Regulation ATS. Rule 301(a)(4),17 CFR 242.301(a)(4).

127 Rule 301(a)(4)(ii)(E), 17 CFR242.301(a)(4)(ii)(E). The term ‘‘commercial paper’’is defined in Rule 300(m), 17 CFR 242.300(m). Thisdefinition is based on the definition of commercialpaper as set forth in 12 CFR 541.5, an Office ofThrift Supervision regulation that definescommercial paper, and section 3(a)(3) of theSecurities Act of 1933, which uses identicallanguage to identify these securities as one categoryof exempted securities.

128 Rule 301(a)(4)(D), 17 CFR 242.301(a)(4)(D).

129 Section 3(a)(42) of the Exchange Act, 15 U.S.C.78c(a)(42).

130 Rule 301(a)(4), 17 CFR 242.301(a)(4).131 See, e.g., TBMA Letter at 17–18 (also urging

the Commission to clarify the application ofproposed Regulation ATS where a trading systemtrades government securities, as well as non-government securities); CBB Letter at 3 (butrequesting guidance from the Commission onwhether an ATS trading government securities andrelying on such an exemption would be precludedfrom trading products other than securities); SIALetter at 3, 11.

132 IBEX Letter at 4–5.133 TBMA Letter at 13, n.21.

government securities broker-dealers arecurrently regulated jointly by theCommission, U.S. Department of theTreasury (‘‘Treasury’’), and federalbanking regulators, under the ExchangeAct (particularly the provisions of theGovernment Securities Act of 1986) andthe federal banking laws.124 Unlike

surveillance of trading in equities andother instruments traded primarily onregistered exchanges,125 surveillance oftrading in government securities iscoordinated among the Treasury, theCommission, and the Board ofGovernors of the Federal ReserveSystem.

The Commission is adopting thisproposed exclusion from RegulationATS with some modifications.126

Specifically, the Commission iseliminating Brady Bonds from the typesof securities an alternative tradingsystem can trade and fall within thisexclusion. The Commission received nocomments specifically addressing thetrading of Brady Bonds by alternativetrading systems. Based on informationthe Commission has available abouttrading on alternative trading systems,however, the Commission is not awareof any systems trading Brady Bonds thatdo not also trade other non-governmentsecurities, most typically other emergingmarket debt. Accordingly, no alternativetrading systems trading Brady Bondswould have been exempt under theproposals. Further, the Commissiondoes not treat Brady Bonds in the samemanner as government securities inother contexts. Moreover, thesignificance of Brady Bonds in themarket is diminishing.

In addition, the Commission isexpanding the exclusion in tworespects. First, the Commission isadding commercial paper 127 and certainoptions on government securities 128 tothe types of securities alternativetrading systems may trade without beingsubject to Regulation ATS. TheCommission believes this expansion isappropriate because commercial paper

does not require registration even as abroker-dealer, and because the term‘‘government securities’’ includescertain options on governmentsecurities for purposes of sections 15Cand 17A of the Exchange Act.129

Second, the Commission is expandingthis exclusion from Regulation ATS toinclude alternative trading systems thatare banks and that trade solelygovernment securities, repurchase andreverse repurchase agreements ongovernment securities, certain optionsof government securities, andcommercial paper because of banks’traditional role in the governmentsecurities market.130

(ii) Response to CommentersThe Commission solicited comment

on whether it was appropriate toexclude from the regulatory frameworkfor alternative trading systems thosealternative trading systems tradingsolely government and other relatedsecurities. Of those commenters whoaddressed this issue, most were in favorof excluding such systems. Most ofthese commenters agreed with theCommission that alternative tradingsystems trading government securitiesare subject to their own specializedoversight structure and, therefore, wereappropriately excluded from the scopeof the Commission’s proposal.131 Onlyone commenter opposed the proposedexclusion of alternative trading systemsthat trade government securities.132

One commenter suggested that theCommission exclude alternative tradingsystems that trade government securitiesfrom the definition in Rule 3b–16, ratherthan exclude them from RegulationATS. This commenter stated that ifthese alternative trading systems wereclassified as exchanges that fact wouldbe cited by proponents of a narrowinterpretation of the TreasuryAmendment to the CommodityExchange Act, potentially resulting in abroad definition of ‘‘board of trade’’beyond its intended meaning as atraditional organized exchange.133 Asstated earlier, the Commission believesthat it would be inappropriate and


134 See supra note 97 and accompanying text.135 TBMA Letter at 17.136 See TBMA Letter at 17; Instinet Letter at 8,

n.11; CBB Letter at 3–4.137 Instinet Letter at 8, n.11.138 See infra note 180 and accompanying text for

the definition of ‘‘covered security.’’ 139 CBB Letter at 3.

140 CBB Letter at 3–4.141 The proposal would not require an alternative

trading system to publicly display its best orders infixed income securities.

without a reasoned basis to transfer partor all of its determination regardingregulation to other statutory contexts.134

The Commission’s reinterpretation of‘‘exchange’’ is grounded on its decisionto use its exemptive authority to allowalternative trading systems to choose tobe regulated as broker-dealers. TheCommission’s reinterpretation ofexchange should not be relied upon byother regulators to interpret other,potentially more restrictive statutoryschemes.

In addition, this same commenterencouraged the Commission to considerthe effects of the proposed rules onbanks that operate alternative tradingsystems. In particular, this commenternoted that the exclusion for alternativetrading systems that trade governmentsecurities applied only if the alternativetrading system registered as a broker-dealer, not if the alternative tradingsystem were a bank.135 The Commissiondid not intend to require banks tradinggovernment securities to register asbroker-dealers and, therefore, Rule301(a)(4), as adopted, excludes fromRegulation ATS alternative tradingsystems that trade government securitiesif these systems are registered as broker-dealers or are banks.

Several commenters raised questionsabout the application of Regulation ATSto alternative trading systems that tradenot only government securities, but alsoother types of securities.136 Onecommenter asked the Commission toextend the proposed exemption foralternative trading systems that tradeonly government securities and otherrelated securities to all trading in thosesecurities. This commenter stated thatbroker-dealers that trade governmentsecurities, as well as other securitiesand financial instruments, should not berequired to restructure their operationsto avail themselves of an exclusion forgovernment securities activities.137

The Commission does not believe thatan alternative trading systems’government securities trading will besubject to more burdensome regulationif it is conducted in the same system astrading in other securities, than if it isconducted in a separate and, therefore,excluded system. Accordingly, theexclusion applies to systems that onlytrade government and other relatedsecurities.

Government securities are not‘‘covered securities’’ 138 and, therefore,

are not subject to the transparencyrequirements of Regulation ATS. Inaddition, an alternative trading systemis only required to comply with the fairaccess requirements for those securities(or categories of securities) in which itrepresents twenty percent or more of thetotal volume. The fair accessrequirement does not apply togovernment securities regardless ofwhether government securities tradingis conducted in the same alternativetrading system as securities subject tothe fair access requirements or in aseparate alternative trading system.Finally, the capacity, integrity, andsecurity requirements would never betriggered by an alternative tradingsystem’s government securities trading.If, however, the trading in othersecurities on that same system exceedsthe twenty percent threshold, analternative trading system in whichgovernment securities are traded wouldhave to meet the capacity, integrity, andsecurity standards. Nevertheless, itseems unlikely that an alternativetrading system would choose to create aseparate alternative trading system forits government securities trading solelyfor the privilege of trading governmentsecurities on a system with lessercapacity, integrity, and security than thesystem on which other securities aretraded. Therefore, the Commission doesnot believe that it will be necessary, asa practical matter, for an alternativetrading system to restructure its systemto avail itself of the governmentsecurities exclusion.

Another commenter asked that theCommission expressly confirm that theexclusion from the scope of RegulationATS for systems trading governmentand related securities does not precludesuch an alternative trading system fromoffering services involving productsother than securities.139 In response, theCommission has clarified that to beexcluded from the scope of RegulationATS an alternative trading system needonly limit its securities activities togovernment securities, Brady Bonds,repurchase and reverse repurchaseagreements on such instruments, andcommercial paper.

Finally, this commenter suggestedthat the Commission adopt rules topermit government securities alternativetrading systems to trade other fixedincome securities on a limited pilotbasis. This commenter argued that,without such a limited exemption,Regulation ATS would have a chillingeffect on the ability of governmentsecurities alternative trading systems tointroduce technological innovation, and

that such a provision would raise nosignificant investor protectionconcerns.140 The Commission, however,does not believe that allowing onecategory of alternative trading systems(i.e., those trading governmentsecurities) to trade other types of fixedincome securities where the regulationand surveillance is different, withoutcomplying with Regulation ATS isappropriate. The notice andrecordkeeping requirements underRegulation ATS are limited and shouldnot interfere with market participants’ability to test new, innovative systems.

d. Alternative Trading Systems TradingNon-Government Debt Securities

(i) DiscussionThe Commission proposed that

alternative trading systems that tradedebt securities (other than those tradinggovernment and other related securities)be subject to Regulation ATS, if theychoose not to register as exchanges.Under Regulation ATS, these systemswould be required to file a notice withthe Commission, maintain an audit trail,periodically report certain informationto the Commission, and ensure that theyhave adequate safeguards to protectsubscribers’ confidential tradinginformation. In addition, alternativetrading systems with twenty percent ormore of the trading volume in aparticular category of debt would haveto meet the fair access and systemscapacity, integrity, and securitystandards.141 The Commission solicitedcomment on what categories of debtwould be appropriate for this purposeand what sources of debt transactionvolume information is available.Specifically, the Commission solicitedcomment on whether the followingcategories would be appropriate:mortgage and asset-backed securities,municipal securities, corporate debtsecurities, foreign corporate debtsecurities, and sovereign debt securities.

The Commission is adopting theproposal to include alternative tradingsystems that trade fixed incomesecurities within its new regulatoryframework. With respect to the fairaccess and systems capacity, integrityand security requirement, the rules asadopted require alternative tradingsystems with twenty percent or more ofthe volume in municipal securities,investment grade corporate debtsecurities, and non-investment gradecorporate debt securities to comply withthe fair access and systems capacity,


142 15 U.S.C. 78c(a)(29).143 Rule 300(l), 17 CFR 242.300(l).144 Rule 300(m), 17 CFR 242.300(m).145 An initiative by TBMA would also make the

MSRB data available on TBMA’s web site <http://www.investinginbonds.com>. See Robert Whalen,Investor Aids: TBMA’s Internet-Based PriceReporting Aims to Increase Market Transparency,The Bond Buyer, Nov. 25, 1998, at 28.

146 Due to the Commission’s concerns regardingthe Year 2000 computer technology conversionprocess, no new Commission rules requiring majorcomputer reprogramming will be made effectivebetween June 1, 1999 and March 31, 2000. SeeSecurities Exchange Act Release No. 40377 (Aug.27, 1998), 63 FR 47501 (Sept. 3, 1998). Accordingly,because the logistical framework for investmentgrade and non-investment grade corporate debt datahas not been fully developed, the Commission isnot making Rules 301(b)(5)(D) and (E) and Rules301(b)(6)(D) and (E) effective until after themoratorium is lifted.

147 See TBMA Letter at 3, MSDW Letter at 13; SIALetter at 11; DBSI Letter at 1 (adopting TBMALetter).

148 See NYSE Letter at 6 (supporting regulation ofalternative trading systems that trade debt securitiesas important for investor protection); IBEX Letter at2–3 (also generally urging the Commission to takesteps to increase transparency, access to best pricedorders, and other investor protections in the debtmarkets, e.g., insider trading and front runningrules).

149 See TBMA Letter at 18–20; SIA Letter at 3, 11.150 TBMA Letter at 19–20.151 See Robert Zipf, How the Bond Market Works

86–87 (1997) (noting characteristics of generalobligation and revenue bonds and the heightenedrisk of revenue bonds relative to general obligationbonds).

152 As of June 30, 1998, there was approximately$3.4 trillion of U.S. Treasury debt securitiesoutstanding with average daily trading volume ofover $200 billion. By comparison, there wasapproximately $1.4 trillion of municipal debtsecurities outstanding with average daily tradingvolume of approximately $1 billion. The BondMarket Association, Research Quarterly (August1998) <http://www.bondmarkets.com/research/9808rschq.pdf>.

integrity, and security requirements.Accordingly, the Commission isadopting rules to define these threecategories of debt securities. TheCommission is deferring any action onrequiring alternative trading systemsthat trade foreign corporate debt orforeign sovereign debt to comply withthe fair access and systems capacity,integrity, and security requirements.

For municipals, the Commission isincorporating into Regulation ATS thedefinition of municipal securities insection 3(a)(29) of the Exchange Act.142

A debt security (other than an exemptedsecurity) with a fixed maturity of at leastone year will be considered investmentgrade corporate debt if it is rated in oneof the four highest ratings categories byat least one Nationally RecognizedStatistical Ratings Organization,143 andwill be considered non-investmentgrade corporate debt if it is not sorated.144 The Commission believes thatthese categories are widely recognizedas relatively distinct markets within thedebt market as a whole and, while notencompassing all forms of debtsecurities, will ensure that alternativetrading systems that provide markets forsignificant segments of the debt markettake adequate measures for systemscapacity, integrity, and security, as wellas provide fair access.

While the Commission is adoptingrules to establish the appropriatecategories for debt securities, thevolume-based rules with respect to allcategories, except municipal securities,will not become effective until volumeinformation is available in a format thatwill enable alternative trading systemsto determine their relative volume.Volume data for municipal securities isavailable and being published throughthe Municipal Securities RulemakingBoard’s (‘‘MSRB’’) Daily Volume PriceReports. On August 24, 1998, the MSRBstarted producing a Combined DailyReport to summarize both intra-dealerand customer transactions of municipalsecurities that are traded four or moretimes per day pursuant to Rule G–14.This report is made available throughdata vendors, such as Bloomberg, byapproximately 6:00 am each businessday.145 Among other information, theCombined Daily Report provides totalvolume data against which alternativetrading systems that trade municipal

securities can measure their complianceobligations under Regulation ATS.

Volume data for the remaining twocategories—investment grade and non-investment grade corporate debt—,however, is not currently compiled orpublished so that alternative tradingsystems can determine their obligationsunder Regulation ATS. In order to allowtime for logistical arrangements to makesuch data available, the Commissionwill not make these fair access andsystems capacity, integrity and securityprovisions of Regulation ATS effectiveuntil April 1, 2000.146

(ii) Response to CommentersSome commenters thought that the

Commission should exclude debtsecurities entirely from RegulationATS.147 On the other hand, severalcommenters supported theCommission’s proposal to includealternative trading systems that tradedebt securities.148 The Commissionbelieves that many of the same concernsabout the trading of equity securities onalternative trading systems applyequally to the trading of fixed incomesecurities on alternative tradingsystems. Specifically, it is importantthat markets with significant portions ofthe volume in particular instrumentshave adequate systems capacity,integrity, and security, regardless ofwhether those instruments are equitysecurities or debt securities. Similarly,as electronic systems for debt grow, itwill become increasingly important forthe fair operation of our markets formarket participants to have fair accessto significant market centers in debtsecurities. One of the consequences ofthe growing role of alternative tradingsystems in the securities marketsgenerally is that debt securities areincreasingly being traded on thesesystems, similar to the way equity

securities are traded. This change in themarket requires appropriate measuresfor markets for debt.

Two commenters suggested that theCommission exempt or excludealternative trading systems tradingmunicipal securities for the samereasons that it proposed to excludealternative trading systems that tradegovernment securities.149 For example,one commenter asserted that themunicipal securities market is overseennot only by securities regulators, butalso by the federal banking regulators.This commenter also pointed out thatthe Commission had proposedexcluding municipal securities in theConcept Release and stated that theCommission should have maintainedthis approach in the ProposingRelease.150 Although the Commissiondid solicit comment in the ConceptRelease on whether alternative tradingsystems trading municipal securitiesshould be excluded from any proposednew regulatory framework, theCommission has concluded that itwould not be appropriate to do so.

There are substantial differencesbetween the oversight of the governmentsecurities market and the municipalsecurities markets, and betweengovernment securities instruments andmunicipal securities instruments. Forexample, municipal securities are farmore varied products than governmentsecurities. While traditional generalobligation bonds issued bymunicipalities are more akin togovernment securities in that they arebacked by the full faith and credit of theissuing taxing authority, revenue bonds,which bear greater resemblance toprivately issued bonds due to their tiesto specific revenue sources, are riskierproducts.151 Most municipal bonds arerarely traded. The market forgovernment securities, on the otherhand, is deep and liquid.152 Therefore,alternative trading systems that maydevelop for municipal securities mayhave widely different qualities thanthose for government securities.Moreover, regulation of the government


153 TBMA Letter at 6–7, 21.154 TBMA Letter at 24.155 See TBMA Letter at 23–25; IBEX Letter at 12.

IBEX also suggested reactivating the SIA practice ofpublishing the average daily trading volume ofcorporate and other bonds on a monthly basiswhich was discontinued in 1994. IBEX Letter at 12.

156 TBMA Letter at 23–25.157 Rule 301(a)(5), 17 CFR 242.301(a)(5).

158 The transparency requirements are discussedinfra Section IV.A.2.c.

159 Section 15(b)(8) of the Exchange Act, 15 U.S.C.78o(b)(8).

160 For example, the structural reformsundertaken by the NASD since August 1996 shouldaid in ensuring the independence of NASDR andinsulating its staff from the commercial interests ofNasdaq.

161 See supra note 4.162 Section 15A of the Exchange Act, 15 U.S.C.

78o–3.

163 See Rule 301(b)(8), 17 CFR 242.301(b)(8).164 Rule 301(b)(1), 17 CFR 242.301(b)(1).165 Rule 301(b)(2)(i) and Form ATS, 17 CFR

242.301(b)(2)(i) and 17 CFR 249.637.166 Most currently operating alternative trading

systems have filed Part 1 of Form 17A–23. To availthemselves of the exemption in Rule 3a1–1(a)(2),these systems must file Form ATS within 20 daysof the effective date of these rules. Internal broker-dealer systems, 17 CFR 240.17a–3(a)(16)(ii)(A),which may also have previously filed Part I of Form17A–23, do not have to file Form ATS.

securities market is shared by theFederal Reserve Board, the TreasuryDepartment and the Commission andother bank regulators, while oversight ofthe municipal securities market isassigned to the Commission and theMSRB. For these reasons, theCommission believes it would not beappropriate to exempt alternativetrading systems that trade municipalsecurities from Regulation ATS.

Only one commenter directlyaddressed the Commission’s request forcomment on possible categories of debt.Although TBMA encouraged theCommission to exclude alternativetrading systems trading debt securitiesfrom Rule 3b–16,153 it stated that, if theCommission chose to go forward withthe proposal, it ‘‘believes that theproposed categories reflect a reasonableindication of how market participantsview and trade debt securities.’’ 154

Several commenters recommendedthat the Commission consider theclearing agencies as a source ofinformation on the trading volume inthe debt market.155 One commenter alsonoted that for municipal securities, theMSRB’s transaction reportingrequirements could be a good source forvolume information.156 As discussedabove, the Commission plans to use theMSRB’s transaction reporting programas a basis for volume in the municipalsecurities market.

e. Exemptions From CertainRequirements of Regulation ATSPursuant to Application to theCommission

The Commission today is alsoadopting a provision to allow theCommission, upon application by analternative trading system, to exempt byorder such alternative trading systemfrom one or more of the requirements ofRegulation ATS.157 The Commissionexpects to issue such an order onlyunder unusual circumstances, and onlyafter determining that such an order isconsistent with the public interest, theprotection of investors and the removalof impediments to, and the perfection ofthe mechanisms of, a national marketsystem.

While the Commission believes thatthe requirements it is adopting underRegulation ATS are appropriate for allalternative trading systems operating

today, the Commission is aware that asystem may develop in the future towhich these requirements may not beappropriate, and they could hinder thedevelopment of specialized tradingsystems. For example, the Commissioncould consider exempting an alternativetrading system that limited participationonly to investment companies withsimilar investment strategies, such asindex funds, from the transparencyrequirements.158

2. Requirements for Alternative TradingSystems Subject to Regulation ATS

Discussed below are the requirementsfor alternative trading systems subject toRegulation ATS.

a. Membership in an SROBecause alternative trading systems

that choose to register as broker-dealerswill not themselves have self-regulatoryresponsibilities, the Commissionbelieves it is important for such systemsto be members of an SRO. For thisreason, the Commission proposed torequire alternative trading systemssubject to Regulation ATS to bemembers of an SRO.

Most alternative trading systems arecurrently registered as broker-dealersand, therefore, are also members of anSRO.159 The Commission understandssome alternative trading systems mayhave concerns about SROs abusing theirregulatory authority for competitivereasons. While the Commissionunderstands that SROs operatecompeting markets and, therefore, havepotential conflicts of interest inoverseeing alternative trading systems,the Commission believes these conflictscan be minimized using theCommission’s oversight.160 TheCommission considers it part of its ownoversight responsibility over SROs toprevent and take the necessary steps toaddress any such actions by SROs.161

Further, an alternative trading systemthat wishes to avoid potential conflictsof interest altogether may choose toregister as an exchange. TheCommission also notes that section 15Aof the Exchange Act would permit anassociation of brokers and dealers toestablish an SRO that does not operatea market.162 Such a national securities

association could be established solelyfor purposes of overseeing the activitiesof alternative trading systems. Ofcourse, this association must be able toeffectively conduct its SROresponsibilities.

The Commission expects SROs toeffectively surveil trading that occurs onalternative trading systems byintegrating alternative trading systemtrading data into the SRO’s existingsurveillance systems. SROs should alsoincorporate relevant informationregarding the entities trading on suchsystems into their existing surveillanceprograms. The enhanced recordkeepingrequirements for alternative tradingsystems will aid SRO oversightconsiderably in this regard.163

The Commission believes it isappropriate to continue to requirealternative trading systems that registeras broker-dealers to be SRO membersand is, therefore, adopting thisrequirement as proposed.164

b. Notice of Operation as an AlternativeTrading System and Amendments

The Commission proposed to requirean alternative trading system registeredas a broker-dealer to file a notice withthe Commission before commencingoperation, amendments to this notice inthe event of material changes, and anotice when an alternative tradingsystem ceases operation. TheCommission is adopting theserequirements as proposed.

More specifically, under RegulationATS, alternative trading systems arerequired to file an initial operationreport with the Commission on FormATS at least twenty days prior tocommencing operation.165 Alternativetrading systems operating currentlymust file Form ATS within twenty daysof the effective date of these finalrules.166 Form ATS requests informationabout the alternative trading system,including a detailed description of howit will operate, its prospectivesubscribers, and the securities it intendsto trade. In addition, the alternativetrading system is required to describe itsexisting procedures for reviewingsystems capacity, security, andcontingency planning. Alternativetrading systems are currently required to


167 17 CFR 240.17a–23. See infra Section V.168 Rule 301(b)(2)(ii), 17 CFR 242.301(b)(2)(ii).169 SIA Letter at 17–18.170 Rule 301(b)(2)(iii), 17 CFR 242.301(b)(2)(iii).

Alternative trading systems would also be requiredto file an amendment to Form ATS to correct anypreviously filed information that has beendiscovered to have been inaccurate when filed. Rule301(b)(2)(iv), 17 CFR 242.301(b)(2)(iv).

171 Rule 301(b)(2)(v), 17 CFR 301(b)(2)(v). Analternative trading system is required to provide aduplicate of each of these filings to surveillancepersonnel designated by the SRO of which it is amember. Rule 301(b)(2)(vii), 17 CFR 301(b)(2)(vii).

172 See supra note 3.

173 SIA Letter at 17–18.174 See SIA Letter at 17–18; American Century

Letter at 6.175 IBEX Letter at 5.

176 See IBEX Letter at 5; SIA Letter at 18;American Century Letter at 6.

177 ECNs include any automated tradingmechanism that widely disseminates market makerorders to third parties and permits such orders tobe executed through the system, other than crossingsystems. Rule 11Ac–1–1, 17 CFR 240.11Ac1–1. Seealso Securities Exchange Act Release No. 37619A(Sept. 6, 1996), 61 FR 48290 (Sept. 12, 1996)(‘‘Order Handling Rules Adopting Release’’).

report most of this information on PartI of Form 17A–23, which theCommission proposed to repeal.167

Form ATS is not an application and theCommission would not ‘‘approve’’ analternative trading system before itbegan to operate. Form ATS is, instead,a notice to the Commission.

An alternative trading system is alsorequired to notify the Commission ofmaterial changes to its operation byfiling an amendment to Form ATS atleast twenty calendar days prior toimplementing such changes.168 Onecommenter requested that theCommission provide more specificguidance as to what would beconsidered a ‘‘material change.’’ 169 Asdiscussed in the Proposing Release,material changes to an alternativetrading system include any change to:the operating platform, the types ofsecurities traded, or the types ofsubscribers. The Commission notes thatcurrently all alternative trading systemsimplicitly make materiality decisions indetermining when to notify theirsubscribers of changes.

In addition to reporting materialchanges at least twenty days beforeimplementation, alternative tradingsystems are required to notify theCommission in quarterly amendmentsof any changes to the information in theinitial operation report that have notbeen reported in a previousamendment.170 Finally, if an alternativetrading system ceases operations, it isrequired to promptly file a notice withthe Commission.171 Under RegulationATS, the initial operation report, anyamendments, and the report filed whenan alternative trading system ceasesoperation will be kept confidential.

In the Proposing Release,172 theCommission requested comment on thenotice requirements and Form ATS. TheCommission specifically requestedcomment on whether such requirementswould be burdensome for alternativetrading systems, and if so, whether theburden is inappropriate. TheCommission also sought comment onthe frequency of filings and whethermore or less frequent filings would be

preferable. Finally, the Commissionsought comment on whether it would beappropriate to permit or to requireelectronic filing of Form ATS and allsubsequent amendments.

Most of the commenters did notcomment directly on the noticerequirements or Form ATS. Onecommenter recommended that theCommission allow for filing of theinitial operation report on Form ATSwithin twenty days after commencingoperation, rather than twenty daysbefore commencing operation asproposed.173 This commenter stated thatsuch a change would ease the regulatoryburden on new systems that often haveuncertain timelines and would avoidthe possibility that a new trading systemwould be prevented from operatingsolely because of the need to wait for atwenty-day regulatory time period torun.

The Commission, however, believesthat twenty days is a short enoughperiod of time that alternative tradingsystems would not be inconveniencedby the requirement. If a system wereonly required to provide notice after itcommenced operations, the Commissionwould have no notice of potentialproblems that might impact investorsbefore the system begins to operate. TheCommission also notes that currentlybroker-dealer trading systems have anidentical requirement to file Form 17A–23 with the Commission twenty daysprior to commencing operation. TheCommission knows of no broker-dealertrading system that was unable to startoperating because of the twenty dayperiod. Consequently, the Commissionbelieves the Rule, as adopted, is areasonable means for the Commission tocarry out its functions and imposes nounnecessary burdens on respondents.

The Commission also requestedcomment on whether the information inForm ATS should remain confidential.Two commenters supported theCommission’s proposal to keepconfidential the information containedin Form ATS,174 and one commenterencouraged the public availability offiled information.175 The Commissioncontinues to believe that notice reportsfiled with the Commission and thealternative trading system’s SROpursuant to Regulation ATS should bekept confidential. Information requiredon Form ATS may be proprietary anddisclosure of such information couldplace alternative trading systems in adisadvantageous competitive position.

Further, because the Commissionwishes to encourage candid andcomplete filings in order to makeinformed decisions and track marketchanges, preserving confidentialityprovides respondents with thenecessary comfort to make full andcomplete filings. Finally, based on theCommission’s experience with Rule17a–23 filings, the Commission believesthat confidentiality is appropriate.

Finally, the Commission solicitedcomment on the possibility ofpermitting Form ATS to be filedelectronically. Several commenterssupported the acceptance of electronicfilings by the Commission as a way toreduce the regulatory burden of filingForm ATS and in light of thetechnological nature of alternativetrading systems.176 The Commissionagrees that electronic filing is animportant goal and plans to worktoward it. Currently, however, legal andtechnological limitations—primarilyrelating to security and authentication—make an electronic filing systeminfeasible. At this time, the Commissionis capable of, and plans to, providealternative trading systems with theability to access Form ATS and FormATS–R on-line, through theCommission’s web site, so that the formcan be downloaded. Alternative tradingsystems would then have to submitthese forms to the Commission by mailor facsimile. Ultimately, theCommission anticipates that currenttechnological barriers will be overcome,and a system able to electronicallyaccept Forms ATS and ATS–R will beavailable.

c. Market Transparency

(i) Importance of Market Transparency

In 1997, the Commissionimplemented rules that require a marketmaker or specialist to make publiclyavailable any superior prices that itprivately offers through certain types ofalternative trading systems known asECNs.177 The rules permit an ECN tofulfill these obligations on behalf ofmarket makers or specialists using itssystem, by submitting the ECN’s bestpriced market maker or specialistquotations to an SRO for inclusion into


178 Presently, nine alternative trading systemshave elected to display quotes under the ECNDisplay Alternative. See Letters dated Jan. 17, 1997from Richard R. Lindsey, Director, Division ofMarket Regulation, SEC to: Charles R. Hood, SeniorV.P. and General Counsel, Instinet Corporation(recognizing Instinet as an ECN); Joshua Levine andJeffrey Citron, Smith Wall Associates (recognizingthe Island System as an ECN); Gerald D. Putnam,President, Terra Nova Trading, LLC (recognizing theTONTO System, now known as Archipelago, as anECN); and Roger D. Blanc, Wilkie Farr & Gallagher(counsel to Bloomberg) (recognizing BloombergTradebook as an ECN). See also Letter datedOctober 6, 1997 from Richard R. Lindsey, Director,Division of Market Regulation, SEC to Matthew G.Maloney, Dickstein Shapiro Morin & Oshinsky LLP(counsel to Spear, Leeds & Kellogg) (recognizing theREDI System as an ECN); Letter dated February 4,1998 from Robert L.D. Colby, Deputy Director,Division of Market Regulation, SEC, to LindaLerner, General Counsel, All-Tech InvestmentGroup, Inc. (recognizing the Attain System as anECN); Letter dated April 21, 1998 from Richard R.Lindsey, Director, Division of Market Regulation,SEC to Mark Dorsey, Fried, Frank, Harris, Shriver& Jacobsen (counsel to The Brass Utility, LLC)(recognizing BRUT as an ECN); and Letters datedNov. 13, 1998 from Robert L.D. Colby, DeputyDirector, Division of Market Regulation, SEC to:Lloyd H. Feller, Morgan, Lewis & Bockius LLP(counsel to Strike Technologies LLC) (recognizingthe Strike System as an ECN); John M. Schaible,PIM Global Equities, Inc. (recognizing the TradingSystem as an ECN).

179 Quoted spreads, which measure the differencebetween the inside ask and the inside bid, havedeclined by forty-one percent. The effective spread,which takes into account that trades may occurinside or outside the quoted spread, declined bytwenty-four percent. The lower decline in theeffective spread is due to a decline in trading insidethe spread. See NASD Economic Research, MarketQuality Monitoring: Overview of 1997 MarketChanges (Mar. 17, 1998).

180 A covered security is defined in the same wayas it is under Rule 11Ac1–1(a)(6), 17 CFR240.11Ac1–1. Specifically, a ‘‘covered security’’ isany security reported by an effective transactionreporting plan and any other security for which atransaction report, last sale data, or quotationinformation is disseminated through an automatedquotation system as described in section3(a)(51)(A)(ii) of the Exchange Act, 15 U.S.C.78c(a)(51)(A)(ii). See Rule 300(g). Accordingly, acovered security includes all exchange-listedsecurities, Nasdaq NM securities, and NasdaqSmallCap securities.

181 See Order Handling Rules Adopting Release,supra note 177, at 87–96.

182 There is divergence among ECNs in the extentto which they have chosen to integrate non-marketmaker orders into the prices they display to thepublic. Several of the nine ECNs that are currentlylinked to Nasdaq display to the public the bestprices of any orders entered into their systems(including both market makers and institutions).

183 Because such trading interest frequentlyremains undisclosed, within certain alternativetrading systems non-market maker participants areable to display prices that lock and cross the publicquotations. If the quotes of such participants weredisclosed to the public, the Commission believes itwould result in improved price opportunities forpublic investors.

184 See SEC, Statement of the Securities andExchange Commission on the Future Structure ofthe Securities Markets (Feb. 2, 1972), 37 FR 5286(Feb. 4, 1972) (emphasis added).

185 In the Concept Release, supra note 2, theCommission considered whether to require certainalternative trading systems to register as exchanges.This approach would have addressed theCommission’s concerns about lack of transparencyby requiring certain significant alternative tradingsystems to participate directly in the nationalmarket system plans. Commenters to the ConceptRelease, however, expressed concerns aboutrequiring alternative trading systems to register asexchanges, and that a much more workable andrealistic approach would be to enhance the systemof broker-dealer regulation under which alternativetrading systems are currently regulated. For

example, in recommending that the Commissionconsider allowing alternative trading systems tocontinue to be regulated as broker-dealers, the SIAcommented that ‘‘additional steps to integrateaggregate trading interest on alternative tradingsystems to public view would be a sensible way ofaddressing concerns that may exist in the aftermathof the Order Handling Rules.’’ See letter from A. B.Krongard, Chairman, Securities IndustryAssociation Task Force on Alternative TradingSystem Concept Release to Jonathan G. Katz,Secretary, SEC, received Oct. 6, 1997.

186 Letter from John Markese, President, AmericanAssociation of Individual Investors, to Jonathan G.Katz, Secretary, SEC, dated Nov. 24, 1998 (‘‘AAIILetter’’) at 1.

187 See supra note 180.188 17 CFR 240.11Ac1–1.

public quotation displays (‘‘ECNDisplay Alternative’’).178

Since the Order Handling Rules wereimplemented, the spread between bidsand offers in covered securities hasnarrowed dramatically.179 This hasbenefited investors, including retailinvestors, who have enjoyed significantcost savings when trading coveredsecurities.180

These rules, however, were notintended to fully coordinate trading onalternative trading systems with publicmarket trading.181 While these ruleshave helped integrate orders on certainalternative trading systems into thepublic quotation system, they onlydisclose the orders market makers andspecialists enter into ECNs, unless the

system voluntarily undertakes todisclose institutional prices.182 In manycases, institutional orders, as well asother non-market maker orders, remainundisclosed to the public.183 Moreover,it is voluntary for an ECN to reflect thebest priced quotations in the publicquotation system on behalf of marketmakers and specialists that participatein its system.

Because certain trading interest onalternative trading systems is notintegrated into the national marketsystem, price transparency is impairedand dissemination of quotationinformation is incomplete. Thesedevelopments are contrary to the goalsthe Commission enunciated overtwenty-five years ago when it noted thatan essential purpose of a nationalmarket system:

[I]s to make information on prices, volume,and quotes for securities in all marketsavailable to all investors, so that buyers andsellers of securities, wherever located, canmake informed investment decisions and notpay more than the lowest price at whichsomeone is willing to sell, and not sell forless than the highest price a buyer isprepared to offer.184

(ii) Integration of Orders Into the PublicQuotation System

Alternative trading systems arebecoming increasingly popular venuesfor trading securities. Because thesesystems are not registered exchangesand do not participate in the nationalmarket system, there is a possibility thatour securities markets could becomeless transparent over time.185 The

Commission believes that it isinconsistent with congressional goalsfor a national market system if the besttrading opportunities are madeaccessible only to those marketparticipants who, due to their size orsophistication, can avail themselves ofprices in alternative trading systems.The vast majority of investors may notbe aware that better prices aredisseminated to alternative tradingsystem subscribers and many do notqualify for direct access to these systemsand do not have the ability to route theirorders, directly or indirectly, to suchsystems. As a result, many customers,both institutional and retail, do notalways obtain the benefit of the betterprices entered into an alternativetrading system. As the AmericanAssociation of Individual Investorspointed out, ‘‘(s)imply stated, investorsbenefit, as do markets, from knowingthe full array of best-priced orders fromall sources * * * It is in the bestinterests of individual investors thatalternative trading systems disseminatebest-priced orders into quotationsystems that are available to thepublic.’’ 186

(A) New Requirements for AlternativeTrading Systems

The Commission is adoptingExchange Act Rule 301(b)(3) to furtherenhance transparency of ordersdisplayed on alternative tradingsystems, and to ensure that publiclydisplayed prices better reflect market-wide supply and demand. Specifically,this rule requires alternative tradingsystems with five percent or more of thetrading volume in any ‘‘coveredsecurity’’ 187 to publicly disseminatetheir best priced orders in thosesecurities. These orders will then beincluded in the quotation data madeavailable to quotation vendors bynational securities exchanges andnational securities associations.188 Onlythose orders that are displayed to morethan one alternative trading systemsubscriber would be subject to the


189 One commenter (who does not internallydisplay orders) expressed its support for this aspectof the proposed transparency requirement, statingthat, while exchanges and broker-dealers should besubject to the same public display requirement, ifan alternative trading system did not display anyorders to subscribers, it should not be required topublicly display those orders to non-subscribersthrough the public quotation stream. See OptiMarkLetter at 4.

190 See infra notes 206–207 and accompanyingtext.

191 The Commission plans to monitor the effectsof the reserve function on market liquidity andtransparency.

192 In addition to phasing in the transparencyrequirements for institutional orders, affectedalternative trading systems may also choose tophase-in the access requirements for the coveredsecurities. See infra notes 216–217 andaccompanying text.

193 The Commission notes that the later date willfall within the moratorium to facilitate Year 2000conversion. Securities Exchange Act Release No.40377 (Aug. 27, 1998), 63 FR 47051 (Sept. 3, 1998).The Commission believes that the phase-in will notrequire major reprogramming, however, andconsequently is not subject to the moratorium. Inaddition, alternative trading systems mayvoluntarily publicly display all non-market makerbroker-dealer and institutional orders covered bythe requirement on or before April 21, 1999.

public display requirement. Asdiscussed in Section IV.A.2.c.iii. below,alternative trading systems are alsorequired to provide all registered broker-dealers with access to these displayedorders.

Importantly, the public displayrequirement in Rule 301(b)(3) appliesonly to orders in ‘‘covered securities.’’The term ‘‘covered securities’’ includesonly exchange-listed, Nasdaq NM, andNasdaq SmallCap securities.Accordingly, alternative trading systemstrading equity securities not includedwithin the definition of ‘‘coveredsecurity,’’ or debt securities, would notbe subject to the public displayrequirement under Regulation ATS.

In the Proposing Release, theCommission proposed a public displayrequirement substantially similar to theone it is adopting today. The proposal,however, would have only requiredalternative trading systems to publiclydisplay their best priced orders in acovered security when the systemrepresents ten percent of the tradingvolume in that security. TheCommission decided instead to adopt afive percent threshold in light of thecomment letters, many of whichsupported the public displayrequirement and recommended that thevolume threshold be lower than tenpercent.

In the Proposing Release, theCommission proposed that the displayrequirement be applied on a security-by-security basis and would not haverequired an alternative trading system topublicly display orders for anysecurities in which its trading volumeaccounted for less than ten percent ofthe total volume for such security. TheCommission, however, requestedcomment on whether an alternativetrading system should be required todisplay the best priced orders in allsecurities traded in its system, if itreaches the volume threshold in aspecified number or percentage of thesecurities it trades.

After considering the comments onthe issue, the Commission is adoptingthe security-by-security approach asproposed. Although a system that tradesmore than the volume threshold in asubstantial number of securities couldbe considered a significant marketwhose best prices in all securitiesshould be transparent, for now theCommission has decided to take thesecurity-by-security approach with alower volume threshold (five percent)than proposed. The security-by-securityapproach, among other things, will morereadily enable the phase-in of securitiessubject to the transparency requirementsas discussed below.

The Commission emphasizes that, asproposed, Rule 301(b)(3) only requiresalternative trading systems to publiclydisplay subscribers’ orders that aredisplayed to more than one other systemsubscriber. Thus, if an alternativetrading system, like some crossingsystems, by its design does not displayorders to other subscribers, the rules donot require those orders to be integratedinto the public quote stream.189

Similarly, if a portion of a subscriber’sorder is not displayed to otheralternative trading system subscribers,that hidden portion is not subject to thepublic display requirement in Rule301(b)(3). Thus, the Commission’s rulesallow institutions and non-marketmakers to guard the full size of theirorders by using the ‘‘reserve size’’features offered by some alternativetrading systems, which allowsubscribers to display ordersincrementally. For example, asubscriber that wishes to sell 100,000shares of a given security could place itsorder in an alternative trading systemand specify that only 10,000 shares areto be displayed to other alternativetrading system subscribers at a time. Inthis instance, Rule 301(b)(3) requiresthat only 10,000 shares be reflected inthe public quote. The ability to continueto control how much of their own ordersto reveal was a concern of severalinstitutions who commented.190 Finally,alternative trading systems are notrequired to provide to the public quotestream orders displayed to only oneother alternative trading systemsubscriber, such as through use of anegotiation feature.

The Commission believes that in lightof the significant trading volume onsome alternative trading systems,integration of institutional and non-market maker broker-dealer orders intothe national market system is essentialto prevent the development of a two-tiered market. Trading anonymity willbe preserved because an alternativetrading system will comply with anypublic display requirement byidentifying itself, rather than thesubscriber that placed the order. Thus,the Commission’s proposal, much likethe ECN Display Alternative, isdesigned to preserve the benefits

associated with anonymity. Moreover,the Commission believes that thecontinued ability of institutions toretain their anonymity and to usefeatures within alternative tradingsystems to shield the full size of theirorders gives institutions the ability tokeep their full trading interest private.The Commission recognizes thatanonymity is often important toinstitutional investors so that when theyare unwinding or building securityholdings they do not signal their tradingstrategy and negatively impact theirown market position.191

Requiring alternative trading systemsto furnish to the public quotationsystem the full size of the best displayedbuy and sell orders will ensure that thepublic quote better reflects true tradinginterest in a particular security.Furthermore, the Commission believesthat institutional investors’ ordersentered into alternative trading systemsprovide valuable liquidity, and thatdisplaying such trading interest willsubstantially strengthen the nationalmarket system. Moreover, this publicdisplay requirement levels the playingfield between market makers—who,when they send customer limit orders toECNs, the ECN must publicly displaythat order—and those ECNs, who do nothave to display customer limit orderssent directly to the ECN.

In order to monitor the effects of thepublic display requirement, however,the rules will permit affected alternativetrading systems to phase-in institutionalorders in covered securities.192 BeforeApril 21, 1999, the Commission willpublish a schedule for the phase-in ofindividual securities. Fifty percent ofthe securities subject to thetransparency requirement will bephased-in on April 21, 1999 and theremainder of the securities will bephased-in on August 30, 1999.193

(B) Response to CommentsThe Commission requested comment

on whether a ten percent volume


194 See AAII Letter at 1 (suggesting that thevolume threshold be much lower than ten percent),NYSE Letter at 5 (stating that it believed a moreappropriate level would be five percent of theaggregate daily volume in a security in any two ofthe three most recent months, because very fewregistered markets (exchanges and associations)accounted for more than ten percent of the volumein any security); CHX Letter at 8 (suggesting that theCommission require all alternative trading systemsto display their best orders regardless of tradingvolume); NASD Letter at 1 (suggesting a volumethreshold of one percent); American Century Letterat 5 (stating opposition to any volume threshold, asvolume in any alternative trading system may besporadic over time). See also ICI Letter at 3; IBEXLetter at 7–8; Ashton Letter at 4; TBMA Letter pp.21–22 (stating that it concurred that display ofequity securities trading on alternative tradingsystems was beneficial to the market as a whole).

195 See SIA Letter at 12 (stating that a volumelevel of ten percent had the potential to captureinsignificant market players and thereforerecommending that the Commission consider alevel of twenty percent).

196 See ICI Letter at 2, n.5 (stating that the displayrequirement should apply to all securities and to allalternative trading systems, regardless of volume.The ICI stated that this would avoid the practice ofrouting to a particular system simply to avoiddisplay); NYSE Letter at 5 (stating that if analternative trading system developed a ‘‘generalpresence’’ in the market, for example by reachingthe volume threshold in ten or more securities, thatalternative trading system should display the bestpriced orders in all securities it traded); AshtonLetter at 4 (stating that once an alternative tradingsystem achieved one percent in a given ‘‘category’’of securities over a six month period, the systemshould be required to display its best orders in allthe securities in that category); CHX Letter at 8(stating that any volume threshold should beapplied on an alternative trading system as a whole,not on a security-by-security basis, because of theburden of tracking security-by-security); AmericanCentury Letter at 5 (commenting that a rulerequiring public display of all orders displayed inan alternative trading system was preferable). Seealso IBEX Letter at 8; NASD Letter at 11. But seeSIA Letter at 12.

197 See SIA Letter at 13–14 (supporting display oforders on a security-by-security basis andrecommending that the volume threshold be raisedto twenty percent of the trading volume in thatsecurity nationwide; also stating that no ordersshould be required to be displayed in the publicquotation stream unless the trading volume in thatsecurity on the alternative trading system exceededtwenty percent of the alternative trading system’soverall trading activity). Of course, the Commissionassumes that those commenters who opposeddisplay of non-market maker orders generallywould also oppose the display of all securities aswell, rather than only those above a certain volumethreshold. See infra notes 204–205.

198 See ICI Letter at 3 (stating that the ICI supportsdisplay of institutional orders provided that thereserve size feature is retained, and provided that

orders are displayed in the public quotation systemunder the name of the alternative trading system,and not the name of the subscriber placing theorder, thereby preserving anonymity); IBEX Letterat 8–9 (stating that the ‘‘reserve size’’ featurepermitted alternative trading system subscribers toavoid adverse market impact and negotiate a largertransaction with a single counter-party, two featuresIBEX believes to be of considerable value. IBEXstated, however, that reserve size availability tosubscribers to an alternative trading system shouldbe contingent on an initial increment being publiclydisplayed; non-subscribers being able to executeagainst the reserve size; and the full size and priceof each increment being immediately reported, asexecuted, to the public quotation system); AshtonLetter at 6 (stating that all orders up to 10,000shares should be displayed, and that orders inexcess of 10,000 shares, should have a minimum of10,000 shares publicly displayed; also stating thatnegotiation and reserve size features should beavailable to non-subscribers, as well as subscribers);American Century Letter at 5 (stating that it was‘‘imperative’’ that the reserve feature be maintained,because it provided depth of supply and demandat a price, while protecting the order from beingused as a ‘‘free option’’ by other participants in themarket). See also Instinet Letter at 11–13 (arguingagainst total pre-trade transparency); BloombergLetter at 19 n.32 (noting reserve feature in theTradebook System); Letter from Daniel G. Weaver,Associate Professor of Finance, Zicklin School ofBusiness, Barauch College to Jonathan G. Katz,Secretary, SEC, dated Nov. 23, 1998 (‘‘WeaverLetter’’) (stating that institutions will move theirtrading upstairs even if the full size of their ordersis hidden from alternative trading systemsubscribers through their use of a ‘‘reserve size’’feature).

threshold would effectively ensure thatalternative trading systems comprising asignificant percentage of the market aresubject to basic market transparencyrequirements. The commenters thatresponded to this issue were split onwhether a ten percent volume thresholdwas too high or too low, although mostfelt it was too high and should belowered.194 A few commenters,however, stated that they believed thevolume thresholds were too low.195

As discussed above, the transparencyrequirement the Commission isadopting in Rule 301(b)(3) obligates analternative trading system todisseminate into the public quote thebest priced orders in each coveredsecurity in which the trading on suchsystem represents more than fivepercent of total trading volume. TheCommission is persuaded bycommenters that stated that a tenpercent threshold would excludetrading on too many alternative tradingsystems. The Commission believes thatlowering the threshold to five percentwill provide more benefits to investors,promote additional market integration,and further discourage two-tier markets.At the same time, the Commissionbelieves that those alternative tradingsystems with less than five percent ofthe volume would not add sufficientlyto transparency to justify the costsassociated with linking to a market.

The Commission requested commenton whether an alternative tradingsystem should be required to display thebest priced orders in all securitiestraded in its system, if it reaches thevolume threshold in a specified numberor percentage of the securities it trades.Of those commenters addressing thisissue, most were in favor of display ofthe best priced orders in all securitiestraded on an alternative trading system

once that alternative trading systemexceeded the volume threshold in somefixed number of securities.196 The NYSEstated that if an alternative tradingsystem developed a ‘‘general presence’’in the market, for example by reachingthe volume threshold in ten or moresecurities, that alternative tradingsystem should display the best pricedorders in all securities it trades. Onecommenter, however, specificallyopposed the display of all securitiestraded on an alternative trading systemrather than mandating display on asecurity-by-security basis.197 Thiscommenter also noted that even displayon a security-by-security basis maycapture a system that trades a significantamount of one security, despite the factthat that security was a minor part of theoverall trading in the system. Asdiscussed above, however, theCommission is adopting the rule asproposed.

The Commission also requestedcomment on whether alternative tradingsystems should be required to displaythe full size of the best priced order,even if the full size is hidden fromalternative trading system subscribersthrough use of a ‘‘reserve size’’ orsimilar feature. All commenters directlyaddressing this issue 198 stated that the

reserve feature should be maintained,especially if the Commission’s rules asadopted required displayed institutionalorders to be integrated into the publicquotation stream. The Commissionagrees that the reserve features arecritical to institutions’ ability tominimize the market impact of theirorders. Further, when orders are notdisplayed to anyone, the Commission’sconcerns about a two-tiered market—where some market participants haveinformation others do not—are absent.Accordingly, Rule 301(b)(3) onlyrequires alternative trading systems topublicly disseminate the best pricedorders that are displayed to otheralternative trading system subscribers.

The Commission requested commenton whether it would be moreappropriate to adopt an alternative toRule 301(b)(3) that would permit, butnot require, the public display of thebest-priced institutional ordersdisplayed in a high volume alternativetrading system. Under this alternative,an alternative trading system meetingthe requirements of Rule 301(b)(3)(i)would only be required to provide to anational securities exchange or nationalsecurities association the best-pricedorders in covered securities displayed inthe alternative trading system by anybroker or dealer and by any othersubscriber that elects to make its ordersavailable for public display. The


199 See Letter from Wessels, Arnold & Henderson,LLC to Jonathan G. Katz, Secretary, SEC, dated Nov.12, 1997 (commenting on the Concept Release).

200 7/28/98 ICI Letter at 2–3. In a later letter, theICI requested clarification of whether certain ordersthe ICI described as ‘‘non-firm’’ would be subjectto display under the Commission’s rules. See Letterfrom Craig S. Tyle, General Counsel, ICI, toJonathan G. Katz, dated November 13, 1998 (‘‘11/13/98 ICI Letter’’). See also the discussion supra atSection III.A.3.

201 American Century Letter at 4–5.202 NYSE Letter at 6.

203 Ashton Letter at 6.204 Instinet Letter at 3, 12, and 14.205 Id. at n.18 and n.23. See also Letter from

David K. Whitcomb, Professor of Finance andEconomics, Rutgers University to Jonathan G. Katz,Secretary, SEC, dated July 27, 1998 (‘‘WhitcombLetter’’) at 2–3 (stating that institutions may, insome instances, feel strongly that displaying theirorders more widely than to other participants in thealternative trading system is undesirable, and that,as a result, institutions may be induced to spreadtheir business among firms on the basis of whetherthe alternative trading system has reached thevolume threshold for public display of orders,rather than on the basis of quality of service.); Letterfrom Ruben Lee, Oxford Finance Group to JonathanG. Katz, Secretary, SEC, dated July 28, 1998 (‘‘LeeLetter’’) at 2–3 (stating that while mandatorytransparency might help retail investors monitor thequality of their executions and reduce theinequality in access to information that retailinvestors face, it could compromise efficiency andliquidity).

206 See 7/28/98 ICI Letter; 11/13/98 ICI Letter;Letter from Rick Dahl, Chief Investment Officer,Missouri State Employees’ Retirement System toJonathan G. Katz, Secretary, SEC, dated Nov. 12,1998 (‘‘Mosers Letter’’); Letter from Russell Rhoads,Director of Equity Trading, and Michael B. Orkin,Chairman and CEO, Caldwell & Orkin, Inc. toJonathan G. Katz, Secretary, SEC, dated Nov. 20,1998 (‘‘Caldwell Letter’’); Letter from Todd M.Sheridan, Senior Portfolio Manager, CaterpillarInvestment Management Ltd. to Jonathan G. Katz,Secretary, SEC, dated Nov. 19, 1998; Letter fromPraveen K. Gottipalli, Director of Investments,Symphony Asset Management to Jonathan G. Katz,Secretary, SEC, dated Nov. 20, 1998 (‘‘SymphonyLetter’’); Letter from Cinda A. Carmer, SeniorSecurities Trader, Heartland Capital Management,Inc. to Jonathan G. Katz, Secretary, SEC, dated Nov.17, 1998; Letter from Patrick J. McCloskey, SeniorVice President, Wellington Management Company,LLP to Jonathan G. Katz, Secretary, SEC, dated Nov.23, 1998 (‘‘Wellington Letter’’); Letter from CarrieCanter, Principal, Equity Trading, Barrow, Hanley,Mewhinney & Strauss, Inc. to Jonathan G. Katz,Secretary, SEC, dated Nov. 12, 1998 (‘‘BarrowLetter’’). See also Weaver Letter (stating that if theCommission required institutions to display the fullsize of their orders, even if the full size is hiddenfrom alternative trading system subscribers throughtheir use of a ‘‘reserve size’’ feature, institutionswill move their trading upstairs).

Commission requested comment onwhether such an alternative wouldsufficiently address the Commission’sconcerns with transparency andfragmentation in the markets. TheCommission is concerned, however, thatthis alternative could exacerbate thecompetitive disparities between broker-dealers and ECNs. Under the OrderHandling Rules, different order displayrequirements are imposed on limitorders received by a market maker andforwarded to an ECN, than are imposedon orders entered directly into an ECN.One commenter expressed concern thatthis differential treatment could serve asa disincentive for customers to placeorders with a broker-dealer that acts asa market maker in a security.199

Most commenters that expressedsupport for the display of institutionaland non-market maker broker-dealerorders did so because the display ofthese orders would increasetransparency and liquidity in themarket. The Investment CompanyInstitute (‘‘ICI’’) stated that it wouldsupport the display of institutionalorders because it believed display ofthose orders would improve the overalltransparency and liquidity of themarket. This support, however, wascontingent upon the continuedavailability of the ‘‘reserve’’ featureoffered by some alternative tradingsystems.200 Another commenter,similarly, supported disclosure ofinstitutional orders because displayedorders ‘‘are good for markets,’’ andstated that there was no cause forconcern that requiring institutions todisplay in the public quotation streamwould lead to a decrease in ordersdisplayed through alternative tradingsystems. In fact, this commenter statedits belief that the opposite would occur,and pointed to the proliferation of ECNsas evidence.201 The NYSE alsocommented that requiring display ofinstitutional orders in the market wouldadd transparency and liquidity. TheNYSE added that it strongly believes allorders of high volume alternativetrading systems, including orders of10,000 shares or more, should berequired to be publicly displayed.202

Ashton suggested that orders of up to

10,000 shares on all alternative tradingsystems should be fully displayed, andorders exceeding 10,000 shares shouldhave at least 10,000 shares publiclydisplayed. Ashton stated that it believedthis would strike the appropriatebalance between displaying such ordersand minimizing their market impact.203

The commenters who opposeddisplay of non-market maker broker-dealer and institutional orders did sobecause of the market impact they feltsuch orders would have if displayed.Instinet stated that requiring the displayof institutional orders would haveseveral negative effects on the market. Inparticular, Instinet claimed that publicdisplay of institutional orders couldhave a ‘‘significant negative impact’’ onthe price and volatility of a security,would divert this order flow to entitiesnot subject to Regulation ATS or tooffshore markets, and would curtail theability of institutions to manage thesecurities transactions of the individualinvestors for whom they act as proxy.204

Instinet also stated that institutional andother non-market maker investors donot perform specialized marketfunctions, and therefore should not besubject to mandatory display in thepublic quotation system. Finally,Instinet stated it believed that customersshould be able to determine thetransparency of their orders whetherthey were placed with a ‘‘traditionalbrokerage firm’’ or a firm ‘‘that offersboth traditional and electronicexecution opportunities.’’ 205

The Commission is not persuaded bycommenters that suggest thatinstitutions currently willing to usealternative trading systems to displaytheir orders to other alternative tradingsystem subscribers, including otherinstitutions, market-makers, and broker-dealers, will be less willing to usealternative trading systems that mustdisplay those orders to the public

market. Our reasons are as follows. Theprimary group of market participantsthat will benefit from the public displayof institutional orders is retail investors.Retail investors are not currentlyalternative trading system subscribers.To avoid market impact, institutions tryto avoid signaling other institutions andmarket professionals, not retailinvestors. Almost all marketprofessionals and a significant numberof institutions already subscribe toalternative trading systems. Thus, theCommission believes that the additionalexposure to the market should not affectinstitutions’ behavior in their use ofalternative trading systems. Moreover,to the extent that institutions want todisplay small sized orders in the publicmarket, rather than their entire order,they will still be able to make use of analternative trading system’s ‘‘reservesize’’ feature. This will enableinstitutions to avoid exposing the totalsize of their order to the public market.

The Commission also receivednumerous comment letters frominstitutions who expressed similarconcerns. Some of these commentersappeared to be concerned that theymight be forced to display all orderssent to alternative trading systems, eventhose orders, or those portions of orders,that are not displayed to any otheralternative trading systemsubscribers.206 To the extent that theseletters are concerned with ‘‘fulldisclosure,’’ that concern is misplaced.Instead, the Commission proposed, andis adopting, a public displayrequirement that applies only to thoseorders (or those portions of orders) thatalternative trading system subscribers


207 See Letter from Gary E. Shugrue, GeneralPartner, Argos Partners Ltd., to Jonathan G. Katz,Secretary, SEC, dated Nov. 11, 1998 (‘‘ArgosLetter’’); Letter from Stacey Matthews, ChelseyCapital, to Jonathan G. Katz, Secretary, SEC, datedNov. 16, 1998, (‘‘Chelsey Letter’’); Letter from JohnD. Race, Partner, DePrince, Race & Zollo, Inc., toJonathan G. Katz, Secretary, SEC, dated Nov. 16,1998, (‘‘DePrince Letter’’); Letter from Michael W.Masters, Portfolio Manager, Masters CapitalInvestments, LLC, to Jonathan G. Katz, Secretary,SEC, dated Nov. 16, 1998, (‘‘Masters Letter’’); Letterfrom Denise O’Brien, Head of Equity Trading,Wanger Asset Management, LP, to Jonathan G. Katz,Secretary, SEC, received Nov. 19, 1998, (‘‘WangerLetter’’); Letter from Gerald N. Brown, BeckerCapital Management, to Jonathan G. Katz, Secretary,SEC, received Nov. 19, 1998 (‘‘Becker Letter’’);Letter from Della L. Hood-Laster, V.P. EquityTrading, Loomis Sayles & Company, LP, to JonathanG. Katz, Secretary SEC, dated Nov. 12, 1998,(‘‘Loomis Letter’’). See also Barrow Letter andMosers Letter.

208 See Letter from Susan Ellis, Vice President,Trading, Granahan Investment Management, Inc. toJonathan G. Katz, Secretary, SEC dated Nov. 16,1998; Letter from Genrald N. Brown, Becker CapitalManagement to Jonathan G. Katz, Secretary, SEC

received Nov. 19, 1998; Letter from Teresa M.Brandt, Head Equity Trader, Advantus CapitalManagement, Inc. to Jonathan G. Katz, Secretary,SEC dated Nov. 19, 1998; Letter from KristenStraubel, Head Trader and Robert T. Lutts,President, Cabot Money Management, Inc. toJonathan G. Katz dated Nov. 20, 1998; Letter fromTracy Altebrando, Senior Equity Trader,Metropolitan Capital Advisors, Inc. to Jonathan G.Katz, Secretary, SEC, dated Nov. 25, 1998. See alsoWanger Letter, Caldwell Letter, Symphony Letter,Wellington Letter.

209 See, e.g., Loomis Letter, Chelsey Letter.210 Letter from Ed Restrepo, Head Trader,

VanWagoner Capital Management to Jonathan G.Katz, Secretary, SEC, dated Nov. 16, 1998(‘‘VanWagoner Letter’’).

211 See VanWagoner Letter. See also Letter fromStacey Carter Fleece, Chief Financial Officer,Brookhaven Capital Management to Jonathan G.Katz, Secretary, SEC dated Nov. 18, 1998 (statingthat institutional orders submitted to dealers do nothave to be published); Letter from John D.Robinson, Head Trader, Longwood AssetManagement to Jonathan G. Katz, Secretary, SEC,dated Nov. 25, 1998.

212 Under Rule 301(b)(3), non-market makerbroker-dealer orders entered into alternative tradingsystems must also be displayed. 17 CFR242.302(b)(3).

have already decided to display to thelarge number of other alternative tradingsystem subscribers. Institutions willremain free to use a reserve feature, ifan alternative trading system has one, tonot display full size of their orders toother alternative trading systemsubscribers. That non-display of totalorder size will also apply if that orderis displayed in the public quote.

Other commenters generallyexpressed concerns similar to thoseexpressed by Instinet, emphasizingconcerns about best execution forinstitutional orders, and expressingconcern about increased marketvolatility.207 The Commission believesthat display of institutional orders in thepublic quote stream will not harm bestexecution—if anything—best executionwill be enhanced as all marketparticipants will have an opportunity toexecute against these orders. TheCommission also believes that theexperience with display of marketmaker orders under the Order HandlingRules suggests that display ofinstitutional orders will not lead toincreased market volatility. Many of thelargest market participants already haveaccess to alternative trading systeminstitutional orders; therefore, theirdisplay in the public quote streamshould not necessarily lead to increasedmarket volatility. It will, however, allowthose market participants who do nothave access to these alternative tradingsystems to have the opportunity toexecute against these orders.

Some of the letters the Commissionhas received since the beginning ofNovember also express a concern that ifinstitutional orders were publiclydisplayed, institutions would lose theiranonymity.208 The Commission did not

propose, nor is it adopting, anyrequirement that would jeopardize aninstitution’s anonymity. Similar to theway in which ECNs currently displayorders in the public quote, alternativetrading systems would display their bestpriced orders in the public quote, butwould not indicate which of theirsubscribers had entered the order.

In addition, a number of institutionalcommenters suggested if Nasdaq hadimplemented its proposed limit orderfile, they would not oppose arequirement that alternative tradingsystems publicly display institutionalorders, if those orders represent the bestpriced order in the alternative tradingsystem they use.209 Unfortunately, noneof these commenters explained whythey would be willing to publiclydisplay their orders through a Nasdaqsponsored central limit order file, butnot publicly display orders they havechosen to display to other alternativetrading system subscribers.

Finally, one commenter expressedconcern that the order display rulewould mean that retail investors wouldincreasingly observe trades taking placebelow the bid and above the ask, andwould be frustrated by their lack ofaccess to these trades.210 Becausecertain institutions’ orders will now bedisplayed in the public quote, however,retail investors will have access to them.The lack of access retail investorscurrently have to alternative tradingsystems is one of the reasons theCommission believes that the display ofinstitutional orders in the public quotestream is particularly important. Inaddition, this commenter stated thatrequiring public display of institutionalorders would tilt the playing field infavor of dealers who do not have todisplay institutional orders.211 Underthe Order Handling Rules, however

market makers are required to displayall customer limit orders that improvetheir quote.

For these reasons, the Commissionagrees with those commenters whobelieve that institutional orders that aredisplayed to subscribers of analternative trading system should beintegrated into the public quotationsystem if they represent the top of thebook in the alternative tradingsystem.212 The Commission believesthat any market impact that results fromsuch display will be vitiated by theretention of the reserve feature, asdiscussed above. The Commission notesthat such institutional orders arecurrently displayed to the subscribers ofalternative trading systems, who maynumber in the thousands. Thesesubscribers are often the market makersand other active traders in the security.As a result, prices displayed only onalternative trading systems areimmediately known to key marketplayers who can adjust their trading totake advantage of their informationadvantage. Moreover, the Commissionbelieves that these orders will provideenhanced transparency and liquiditywhen integrated into the publicquotation stream, and will furthercurtail the development of a two-tieredmarket.

Nonetheless, the Commission isconcerned about commenters’statements that institutions may react tothe transparency requirement byshipping more orders upstairs oroverseas. The Commission intends toclosely monitor the impact of thisrequirement, and will modify it if harmappears to result.

(iii) Access to Publicly Displayed Orders

(A) Application of Access RequirementsUnder Regulation ATS

The Commission believes that inaddition to the display of betteralternative trading system prices in thepublic quotation system, the availabilityof such trading interest to publicinvestors is an essential element of thenational market system. Therefore, theCommission proposed that alternativetrading systems afford all non-subscriber broker-dealers equivalentaccess to the alternative trading systemorders displayed in the public quote,similar to the manner in which ECNscurrently comply with the ECN Display


213 Rule 11Ac1–1(c)(5)(ii), 17 CFR 240.11Ac1–1(c)(5)(ii) (‘‘Quote Rule’’). See also Order HandlingRules Adopting Release, supra note 177.

214 See infra note 218 and accompanying text.215 Rule 301(b)(5), 17 CFR 242.301(b)(5).216 See supra notes 192–193 and accompanying

text.217 The Commission emphasizes that, as with the

transparency phase-in, alternative trading systemsmay voluntarily provide access to non-subscriberson or before April 21, 1999 in all securities coveredby the rule.

218 See ICI Letter at 3; IBEX Letter at 9–10; AshtonLetter at 6; American Century Letter at 2; OptiMarkLetter at 4.

219 Instinet Letter at 10.220 See supra notes 205–212 and accompanying

text.

221 Instinet Letter at 16–17.222 American Century Letter at 2.223 See Proposing Release, supra note 3, at n. 108.

Alternative under the Quote Rule.213

The Commission agrees with thosecommenters who stressed theimportance of equivalent access for non-participants and who stated that simplyrequiring alternative trading systems todisplay prices in the public quotationsystem does not go far enough tofacilitate the best execution of customerorders without a mechanism to accessorders at those prices.214 Accordingly,the Commission is adopting therequirement as proposed.215

Specifically, with respect to anysecurity in which an alternative tradingsystem is required to publicly displayits best priced orders because it has fivepercent or more of all trading in thatsecurity, such alternative trading systemmust provide for members of the SROwith which it is linked the ability toeffect a transaction with those orders.As discussed above, the Commission isphasing in the public displayrequirement.216 In addition, alternativetrading systems are not required toprovide access to a security until thepublic display requirement is effectivefor that security.217

The Commission believes that non-subscribing broker-dealers should beable to execute against those alternativetrading system orders that are publiclydisplayed to the same extent as if thatprice had been reflected in the publicquote by a national securities exchangeor national securities association. Thus,an alternative trading system shouldrespond to orders entered by non-participants no slower than it respondsto orders entered directly bysubscribers. The Commission believesthat, under current NASD rules, anyalternative trading system that allowsnon-subscribing broker-dealers toexecute against publicly displayedalternative trading system orders in thesame manner as ECNs linked to theNasdaq market currently do wouldcomply with this requirement. TheNASD does not currently require ECNsto automatically execute orders sent tothe ECN through the NASD’s SelectNetlinkage with the ECN. Any SRO towhich alternative trading systems maybe linked, may determine that it isnecessary for the fair and orderlyoperation of its market to require that

publicly displayed alternative tradingsystem orders be subject to automaticexecution. Any such proposed rulechange, of course, would have to befiled with the Commission by the SRO,published for comment, and approvedby the Commission. The Commissionwould not approve any such SRO ruleunless it finds that such rule isconsistent with the Exchange Act.

(B) Response to CommentsThe Commission asked for comment

on whether alternative trading systemsshould be required to provide non-subscribers with equivalent access todisplayed orders. Several commentersresponded to this issue. Most of thesecommenters stated that non-subscribersshould be given equivalent access.218

Only one commenter cautioned againstgranting such access. This commenterargued that alternative trading systemsand traditional broker-dealers engage inthe same business and, therefore, itwould impede innovation as well as beunfair to require fair access to tradingopportunities on alternative tradingsystems when the Commission is notproposing to require such access tomore traditional broker-dealers.219 TheCommission does not believe thatalternative trading systems andtraditional broker-dealers engage in thesame business.220 As discussed above,the Commission believes that the publicdisplay of orders on alternative tradingsystems that are currently displayedonly to the subscribers of thosealternative trading systems will improvethe public securities markets. Without amechanism to access these orders, anypublic display requirement isinsufficient. Accordingly, theCommission is adopting the fair accessrequirement.

In the Proposing Release, theCommission also stated that it believesthat for an alternative trading system tocomply with this equivalent executionaccess requirement, the publiclydisplayed alternative trading systemorders would need to be subject toautomatic execution through smallorder execution systems operated by theSRO to which the alternative tradingsystem is linked. One commenterstrongly urged the Commission toeliminate the automatic executionaccess requirements from its proposal.This commenter was opposed to such alinkage, because it believed it wouldeffectively eliminate pure agency

brokers from markets in coveredsecurities, because brokers would berequired to commit capital if automaticexecution resulted in multipleexecutions against client orders. Thiscommenter also noted that theCommission’s Order Handling Rules donot require automatic execution, butrequire only that response times fornon-subscriber trade requests are noslower than response times forsubscribers, and believed this to be amore balanced approach to executionaccess issues. 221 Similarly, AmericanCentury, while supporting equivalentaccess to non-subscribers, stated thatautomatic execution accessrequirements were risky as well,because of the possibility of doubleexecution.222 The Commission does notexpect—by operation of its rules alone—that alternative trading systems will besubject to automatic execution throughSROs’ small order execution systems.Nevertheless, the Commission believesthat an SRO to which an alternativetrading system is linked should be ableto establish rules regarding how thatalternative trading system is integratedinto its market. The Commission notesthat any change to SRO rules regardingautomatic execution would have to beapproved by the Commission afternotice and the opportunity for thepublic to comment, and subject toCommission review for competitivefairness and consistency with theExchange Act.

In addition, the Commission asked ifthere was a feasible way to allowmarket-wide interaction without linkageto SRO order execution systems, andwhether there was a feasible way togrant equivalent non-subscriber accessto institutions that are not broker-dealers.

(iv) Execution Access Fees

(A) Limitations on Alternative TradingSystem Fees Charged to Non-Subscribers

In the Proposing Release, theCommission stated that an alternativetrading system’s fee schedules shouldnot be used to circumvent the ability ofnon-participants to access a system’spublicly displayed orders.223 Becausereasonable fees are a component ofequal access, the rules the Commissionis adopting today prohibit an alternativetrading system from setting fees that areinconsistent with the principle ofequivalent access to the alternativetrading system quotes by members ofthe SRO to which the alternative trading


224 Rule 301(b)(4), 17 CFR 242.301(b)(4).225 See Order Handling Rules Adopting Release,

supra note 177, at n.272.

226 See, e.g., NASD Rule 4623. SecuritiesExchange Act Release Nos. 38156 (Jan. 10, 1997),62 FR 2415 (Jan. 16, 1997); 38008 (Dec. 2, 1996),61 FR 64550 (Dec. 5, 1996).

227 See ICI Letter at 3; Instinet Letter at 17–18;NASD Letter at 12; American Century Letter at 2;OptiMark Letter at 5. See also IBEX Letter at 11(opposing allowing SROs to dictate a fee schedulefor alternative trading systems, in which feescharged non-subscribers are lower than thosecharged subscribers), Ashton Letter at 6, n.7(opposed to the idea that non-subscribers be linkedthrough an SRO execution system only).

228 See NYSE Letter at 7; CHX Letter at 8–10.229 SIA Letter at 17 (stating that fees imposed by

alternative trading systems raised a number ofprocedural, structural and policy issues, andrecommending that the Commission make these thesubject of a separate release).

230 NASD Letter at 12. See also ICI Letter at 3(recommending that alternative trading systems berequired to comply with any SRO rules limitingfees).

231 See Order Handling Rules Adopting Release,supra note 177, at nn.347–65 and accompanyingtext; Division of Market Regulation, Division ofMarket Regulation, Market 2000: An Examination ofCurrent Equity Market Developments App V (1994)(‘‘Market 2000 Study’’).

232 While SRO proposed rule changes relating tofees imposed by the SRO are eligible to becomeeffective upon filing under section 19(b)(3)(A)(ii) of

Continued

system is linked. The rules also requirean alternative trading system to complywith the rules or standards governingfees established by the nationalsecurities exchange or nationalsecurities association through whichnon-subscribers have access.224

The Commission believes that feescharged by an alternative trading systemwould be inconsistent with equivalentaccess if they have the effect of creatingbarriers to access for non-subscribers.As the Commission stated in adoptingthe Order Handling Rules, any ECN feesshould be similar to thecommunications or systems chargesimposed by various markets.225 Inaddition, the Commission believes thatthe national securities exchange ornational securities association to whichthe alternative trading system providesthe prices and sizes of its best pricedorders should have further authority toassure that fees charged by alternativetrading systems to non-subscribers aredisclosed or otherwise consistent withfees typically charged by the membersof the exchange or association for accessto displayed orders. There are a numberof ways the exchange or associationcould address the issue of fees chargedby alternative trading systems. Forexample, subject to Commission reviewand approval, an exchange orassociation could establish a standardfor what constitutes a fair andreasonable fee for non-subscriber accessto an alternative trading system,consistent with the effective operationof the self regulatory organization’smarket and the Commission’sequivalent access requirement. Theexchange or association may alsorequire alternative trading system fees tobe charged in a manner consistent withthe exchange’s or association’s market,such as requiring the fee to beincorporated in the displayed quote.

At such time as quotations in thenational market system are reflected indecimals rather than in fractions, theCommission will reconsider the rule’slimitation on alternative trading systemscharging fees only as permitted by thenational securities exchange or nationalsecurities association to which they arelinked. At that time, the Commissionwill also consider whether alternativetrading systems should be permitted orrequired to reflect any fee charged intheir quotations.

Any rules the exchange or associationdevelops will of course need to beconsistent with the goals of promotingcompetition and protecting investors.

The Commission encourages SROs thataccept alternative trading system quotesto work with alternative trading systemsto develop uniform standards regardingdisplay and execution access by SROmembers to alternative trading systemslinked to the SRO.226 In addition, tofoster equivalent access to alternativetrading systems for exchange-listedsecurities, the Commission expectsIntermarket Trading System (‘‘ITS’’)participants to modify ITS Planrequirements where necessary toaccommodate alternative trading systemparticipation in the markets of ITSparticipants, and access to thosealternative trading systems through ITS.If the SROs and ITS participants cannotcome to terms with affected alternativetrading systems within a reasonabletime, the Commission will considerexercising its authority to mandate thenecessary linkages.

(B) Response to CommentsThe Commission requested comment

on the fees that alternative tradingsystems should be permitted to chargenon-subscribers under the proposedrules. In addition, the Commissionrequested comment on whether therewere alternatives for assuring fairexecution access for non-subscribersother than limiting fees, or another testfor determining whether non-subscriberfees assure equal access.

Ten comment letters addressed theissue of fees charged by alternativetrading systems for access by non-subscribers. Of these, seven weregenerally in favor of permittingalternative trading systems to chargesome fee to non-subscribers,227 twowere opposed,228 and one felt the issueneeded to be addressed in a separaterelease by the Commission.229

Most of the commenters who were infavor of allowing fees stated that feesshould be ‘‘reasonable,’’ or should notexceed the fees typically charged tosubscriber broker-dealers. The NASD,while not opposing such fees, stated

that the Commission should reconsiderthe benchmark for an alternative tradingsystem’s fees, because it believed thatfor many alternative trading systems,non-subscriber orders were of primaryimportance. Because of this, the NASDstated that any fees should be set at thelow end of the threshold, rather than atthe level that a ‘‘substantial proportion’’of an alternative trading system’sbroker-dealer customers were paying.The NASD supported permitting SROsto regulate fees, so that such issuescould be discussed at the SRO level.The NASD also recommended that theCommission discuss ‘‘the practicalissues related to billing disputes andrefusals to trade,’’ because billingdisputes have led to locked and crossedmarkets.230 Finally, the NASD asked theCommission to address the bestexecution obligations of marketparticipants when a fee is not includedin the publicly displayed price of anorder. A broker-dealer’s duty of bestexecution requires it to seek the mostfavorable terms reasonably availableunder the circumstances for acustomer’s transaction. While price isthe predominant element of bestexecution, the traditional non-pricefactors of executions should also beconsidered.231

Instinet commented that market forcesshould determine the appropriate feesthat broker-dealers can charge for theirservices. Consequently, Instinetopposed any proposal to limit (oreliminate entirely) access fees chargedby a broker-dealer subject to RegulationATS if the rules of the nationalsecurities exchange or association towhich the broker-dealer is linked limits(or prohibits) such fees. TheCommission will, of course, review anyproposed SRO rules relating to accessfees. To be approved by theCommission, any such rules must benecessary to maintain consistencywithin the SRO’s market, as well asbeing designed to promote just andequitable principles of trade, to promotefair competition, to facilitatetransactions in securities, and, ingeneral, to protect investors and thepublic interest.232 Instinet also stated,


the Exchange Act, and Rule 19b–4(e)(2) of theExchange Act, the Commission continues to requireSROs to file proposed rule changes regarding feesapplicable to non-members or non-participantsunder section 19(b)(2) for full notice and comment.See Securities Exchange Act Release No. 35123(Dec. 20, 1994), 59 FR 66692 (Dec. 28, 1994). Thus,a proposed SRO rule relating to fees that alternativetrading systems charge would not be eligible tobecome effective upon filing.

233 Instinet Letter at 17–18 (also stating that theSRO to which an alternative trading systembelonged should not be authorized to set fees).

234 American Century Letter at 2 (also agreeingthat decimalization will provide a more validframework for this pricing structure). See also ICILetter at 3, n.8 (stating that market makers shouldbe able to assess liquidity fees when their quotesare ‘‘hit’’).

235 OptiMark Letter at 4–5.236 NYSE Letter at 7 (stating that such fees could

make it impossible for market participants todetermine the true cost of executing orders, butindicating that if fees were included in thedisseminated quotation that would be acceptable);CHX Letter at 8–10 (alternatively, CHX suggestedthe Commission allow firms to ignore alternativetrading system quotes at the NBBO if the next priceavailable after payment of the access fee is worsethan the next best available execution). But seeIBEX Letter at 11 (opposing including fees in thepublic quote).

237 See supra note 213.238 See Ashton Letter at 6 (suggesting that the

Commission consider amending the Quote Rule torequire all exchanges, over-the-counter dealers, andalternative trading systems to disseminate to thepublic quote the actual size behind the best bid andoffer quotations). See also IBEX Letter at 11.

239 Rule 11Ac1–1(c)(5)(ii)(A) and (B), 17 CFR11Ac1–1(c)(5)(ii)(A) and (B).

240 See supra notes 177–183 and accompanyingtext.

241 Sections 6(b)(2) and 6(c) of the Exchange Act,15 U.S.C. 78f(b)(2) and (c); section 15A(b)(8) of theExchange Act, 15 U.S.C. 78o–3(b)(8).

242 ‘‘Restraints on membership cannot be justifiedas achieving a valid regulatory purpose and,therefore, constitute an unnecessary burden oncompetition and an impediment to the development

of a national market system.’’ H.R. Rep. No. 123,94th Cong., 1st Sess. 53 (1975).

243 See supra Section IV.A.2.c.(ii).244 Rule 301(b)(5), 17 CFR 242.301(b)(5).

Alternative trading systems that derive their prices

however, that it would urge theCommission to ensure that all publicexecution access fee requirements werehandled in such a way that all ordersintegrated into the public quote streamwere treated consistently, and so that allbroker-dealers were able to setappropriate fees for the services theyperformed, subject to SRO rules.233

American Century stated that allmarket participants who posted bidsand offers, not just alternative tradingsystems, should be permitted to chargefees. American Century recommendedthat participants who provide liquiditybe permitted to charge a fee for thatliquidity, and that those who tookliquidity should pay fees.234 OptiMarkstated that the Commission shouldconsider what economic incentive itwould be creating by permittingalternative trading systems that registeras broker-dealers to charge fees, but notpermitting those that register asexchanges to do so.235

The Commission also requestedcomment on whether fees should beincluded in the price of an order quotedto the public, particularly once ordersare quoted in decimals. In this regard,the NYSE and the Chicago StockExchange (‘‘CHX’’) stated that fees madeit difficult to determine the true cost ofexecuting an order and indicated thatthis would change if fees could beincluded in the quote.236 As discussedabove, when quotations in the nationalmarket system are reflected in decimalsrather than fractions, the Commissionwill reconsider whether alternativetrading systems should reflect any feescharged in their quote, and if so,

whether they should be subject to SROrequirements.

(v) Amendment to Rule 11Ac1–1 Underthe Exchange Act

The Commission also proposed anamendment to Rule 11Ac1–1 under theExchange Act.237 The amendmentwould expand the ECN DisplayAlternative to allow alternative tradingsystems that display orders and provideequal execution access to those ordersunder Rule 301(b)(3) of Regulation ATSto fulfill market makers’ and specialists’obligations under the Quote Rule. Onlytwo comment letters addressed theproposed amendment to the Quote Rule,both of which supported it.238

The Commission is adopting theamendment to the Quote Rule asproposed.239 The Quote Rule currentlyrequires all market makers andspecialists to make publicly availableany superior prices that it privatelyoffers through ECNs. The ECN DisplayAlternative in the Quote Rule permitsan ECN to fulfill these obligations onbehalf of market makers and specialistsusing its system by submitting theECN’s best market maker or specialistpriced quotation to an SRO for inclusioninto the public quotation.240 Today’samendment to the Quote Rule isintended to expand the ECN DisplayAlternative to allow alternative tradingsystems that display orders and provideequal execution access to those ordersunder Rule 301(b)(3) of proposedRegulation ATS to fulfill market makers’and specialists’ obligations under theQuote Rule.

d. Fair Access

(i) Importance of Fair Access

The Exchange Act requires registeredexchanges and national securitiesassociations to consider the publicinterest in administering their marketsand to establish rules designed to admitmembers fairly.241 These requirementsare intended to ensure that markets treatinvestors and other market participantsfairly.242 Alternative trading systems

that choose to register as exchanges willbe subject to these requirements. Underthe current regulatory approach,however, there is no mechanism toprevent unfair denials or limitations ofaccess by alternative trading systems orregulatory oversight of such denials orlimitations of access. Access toalternative trading systems may not becritical when market participants areable to substitute the services of onealternative trading system with those ofanother. However, when an alternativetrading system has a significantly largepercentage of the volume of trading,unfairly discriminatory actions hurtinvestors lacking access to the system.

Fair treatment by alternative tradingsystems of potential and currentsubscribers is particularly importantwhen an alternative trading systemcaptures a large percentage of tradingvolume in a security, because viablealternatives to trading on such a systemare limited. Although the Commission isadopting rules to require alternativetrading systems with significant tradingvolume to publicly display their bestbid and offer and provide equal accessto those orders,243 direct participationin alternative trading systems offersbenefits in addition to execution againstthe best bid and offer. For example,participants can enter limit orders intothe system, rather than just executeagainst existing orders on a fill-or-killbasis. Participants in an alternativetrading system can view all orders, notjust the best bid or offer, which providesimportant information about the depthof interest in a particular security.Participants also have access to uniquefeatures of alternative trading systems,such as ‘‘negotiation’’ features, wherebyone participant can send orders toanother participant proposing specificterms to a trade, without eitherparticipant revealing its identity. Somealternative trading systems also allowparticipants to enter ‘‘reserve’’ orderswhich hide the full size of an order fromview. Because of these advantages toparticipants in an alternative tradingsystem, access to the best bid and offerthrough an SRO is an incompletesubstitute. Therefore, the rules theCommission is adopting today requiremost alternative trading systems that areregistered as broker-dealers and thathave a significant percentage of overalltrading volume in a particular securityto comply with fair access standards, asdescribed in more detail below.244


for securities from prices for those same securitieson another market are not subject to thisrequirement.

245 The Commission notes that this twentypercent volume threshold is based on currentmarket conditions. If there is a change in thesemarket conditions, or if the Commission believesthat alternative trading systems with less thantwenty percent of the trading volume are engagingin inappropriate exclusionary practices or inanticompetitive conduct, the Commission mayrevisit these fair access thresholds. The Commissionintends to monitor the impact and effect of thesefair access rules, as well as the practices ofalternative trading systems, and will considerchanging these rules if necessary to preventanticompetitive behavior and ensure that qualifiedinvestors have access to significant sources ofliquidity in the securities markets.

246 The term ‘‘equity security’’ is defined insection 3(a)(11) of the Exchange Act, 15 U.S.C.78c(a)(11) and Rule 3a1–1, 17 CFR 240.3a1–1.Options and limited partnerships are includedwithin the definition of an equity security.

247 See supra Section IV.A.1.d.248 See supra note 146 (discussing the April 1,

2000 effective date).249 Rule 301(b)(5)(iii), 17 CFR 242.301(b)(5)(iii).

250 Several commenters agreed with theCommission that an alternative trading systemshould be required to establish standards forgranting access to trading in its system. See IBEXLetter at 12; Ashton Letter at 6; SIA Letter at 4, 14.

251 Rule 303(a)(1)(iii), 17 CFR 242.303(a)(1)(iii).The Commission expects an alternative tradingsystem to maintain a record of its standards at eachpoint in time. If the alternative trading systemamends or modifies its access standards, the recordskept should reflect historic standards, as well ascurrent standards.

252 Moreover, if an alternative trading systemrequires subscribers to open an account withanother broker-dealer with which the alternativetrading system has a clearing arrangement, thealternative trading system is responsible forensuring that the clearing broker-dealer does notunfairly deny access to any person. Thus, thealternative trading system—as part of its agreementwith the clearing firm—must ensure that theclearing firm establishes standards for customersopening an account and that notices are sent to anyprospective customer denied an account.

253 Rule 301(b)(5)(ii), 17 CFR 242.301(b)(5)(ii).254 Rule 301(b)(5)(ii)(D), 17 CFR

242.301(b)(5)(ii)(D).

(ii) Fair Access RequirementThe Commission is adopting

Exchange Act Rule 301(b)(5) to ensurethat qualified market participants havefair access to the nation’s securitiesmarkets. As the Commission proposed,an alternative trading system registeredas a broker-dealer and subject toRegulation ATS will be required toestablish standards for access to itssystem and apply those standards fairlyto all prospective subscribers, if thealternative trading system, during fourof the preceding six months, accountsfor twenty percent or more of thetrading volume.245 This twenty percentvolume threshold will be applied on asecurity-by-security basis for equitysecurities.246 Accordingly, if analternative trading system accounted fortwenty percent or more of the sharevolume in any equity security, it mustcomply with the fair accessrequirements in granting access totrading in that security.

For debt securities, the Commissionproposed that if an alternative tradingsystem accounted for twenty percent ormore of the volume in any category ofdebt security, the alternative tradingsystem would be subject to the fairaccess requirements in granting accessto trading in securities in that category.The Commission solicited comment onthe appropriate categories of debtsecurities. Specifically, the Commissionasked whether categories such asmortgage and asset-backed securities,municipal securities, corporate debtsecurities, foreign corporate debtsecurities, and foreign sovereign debtsecurities would be appropriate. Afterconsidering the comments, theCommission is adopting rules thatrequire alternative trading systems withtwenty percent or more of the volume inmunicipal securities, investment gradecorporate debt securities, and non-

investment grade corporate debtsecurities to meet the fair accessrequirements with respect to thatcategory. The Municipal SecuritiesRulemaking Board’s transactionreporting plan now providesinformation on the aggregate trading inmunicipal securities.247 The fair accessrequirement will be effective foralternative trading systems with twentypercent or more of the volume inmunicipal securities on April 21, 1999.

Because similar information forinvestment grade and non-investmentgrade corporate debt, however, is notcurrently available, the fair accessrequirements in Rule 301(b)(5)(D) and(E) will not be made effective until April1, 2000 with the expectation that furtherinformation will be available at thattime.248 The Commission is deferringaction on the fair access standards foralternative trading systems trading asubstantial portion of the market inforeign corporate debt and foreignsovereign debt until such time asreliable data is available by whichalternative trading systems maydetermine their relative portion of themarket.

The Commission is excluding fromthe fair access requirement thosealternative trading systems that matchcustomer orders for securities with othercustomer orders, at prices for thosesame securities established outside suchsystem.249 Thus, regardless of theirtrading volume, systems that, forexample, match customer orders prior tothe market opening and then executethose orders at the opening price for thesecurities are not required to complywith the fair access requirement. Inaddition, systems that match unpricedorders at the mid-point of the bid andask, or at a value weighted average orprices on another market are not subjectto the fair access requirements. TheCommission, however, would notconsider an alternative trading system tobe excluded from the fair accessrequirements in paragraph (b)(5) of Rule301 if that system priced any securitytraded on that system using pricesestablished outside such system forinstruments other than the particularsecurity being executed. Therefore, asystem would not be excluded if ittraded options or other derivativesbased on prices established on theprimary market for the underlyingsecurity.

Alternative trading systems subject tothis fair access requirement must

comply with the requirements inparagraph (b)(5)(ii) of Rule 302.Specifically, these alternative tradingsystems must establish standards forgranting access to trading on theirsystems,250 and maintain thesestandards in their records.251 Analternative trading system must applythese standards fairly and is prohibitedfrom unreasonably prohibiting orlimiting any person with respect totrading in any equity securities, or incertain categories of debt securities,when that trading exceeds the twentypercent volume threshold. For example,the Commission will consider it a denialof access by an alternative tradingsystem if the alternative trading systemrefuses to open an account for acustomer, thereby denying thatcustomer the use of its tradingfacilities.252 In addition, if an alternativetrading system grants, denies or limitsaccess to trading to any person, thealternative trading system is required tokeep records of each action, includingthe reasons for such action.253 Eachalternative trading system will also berequired to provide a list of all grants,denials or limitations of access to theCommission on Form ATS–R eachquarter. For each grant, denial orlimitation of access, alternative tradingsystems must provide the name of theperson, nature and effective date of thedecision, and any other information thatthe alternative trading system deemsrelevant. For denials or limitations ofaccess, alternative trading systems mustprovide information describing thereasons for the decision.254 Forexample, if an applicant has a relevantdisciplinary history, has insufficientfinancial resources, or refuses to agree toabide by the rules of the alternativetrading system, an alternative trading


255 Rule 301(b)(9), 17 CFR 242.301(b)(9); FormATS–R, 17 CFR 249.638.

256 For example, the Commission has recognizedthat the creditworthiness of a counterparty is alegitimate concern of market participants. See Letterfrom Richard R. Lindsey, Director, Division ofMarket Regulation, SEC, to Richard Grasso,Chairman and Chief Executive Officer, NYSE, datedNov. 22, 1996 at 17. The Commission also requestedcomment on what might be appropriate reasons foran alternative trading system to deny marketparticipants access. Most commenters also statedthat objective standards, such as creditworthiness,would be appropriate, provided that thesestandards were applied in a non-discriminatorymanner. See IBEX Letter at 12 (stating that credit-worthiness would be the most significant standard);ICI Letter at 4 (requesting that the Commissionclarify that the standards for access can take intoaccount factors that are relevant to credit or otherforms of counterparty risk); SIA Letter at 14(recommending that the Commission allowalternative trading systems to limit access to anycategory of its choosing, provided that thestandands are not applied in a discriminatorymanner, and stating that an alternative tradingsystem should be permitted to select its standards,publish them, and apply them as stated in a non-discriminatory manner); TBMA Letter at 26(requesting that the Commission clarify that analternative trading system would still be allowed toset standards describing the customers with whomit wishes to do business, provided its standards areapplied in a non-discriminatory manner). See alsoOptiMark Letter at 4, n.8 (stating that non-subscribers who wished to become subscribersshould not be ‘‘unreasonably denied’’).

257 See, e.g., IBEX Letter at 12 (stating thatreasonable credit or capital requirements or pastbad faith dealings should be the only basis fordenying access); Ashton Letter at 6 (arguing thatalternative trading systems should be required toprovide equivalent access throughnondiscriminatory system fees).

258 See TBMA Letter at 26 (stating that it wouldsupport a fair access requirement for exchanges, butnot for alternative trading systems); ICI Letter at 4(stating that it was not aware of any materialbarriers to entry to the existing ECNs, and so didnot believe that the fair access requirement wasnecessary).

259 OptiMark Letter at 4.260 See TBMA Letter at 22–23 (recommending

that the threshold level be raised to thirty-fivepercent to avoid capturing insignificant marketparticipants, particularly in regard to the bondmarket); SIA Letter at 3–4 (recommending that thethreshold level be raised to forty percent); ICI Letterat 4 (recommending raising the threshold level tofifty percent).

261 See IBEX Letter at 12 (recommending that thethreshold level be lowered to ten percent);American Century Letter at 3.

262 NASD Letter at 12 (stating that twenty percentis an appropriate level).

263 American Century Letter at 3.264 Rule 301(b)(5)(i), 17 CFR 242.301(b)(5)(i).265 IBEX Letter at 13. See also ICI Letter at 4

(stating that the Commission should not provide aright to appeal denial of access, but that complaintsshould be handled as any other complaint againstbroker-dealers were handled: through theappropriate SRO or the Commission).

system should include such reasons inits filing with the Commission. TheCommission intends to enforce the fairaccess rules by reviewing these reportsand investigating any possibleviolations of the rule.255

The fair access requirements theCommission is adopting today are basedon the principle that qualified marketparticipants should have fair access tothe nation’s securities markets.Alternative trading systems remain freeto have reasonable standards for access.Such standards should act to prohibitunreasonably discriminatory denials ofaccess. A denial of access is reasonableif it is based on objective standards. Forexample, an alternative trading systemmay establish minimum capital or creditrequirements for subscribers.256

Similarly, an alternative trading systemmay reasonably deny access to investorsbased on a relevant, unfavorabledisciplinary history. In addition, analternative trading system could allowinstitutional subscribers the option ofrefusing to trade with broker-dealersubscribers, as long as the alternativetrading system grants this option tosubscribers based on objective and fairlyapplied standards. Provided that theseor other standards were appliedconsistently to all subscribers, analternative trading system would beconsidered to be granting and denyingaccess fairly. A denial of access mightbe unreasonable, however, if it werediscriminatorily applied among similar

subscribers or if it were based solely onthe trading strategy of a potentialparticipant.

The proposed rules included a right ofappeal to the Commission of any denialor limitation of access, as well as arequirement that an alternative tradingsystem notify a person denied or limitedaccess of their right of appeal. TheCommission has decided not to adoptthese provisions. The Commission isconcerned that such a right of appealwould prove burdensome to thealternative trading system, the partydenied or limited access, andCommission staff. In addition,commenters generally approved of thegoals of fair access, but were notsupportive of providing a right of appealto the Commission.

(iii) Response to Comments

Commenters who addressed theproposed fair access requirementgenerally agreed with the Commission’sgoal of ensuring that alternative tradingsystems with significant volumeestablish criteria for fairly determiningaccess.257 Two commenters, for variousreasons, did not believe that arequirement ensuring fair access byalternative trading systems wasnecessary.258 Another commenterargued that alternative trading systemsthat do not display to subscribersshould not be required to grant accessto non-subscribers.259

The Commission solicited commenton the level of volume at which fairaccess requirements should be applied.Of those commenters who addressed theCommission’s proposed threshold oftwenty percent, three believed that thelevel should be raised,260 two believedit should be lowered,261 and onebelieved twenty percent was

appropriate.262 One of the commentersthat recommended the Commissionlower the threshold from twenty percentstated that fair access should be ensuredregardless of volume, because volumelevels are subject to variation over time,and because unfair denials of access byeven small systems could make accessto quotes in illiquid securitiesparticularly difficult.263

The Commission agrees with thiscommenter that fair access is animportant element of fair markets.Nevertheless, in balancing the need forfair access with the costs that may beassociated with such a requirement, theCommission believes that a twentypercent threshold strikes the rightbalance. As discussed above, the rulesthe Commission is adopting todayrequire that an alternative tradingsystem subject to Regulation ATScomply with fair access requirements if,during at least four of the preceding sixmonths, the alternative trading systemaccounted for twenty percent or more ofthe average daily share volume in anyequity security or certain categories ofdebt.264

The Commission also requestedcomment on whether persons deniedaccess to an alternative trading systemshould have the right to appeal thisaction to the Commission, what formthe appeal should take, and what theappropriate standard for Commissionreview should be. Five comment lettersdirectly addressed the issue of appeal tothe Commission of denials of access.

One commenter favored a right toappeal a denial of access, but stated thatthe appeal process should begin at theSRO level.265 This commenter statedthat appeal to the Commission shouldoccur only if the SRO fails to resolve thedispute. Another commenter, similarly,stated that it believes denials orlimitations of access should be handledthrough current SRO complaint anddisciplinary procedures, rather thanthrough procedures used to appeal SROdeterminations to the Commission. Thiscommenter stated that it believes formalCommission procedures could blur theallocation of supervisory authority overbroker-dealers and could lead toduplicative or inconsistent reviewproceedings in some cases. Moreover,this commenter was concerned that a


266 Instinet Letter at 19.267 SIA Letter at 14–15. See also TBMA Letter at

26.268 See Proposing Release, supra note 3, at

Section III.A.2.e.269 Securities Exchange Act Release No. 27445

(Nov. 16, 1989), 54 FR 48704 (‘‘ARP I’’); SecuritiesExchange Act Release No. 29185 (May 9, 1991), 56FR 22489 (‘‘ARP II’’). ARP I and ARP II werepublished in response to operational difficultiesexperienced by SRO automated systems during theOctober 1987 market break. These releasespredicted future capacity requirements, emphasizedthe need to maintain accurate trade and quoteinformation, and discussed the degree to whichcomputer automation has become, and is likely toincrease as, an integral part of securities trading.

270 ARP II, supra note 269, set forth guidanceconcerning the nature of these independentreviews.

271 The Commission notes that the United StatesGeneral Accounting Office (‘‘GAO’’) has conductedseveral studies on the subject of computer systemsand their role in the financial markets. Generally,the GAO has recommended that the Commissiontake steps to improve systems capacity, integrity,and security, See GAO, Stronger System Controlsand Oversight Needed to Prevent NASD ComputerOutage (Dec. 1994) (regarding Nasdaq systemoutages); GAO, Stock Markets: Information VendorsNeed SEC Oversight to Control Automation Risks(Jan. 1992) (regarding risk assessments of automatedoperations of stock market informationdissemination vendors); GAO, Computer SecurityControls at Five Stock Exchanges NedStrengthening (Aug. 1991) (regarding systemsrelated risks at stock markets); GAO, ActiveOversight of Market Automation by SEC and CFTCNeeded (Apr. 1991) (regarding automation risks ofthe securities and futures markets); GAO, TighterComputer Security Needed (Jan. 1990) (regardingthe Common Message Switch System and theIntermarket Trading System operated by theSecurities Industry Automation Corporation and theNasdaq system operated by the NASD).

272 ARP I, supra note 269, 54 FR at 48705; ARPII, supra note 269, 56 FR at 22490.

273 See ARP I, supra note 269, 54 FR at 48706,at n.17; ARP II, supra note 269, 56 FR at 22493, atn.15.

274 With regards to system capacity, integrity, andsecurity standards, the Commission notes thatduring the past year, Instinet, Island, Bloomberg,and Archipelago (operated by Terra Nova) have allexperienced system outages due to problems withtheir automated systems. On a number of occasions,ECNs have had to stop disseminating market makerquotations in order to keep from closing altogether,including during the market decline of October1997 when one significant ECN withdrew its quotesfrom Nasdaq because of lack of capacity. Similarly,a major interdealer broker in non-exempt securitiesexperienced serious capacity problems inprocessing the large number of transactions inOctober 1997 and had to close down temporarily.As a result, the Commission believes that thevolume thresholds discussed above are necessary toensure that trading systems have developed systemscapacity, integrity, and security standards that areadequate to prevent such system outages.

275 Rule 301(b)(6) applies to the same categoriesof debt securities as Rule 301(b)(5), discussed supranote 248 and accompanying text. Specifically, thecategories are investment grade corporate debtsecurities, non-investment grade corporate debtsecurities, and municipal securities. 17 CFR242.301(b)(6).

276 See supra Section IV.A.2.d.277 See supra Section IV.A.1.e.278 See supra note 146 (discussing the April 1,

2000 effective date).

right to appeal to the Commission couldlead to the frequent filing of frivolous orvexatious complaints against the broker-dealer, thereby impeding its ability toscreen out potentially unqualifiedcustomers.266 As discussed above, theCommission has decided not to adoptthe proposed right of appeal to theCommission.

One commenter opposed a right toappeal denial of access, on the basis thatthere was no need for it. If, however, theCommission did implement its proposalto provide those denied access with theright to appeal to the Commission, thiscommenter recommended that theCommission ensure that this process didnot become a means to dictate withwhom a proprietary system maycontract and that the allowable relief notbe so expansive as to allow theCommission to alter the alternativetrading system’s published accessstandards.267

e. Capacity, Integrity, and SecurityStandards

As discussed in the ProposingRelease,268 in November 1989 and May1991, the Commission published twopolicy statements regarding the use oftechnology in the securities markets.269

These policy statements established theautomation review program and calledfor the SROs to establish, on a voluntarybasis, comprehensive planning, testing,and assessment programs to determinesystems’ capacity and vulnerability. TheCommission recommended that SROs:(1) establish current and future capacityestimates; (2) conduct capacity stresstests; and (3) obtain annual independentassessments of systems to determinewhether they can performadequately.270 In addition, theCommission staff conducts oversightreviews of the SROs’ systemsoperations. All SROs currentlyparticipate in the Commission’sautomation review program, which hasbeen a significant force in stimulating

the SROs to upgrade their systemstechnology.271

The automation review program wasestablished because of ‘‘the impact thatsystems failures have on publicinvestors, broker-dealer risk exposure,and market efficiency.’’ 272 While thisprogram did not directly apply toalternative trading systems, theCommission noted that all broker-dealers should engage in systems testingand use the policy statement as aguideline.273 Because some alternativetrading systems now account for asignificant share of trading in the U.S.securities markets, failures of theirautomated systems have as much of apotential to disrupt the securitiesmarkets as failures of SROs’ automatedsystems. For this reason, theCommission proposed to requirealternative trading systems withsignificant volume to meet certainsystems capacity, integrity, and securitystandards.274 The proposedrequirements were similar to those

standards SROs currently follow underthe automation review program.

(i) Application of Capacity, Integrity,and Security Standards

The Commission is adoptingExchange Act Rule 301(b)(6) to reducethe likelihood that alternative tradingsystems that play a significant role inour national market system will disruptthe securities markets due to failures oftheir automated systems. This rulerequires alternative trading systemstrading twenty percent or more of thevolume in any equity security or incertain categories of debt securities 275

to comply with standards regarding thecapacity, integrity, and security of theirautomated systems. As for the fairaccess requirements discussed above,the volume thresholds are on a security-by-security basis for equity securities.Accordingly, if any one equity securitytraded on an alternative trading systemaccounts for more than twenty percentof the total share volume in that securityduring four of the preceding six months,the alternative trading system isrequired to meet the capacity, integrity,and security requirements for thatsecurity, although in practice this maycause compliance with the standards forall securities traded in that system. Withrespect to debt securities, an alternativetrading system is required to meet thesystems capacity, integrity, and securitystandards if it trades twenty percent ormore of the volume during four of thepreceding six months in any of thefollowing categories: municipalsecurities, non-investment gradecorporate debt, and investment gradecorporate debt.276

The Municipal Securities RulemakingBoard’s transaction reporting plan nowprovides information on the aggregatetrading in municipal securities.277

Because similar information forinvestment grade and non-investmentgrade corporate debt, however, is notcurrently available, the system capacity,integrity, and security requirements inRule 301(b)(6)(D) and (E) will not bemade effective until April 1, 2000.278

The Commission is deferring action onthe system reliability standards foralternative trading systems trading asubstantial portion of the market inforeign corporate debt and foreign


279 Rule 301(b)(6)(iii), 17 CFR 242.301(b)(6)(iii).280 Rule 301(b)(6)(ii)(A)–(F), 17 CFR

242.301(b)(6)(ii)(A)–(F).

281 Rule 301(b)(6)(ii)(G), 17 CFR242.301(b)(6)(ii)(G).

282 Rule 301(b)(6), 17 CFR 242.301(b)(6).Regulation ATS also requires alternative tradingsystems to preserve documentation relating to theirefforts to meet the requirements of this rule. SeeRule 303(a)(1)(iv), 17 CFR 242.303(a)(iv).

283 See ARP II, supra note 269.284 See Proposing Release, supra note 3, at

Section III.A.2.e.285 See Ashton Letter at 5; NASD Letter at 11;

TBMA Letter at 27 (but only if a system plays somerole in price discovery such as a traditionalexchange does).

286 NASD Letter at 11.287 See TBMA Letter at 22–23; SIA Letter at 13.

288 See TBMA Letter at 22–23.289 SIA Letter at 13.290 Ashton Letter at 5.291 ICI Letter at 4.

sovereign debt until such time asreliable data is available by whichalternative trading systems maydetermine their relative portion of themarket.

As for the fair access requirement, theCommission is excluding from thesystems capacity, integrity, and securityrequirement those alternative tradingsystems that match customer orders forsecurities with other customer orders, atprices for those same securitiesestablished outside such system.279

Thus, regardless of their trading volume,systems that, for example, matchcustomer orders prior to the marketopening and then execute those ordersat the opening price for the securitiesare not required to comply with thesesystems reliability requirements. Inaddition, systems that match unpricedorders at the mid-point of the bid andask, or at a value weighted average orprices on another market are not subjectto the fair access requirements. TheCommission, however, would notconsider an alternative trading system tobe excluded from the requirements inparagraph (b)(6) of Rule 301 if thatsystem priced any security traded onthat system using prices establishedoutside such system for instrumentsother than the particular security beingexecuted. Therefore, a system would notbe excluded if it traded options or otherderivatives based on prices establishedon the primary market for theunderlying security.

An alternative trading system thatmeets these volume thresholds will berequired to: (1) Establish reasonablecurrent and future capacity estimates;(2) conduct periodic capacity stress testsof critical systems to determine suchsystem’s ability to process transactionsin an accurate, timely, and efficientmanner; (3) develop and implementreasonable procedures to monitorsystem development and testingmethodology; (4) review thevulnerability of its systems and datacenter computer operations to internaland external threats, physical hazards,and natural disasters; and (5) establishadequate contingency and disasterrecovery plans. An alternative tradingsystem is required to meet theseproposed standards with respect to allits systems that support order entry,order handling, execution, orderrouting, transaction reporting, and tradecomparison in the particular security.280

In addition, alternative trading systemssubject to this provision are required tonotify the Commission staff of material

systems outages and material systemschanges.281 This information will enableCommission staff to better understandthe operation of the alternative tradingsystem and to identify potentialproblems and trends that may requireattention.

Finally, under Regulation ATS,alternative trading systems that meet thevolume levels set forth above arerequired to perform an annualindependent review of the systems thatsupport order entry, order handling,execution, order routing, transactionreporting and trade comparison.282 Asdiscussed in greater detail in theCommission’s May 1991 PolicyStatement,283 an independent reviewshould be performed by competent,independent audit personnel followingestablished audit procedures andstandards. If internal auditors are usedby an alternative trading system tocomplete the review, these auditorsshould comply with the standards of theInstitute of Internal Auditors and theElectronic Data Processing AuditorsAssociation (‘‘EDPAA’’). If externalauditors are used, they should complywith the standards of the AmericanInstitute of Certified Public Accountants(‘‘AICPA’’) and the EDPAA.

(ii) Response to CommentsIn the Proposing Release,284 the

Commission requested comment on itsproposal to require significantalternative trading systems to satisfysystems capacity, integrity, and securitystandards. While most commenters didnot specifically address this proposedrequirement, those that did commentgenerally supported it.285

The Commission asked whether thetwenty percent volume thresholdproposed was appropriate. In thisregard, the NASD supported the twentypercent proposed volume threshold.286

Two other commenters, however,suggested that the Commission’sproposed threshold was too low.287

Specifically, one of these commentersargued that the Commission shouldraise the volume threshold from twenty

percent to thirty-five percent to avoidincluding debt market participants withno significant role in price discovery.This commenter stated that, given thedecentralized and fungible nature of thedebt markets, an alternative tradingsystem trading debt securities wouldneed twenty percent or more of therelevant market to materially affect themarkets in the manner in which theCommission is concerned.288 Anothercommenter, similarly, suggested thatthese requirements not be imposed untilan alternative trading system had fortypercent of the market in any security. Inaddition, before the capacity, integrity,and security requirements are triggered,this commenter recommended that anysecurity (or category of debt) in whichthe alternative trading system reachedforty percent of aggregate daily volumealso represent twenty percent or more ofthe alternative trading system’s overalltrading activity.289 One commenter,however, argued that the Commission’sproposed threshold was too high, andthat it should instead be applicable toalternative trading systems with onepercent of the consolidated volume in acategory of equity securities, such aslisted or Nasdaq securities.290

In addition, while the ICI stated itsbelief that competitive pressures willgenerally suffice to ensure thatalternative trading systems have thecapacity to execute trades in a timelymanner, the ICI also stated that it wouldnot oppose such requirements as long asthe Commission applied them in aflexible manner and did not dictate howalternative trading systems structuretheir operations.291

The Commission believes thatalternative trading systems that have asignificant role in the marketplaceshould be able to handle reasonablyforeseeable volume surges and beprepared for reasonably anticipatedfuture volume increases. As a result, theCommission continues to believe thatthe volume thresholds above areappropriate. Investors and other marketparticipants increasingly rely onalternative trading systems to buy andsell securities. The ability of thesemarkets to meet the demands of marketparticipants is directly related to thereliability of their automated systems.The Commission realizes thatalternative trading systems havesignificant business incentives to ensurethat their systems have adequatecapacity so that participants’ orders donot experience unnecessary delays. The


292 The Commission is aware of several incidentsinvolving the manipulation of quotations throughalternative trading systems. The participants whoengaged in the manipulation were able to profit asa result. See supra note 5.

293 Rule 301(b)(7), 17 CFR 242.301(b)(7).

294 Rule 301(b)(8), 17 CFR 242.301(b)(8).295 Rule 302(a), 17 CFR 242.302(a).296 Securities Exchange Act Release No. 39729

(Mar. 6, 1998), 63 FR 12559 (Mar. 13, 1998).297 Rule 303(a)(1)(ii), 17 CFR 242.303(a)(1)(ii).298 See supra Section IV.A.2.d.299 Rule 303(a)(2), 17 CFR 242.303(a)(2).

300 Rule 303(b), 17 CFR 242.303(b). Rule 17a–4(f)provides for the maintenance of records onmicrofilm, microfiche, or electronic storage media.The Commission recognizes that alternative tradingsystems may generate much of the information inelectronic form and generally may wish to keeprecords in electronic format. 17 CFR 240.17a–4(f).

301 17 CFR 240.17a–3 and 17 CFR 240.17a–4.302 17 CFR 240.17a–4(i).303 Rule 303(d), 17 CFR 242.303(d).304 See ICI Letter at 4; Ashton Letter p. 5.305 TBMA Letter at 16. TBMA suggested

exempting alternative trading systems that do notexceed fifteen percent of the relevant market fromRegulation ATS and, thus, from the recordkeepingrequirements. TBMA stated that the additionalrecordkeeping requirements would not provide theCommission significant new information beyondwhat is currently included within broker-dealerrecordkeeping requirements. Id.

systems capacity, integrity, and securityrules are intended as a back-up toensure that alternative trading systemsthat have a significant role in the marketmaintain sufficient systems andprocedures to minimize the effects ofpotential systems problems in thesecondary markets.

f. Examination, Inspection, andInvestigations of Subscribers

The Commission proposed that analternative trading system be required tocooperate with the Commission’s or anSRO’s inspection, examination, orinvestigation of the alternative tradingsystem or any of the alternative tradingsystem’s subscribers. Presently, theCommission has the authority to inspectand examine any member of anynational securities exchange or anynational securities association directly.This is because all such members arebroker-dealers. Alternative tradingsystems, however, also could havecertain other subscribers, such asinstitutions or individuals, to which theCommission’s inspection authority doesnot extend. Because alternative tradingsystems could be used by subscribers tomanipulate the market in a security,292

it is imperative that alternative tradingsystems cooperate in all inspections,examinations, and investigations.Although neither the Commission northe SROs has the authority to directlyinspect non-broker-dealer subscribers ofalternative trading systems, any relevanttrading information involving suchsubscribers would be maintained by thealternative trading system under itsrecordkeeping requirements, and wouldbe required to be made available uponrequest to its SRO or the Commission.Under the rules the Commission isadopting today, an alternative tradingsystem’s exemption from exchangeregistration is conditioned on itcooperating with the Commission’s oran SRO’s inspection, examination, orinvestigation of the alternative tradingsystem or any of its subscribers.293

g. Recordkeeping

The Commission proposed thatalternative trading systems be requiredto keep certain records. TheCommission is adopting theserecordkeeping requirements asproposed. As adopted, Regulation ATSrequires alternative trading systems tomake and keep the records necessary to

create a meaningful audit trail.294

Specifically, alternative trading systemsare required to maintain dailysummaries of trading and time-sequenced records of order information,including the date and time the orderwas received, the date, time, and priceat which the order was executed, andthe identity of the parties to thetransaction. In addition, alternativetrading systems are required to maintaina record of subscribers and anyaffiliations between subscribers and thealternative trading system.295 Whilesome of the information that is requiredby the Regulation ATS will also berequired under the NASD’s Order AuditTrail System (‘‘OATS’’),296 OATS is anNASD rule and does not cover allsecurities traded through alternativetrading systems.

These recordkeeping requirementsalso require alternative trading systemsto keep records of all notices providedto subscribers, including noticesaddressing hours of operation, systemmalfunctions, changes to systemprocedures, and instructions pertainingto access to the alternative tradingsystem.297 In addition, alternativetrading systems are required to keepdocuments made (if any) in the courseof complying with the systems capacity,integrity, and security standards in Rule301(b)(6). These documents include allreports to an alternative trading system’ssenior management, and recordsconcerning current and future capacityestimates, the results of any stress testsconducted, procedures used to evaluatethe anticipated impact of new systemswhen integrated with existing systems,and records relating to arrangementsmade with a service bureau to operateany automated systems. These recordswill allow the Commission to examinewhether alternative trading systems arecomplying with the requirements underProposed Rule 301(b)(6). Finally, analternative trading system subject to thefair access requirements discussedabove is required to keep a record of itsaccess standards.298

Regulation ATS requires that theserecords be kept for at least three years,the first two years in an easily accessibleplace. Some records, such aspartnership articles and articles ofincorporation, must be kept for the lifeof the alternative trading system.299

Alternative trading systems are

permitted to keep records in any formbroker-dealers are permitted to keeprecords under Rule 17a–4(f) under theExchange Act.300

The Commission recognizes thatalternative trading systems subject toRegulation ATS are subject to therecordkeeping requirements for broker-dealers under Rules 17a–3 and 17a–4 ofthe Exchange Act,301 which may requirethat some of the same records be madeand kept. Regulation ATS does notrequire an alternative trading system toduplicate trading records maintained inthe course of its normal recordkeepingoperations, provided that the alternativetrading system can sort and retrievesystem records separately upon request.In addition, as broker-dealers arecurrently permitted to do,302 RegulationATS permits an alternative tradingsystem to retain a service bureau,depository, or other recordkeepingservice to maintain required records onbehalf of the alternative trading systemas long as the designated party agrees tomake the records available to theCommission upon request.303

The Commission solicited commenton these recordkeeping requirements. Ingeneral, the comments received on thisprovision were mixed. Two commenterssupported requiring alternative tradingsystems to keep the records necessary tocreate a meaningful audit trail.304 Onthe other hand, one commenterexpressed concern that theCommission’s proposal would imposethe same recordkeeping requirements onboth small and large alternative tradingsystems. Instead, this commenter arguedthat smaller systems should be subjectto none or only minimal regulationgenerally, and that even therecordkeeping requirements may serveas a significant barrier to market entryand innovation.305

The Commission believes that, for themost part, the records it is requiringalternative trading systems to make andkeep are records that alternative trading


306 Ashton Letter at 5. Ashton pointed out that,because SRO-sponsored systems compete directlywith alternative trading systems, SROs should notbe able to gain confidential information through theregulatory reporting process. Id.

307 Rule 301(b)(7), 17 CFR 242.301(b)(7).308 See also Securities Exchange Act Release No.

35124 (Dec. 20, 1994), 59 FR 66702 (Dec. 28, 1994)(addressing similar concerns in the context of Rule17a–23).

309 Instinet Letter at 20–21. Instinet stated that theCommission should work with SROs to establishrecordkeeping requirements that minimizeduplication and inconsistency as well as providingalternative trading systems substantial flexibility instructuring their recordkeeping operations. Id.

310 Rule 301(b)(9), 17 CFR 242.301(b)(9).311 17 CFR 230.144A. Brokers and others who use

alternative trading systems to trade Rule 144Aeligible securities and other types of restrictedsecurities should ensure those systems arestructured to permit the traders’ compliance withtheir obligations under Rule 144A and under theSecurities Act of 1933.


313 See infra Section V. Rule 17a–23 under theExchange Act generally requires U.S. broker-dealersthat sponsor broker-dealer trading systems toprovide a description of their systems to theCommission and report transaction volume andother information on a quarterly basis. This rulealso requires that such broker-dealers keep recordsregarding system activity and to make such recordsavailable to the Commission. 17 CFR 240.17a–23.See also Securities Exchange Act Release No. 35124(Dec. 20, 1994), 59 FR 66702 (Dec. 28, 1994).

314 Rule 301(b)(2)(vii), 17 CFR 242.301(b)(2).

systems would otherwise keep as part oftheir business, and that therefore theserequirements will not place undueburdens upon alternative tradingsystems. In addition, the Commissionbelieves that the highly automatednature of alternative trading systemswill help facilitate the construction andmaintenance of an audit trail. TheCommission also believes that theserecordkeeping requirements arenecessary to permit surveillance andexamination to help assure fair andorderly markets.

One commenter recommended that analternative trading system’s records andreports only be available to analternative trading system’s SRO on aconfidential, need-to-know basis.306

Regulation ATS provides thatalternative trading systems are requiredto permit inspections and examinationsof their records by the Commission orthe SRO of which they are a member.307

The Commission noted in the ProposingRelease that, while potential conflicts ofinterest in overseeing alternative tradingsystems may arise, the Commissionbelieves these conflicts can be managedusing the Commission’s oversightauthority. The Commission alsorecognized that some marketparticipants might be concerned thatSROs could abuse their regulatoryauthority, but noted that theCommission has oversight responsibilityover SROs to prevent such activity. Inthis regard, the Commission expectsSROs to carefully assess, and revisewhere necessary, their internal policiesand procedures for protecting theconfidentiality of sensitive informationobtained in the course of fulfilling theirSRO regulatory responsibilities.308

Finally, one commenter asked that theCommission consider the relationship ofany new recordkeeping requirementswith applicable SRO recordkeepingrules, such as the NASD’s recently-adopted OATS.309 The Commissionnotes that, while some of theinformation required by Regulation ATSwill also be required by SRO rules, suchrules do not have the same scope and

are not designed to meet the same goals.Moreover, SRO rules may not apply toall alternative trading system activities.In addition, the Commission is onlyrequiring that records of certaininformation be made and kept, but isnot dictating in what form those recordsare maintained. This means thatalternative trading systems haveflexibility in how they comply withSRO and Commission rules. Further, ifduplicative rules exist, the samealternative trading system practicesshould serve to satisfy both sets of rules.

h. Reporting and Form ATS–R

The Commission proposed thatalternative trading systems be requiredto periodically report certaininformation about their activities. TheCommission is adopting theserequirements as proposed. RegulationATS, as adopted, requires alternativetrading systems to file with theCommission transaction reports within30 calendar days of the end of eachcalendar quarter on Form ATS–R.310

Specifically, Form ATS–R requiresalternative trading systems to reporttotal volume in terms of number of unitstraded and dollar value for the followingcategories of securities: (1) Listed equitysecurities, (2) Nasdaq NM securities, (3)Nasdaq SmallCap securities, (4) equitysecurities that are eligible for resalepursuant to Rule 144A under theSecurities Act of 1933,311 (5) pennystocks, (6) equity securities not includedin (1)–(5), (7) rights and warrants, (8)listed options, and (9) unlisted options.In addition, alternative trading systemsare required to report the totalsettlement value in U.S. dollars for: (1)Corporate debt securities (separately forinvestment grade and non-investmentgrade), (2) government securities, (3)municipal securities, (4) mortgagerelated securities, and (5) debt securitiesnot included in (1)–(4). Alternativetrading systems are required to file after-hours trading information in listedequity, Nasdaq NM, and Nasdaq SmallCap securities, as well as listed options.This information will permit theCommission to monitor the trading onalternative trading systems. In addition,alternative trading systems subject tothe fair access requirements in Rule301(b)(5), as discussed above,312 must

report quarterly on Form ATS–R thepersons to whom they grant, deny orlimit access to the alternative tradingsystems, as well as the date of theaction, the effective date of the action,and the nature of the denials orlimitations of access.

Because Rule 17a–23 313 will beeliminated, data filed by alternativetrading systems on Form ATS–R willreplace the information currently filedon Form 17A–23 by broker-dealersoperating trading systems. Unlike Part IIof Form 17A–23, Form ATS provides atemplate on which alternative tradingsystems are required to file therequested information with theCommission. This template shouldallow alternative trading systems to filethe required information in a moreuniform format that will be more usefulto the Commission. For example, theCommission anticipates using thisinformation to develop examinationmodules for the inspection of alternativetrading systems. The Commission alsoexpects to use the information to furtherunderstand the effect of alternativetrading systems on the securitiesmarkets.

Another difference between Part II ofForm 17A–23 and Form ATS is thatForm ATS requires alternative tradingsystems to provide information aboutthe volume of particular types ofsecurities that are not listed on anexchange or traded on Nasdaq. Thesenew reporting requirements on FormATS–R will improve the quality of thedata that the Commission has availableto consider the effectiveness of itsregulatory program. Due to the highlyautomated nature of alternative tradingsystem operations and the experienceswith Rule 17a–23, the Commission doesnot anticipate that gathering andsubmitting the data required on FormATS–R will be overly burdensome.Alternative trading systems are alsorequired to make reports on Form ATS–R available to surveillance personnel ofany SRO of which they are a member.314

The Commission solicited commenton the transaction reportingrequirements and Form ATS–R. Inparticular, the Commission solicitedcomment on the frequency and scope oftransaction reporting requirements


315 See ICI Letter at 4 (supporting the proposal torequire reports quarterly); Ashton Letter at 5; IBEXLetter at 5.

316 Ashton Letter at 5.317 See IBEX Letter at 5; American Century Letter

at 6.318 Ashton Letter at 5. Ashton pointed out that,

because SRO-sponsored systems compete directlywith alternative trading systems, SROs should notbe able to gain confidential information through theregulatory reporting process. Id.

319 See supra Section IV.A.2.g.

320 See ICI Letter at 4–5 (stating that it agreed thatthe failure to keep trading information confidentialcreated the potential for abuse); Instinet Letter at 21(requesting that the Commission clarify whether ornot the proposed confidentiality provisions wouldprohibit registered representatives from providingcustomers with information (other than confidentialcustomer information) regarding the trading activityof the alternative trading system); AmericanCentury Letter at 1–2 (stating that agency broker-dealer functions should be separate fromintermediated broker-dealer functions that allow analternative trading system employee to ‘‘work’’ anorder on behalf of customers, and that theseemployees should not have access to the orders ofcustomers who choose to work their orders withoutthe assistance of employees of the alternativetrading system). 321 Rule 301(b)(10), 17 CFR 242.301(b)(10).

proposed in Regulation ATS. Nocommenters responded to theCommission’s request for comments onthe information requested on FormATS–R.

The Commission received nocomments opposing the proposedreporting requirements. Severalcommenters generally supported theCommission’s proposal to requirealternative trading systems to reporttheir trading volume.315 Onecommenter, however, commented thatthe Commission should require monthlyreporting instead of the proposedquarterly reporting requirement.316 TheCommission believes that quarterlyreporting under Regulation ATS, asadopted, will provide sufficientlyfrequent reporting to the Commission.In view of the Commission’s desire tominimize respondent reporting burdens,the Commission believes that morefrequent reporting would not providematerially improved investorprotections. Based on the Commission’sexperience with reporting requirementsunder Rule 17a–23, the Commissionbelieves that a quarterly filingrequirement of Form ATS–R isappropriate.

The Commission also requestedcomment on the appropriateness ofpermitting Form ATS–R to be filedelectronically. Two commenters thoughtthat if the Commission were to acceptfilings electronically it would be fasterand less expensive.317

Finally, one commenterrecommended that an alternativetrading system’s records and reportsonly be available to an alternativetrading system’s SRO on a confidential,need-to-know basis.318 As describedabove with respect to the recordkeepingrequirements,319 the Commissionbelieves that the separation between themarket and regulatory functions of anSRO and the Commission’s oversight ofSROs are sufficient to maintain anappropriate level of confidentiality of,and access to, alternative trading systeminformation. The Commission believesthat SROs need to have access torelevant information in order to carryout their oversight responsibilities. TheCommission expects that SROs willmaintain and enforce appropriate

internal policies and procedures toprotect against misuse of suchinformation.

i. Procedures To Ensure ConfidentialTreatment of Trading Information

The Commission requested commenton proposed Rule 301(b)(10) requiringalternative trading systems to have inplace safeguards and procedures toprotect trading information and toseparate alternative trading systemfunctions from other broker-dealerfunctions, including proprietary andcustomer trading. The Commission didnot propose specific procedures, butencouraged commenters to express theirviews on the requirements, includinghow to prevent the misuse byalternative trading systems ofconfidential customer information. TheCommission received only threecomment letters which directlyaddressed this issue. All supported theCommission’s proposal, although onealso requested clarification on what theconfidentiality provisions covered.320

The rules the Commission is adoptingtoday require alternative tradingsystems to have in place safeguards andprocedures to protect tradinginformation and to separate alternativetrading system functions from otherbroker-dealer functions, includingproprietary and customer trading. TheCommission believes that the sensitivenature of the trading informationsubscribers send to alternative tradingsystems requires such systems to takecertain steps to ensure theconfidentiality of such information. Forexample, unless subscribers consent,registered representatives of alternativetrading systems should not discloseinformation regarding trading activitiesof such subscribers to other subscribersthat could not be ascertained fromviewing the alternative trading system’sscreens directly at the time theinformation is conveyed.

The Commission’s concern regardingconfidentiality grew out of itsinspections of some ECNs, during which

the Commission staff found that some ofthe broker-dealers operating ECNs usedthe same personnel to operate the ECNas they did for more traditional broker-dealer activities, such as handlingcustomer orders that were received bytelephone. These types of situationscreate the potential for misuse of theconfidential trading information in theECN, such as customers’ ordersreceiving preferential treatment, orcustomers receiving materialconfidential information about orders inthe ECN. The rules concerningconfidentiality that the Commission isadopting today are designed toeliminate the potential for abuse of theconfidential trading information thatsubscribers send to alternative tradingsystems. The Commission recognizesthat some alternative trading systemsprovide traditional brokerage services aswell as access to their alternativetrading systems. The proposed rules arenot intended to preclude these services;rather, they are designed to prevent themisuse of private customer informationin the system for the benefit of othercustomers, the alternative tradingsystem operator, or its employees.

Therefore, the Commission isadopting rules which require that: (1)Information, such as the identity ofsubscribers and their orders, beavailable only to those employees of thealternative trading system who operatethe system or are responsible for itscompliance with the proposed rules; (2)the alternative trading system has inplace procedures to ensure that all itsemployees are unable to use anyconfidential information for proprietaryor customer trading, unless thecustomer agrees; and (3) proceduresexist to ensure that employees of thealternative trading system cannot usesuch information for trading in theirown accounts.321

The Commission intends the rules toprevent the disclosure or the use ofinformation about a customer’s tradingorders. Many of the alternative tradingsystems operating today are anonymous;one of the reasons ECNs are popularwith investors is that they permit widedissemination of orders but provideanonymity. The broker-dealersoperating these systems, under the rulesthe Commission is adopting today,cannot disclose any confidentialcustomer information (including theidentity of the subscriber entering anorder) to other customers, or use thatinformation for proprietary or agencytrades.

The Commission expects that existingalternative trading systems will


322 Alternative trading systems that continue to beregulated as broker-dealers would remain subject tooversight by national securities exchanges and theNASD, in their self-regulatory capacities. See supraSection IV.A.2.a.

323 Options Clearing Corporation By-laws, Art.VII, Sections 1 and 4. Registered exchanges that aremembers of the OCC determine such matters aslisting, registration, clearance, issuance andexercise of options contracts. Exchange members ofthe OCC are also able to use registration anddisclosure materials tailored for standardizedoptions.

324 The Commission has the authority to reviewfinal disciplinary sanctions imposed by SROs onmembers or associated persons of members,including sanctions imposed for violations of SROrules. The Commission may only affirm a sanctionimposed by an SRO on one of its members,participants or associated persons of its membersfor a violation an SRO’s rules, if the Commissionfinds that: (1) The member, participant, orassociated person of the member engaged in the actsor practices that the SRO found were engaged in;(2) such acts or practices are in violation of theSRO’s rules; and (3) the SRO’s rules, and theapplication by the SRO of its rules, are consistentwith the purposes of the Exchange Act. Sections

19(d)(2) and 19(e) of the Exchange Act, 15 U.S.C.78s(d)(2) and 78s(e).

325 15 U.S.C. 78f.326 See S. Rep. No. 75, supra note 107.327 Section 6(a) of the Exchange Act, 15 U.S.C.

78f(a).328 17 CFR 240.6a–1.

implement procedures such as these asquickly as possible, if they do notalready have them in place. Theseprocedures should be clear andunambiguous and presented to allemployees, regardless of whether theyhave direct responsibility for theoperation of the alternative tradingsystem. Presently, many broker-dealersemploy various means to ensure thatsensitive information does not flowfrom one division to another. Thesemethods include physical separation,written procedures, separate personnel,and restricted access. The Commissionbelieves that firewalls such as thesecould be used by broker-dealers thatoperate alternative trading systems toensure that sensitive informationregarding the alternative trading systemis contained in the proper unit of thebroker-dealer.

The Commission is not adoptingspecific procedures because it believesthat the broker-dealers who operate thealternative trading systems are in thebest position to know what procedureswould best prevent abuses. Experiencehas demonstrated, however, potentialfor abuse and the Commission regardsthese procedures as important.

B. Registration as a National SecuritiesExchange

Trading systems that fall within Rule3b–16 are only required to comply withRegulation ATS if they wish to beexempt from the definition of‘‘exchange.’’ Such systems may chooseinstead to register as national securitiesexchanges. The Commission expectsthat some trading systems will find thatregistration as a national securitiesexchange provides attractive benefitsthat make this option more suitable totheir business objectives. In particular,registered exchanges enjoy moreautonomy in their daily operations thando broker-dealers that are members ofSROs. Because any trading system thatregisters as an exchange would be anSRO, it would not be subject tooversight by a competing nationalsecurities exchange or nationalsecurities association.322 Similarly, as anational securities exchange, a tradingsystem would be able to establish itsown rules of conduct, trading rules, andfee structures for access. An alternativetrading system registered as a broker-dealer, on the other hand, would haveto comply with the rules of the SRO towhich it belongs, including any rules

regarding fees or the automaticexecution of orders.

In addition, systems that elect toregister as exchanges may benefit fromthe added prestige and investorconfidence associated with status as aregistered exchange. Registeredexchanges are also able to establishlisting standards, which may promoteinvestor confidence in the quality of thesecurities traded on the exchange.Registered exchanges may also becomedirect participants in the nationalmarket system mechanisms, such as theITS, Consolidated Tape Association(‘‘CTA’’), and the ConsolidatedQuotation System (‘‘CQS’’). Directparticipation in these systems mayprovide a higher degree of transparencyand execution opportunities forsubscribers to a trading system. Asdirect participants in the nationalmarket system mechanisms, registeredexchanges are also entitled to share inthe revenues generated by the nationalmarket system systems, such as revenuefrom CTA fees. Moreover, as theCommission noted in the ProposingRelease, only registered exchanges areeligible to be participants of the OptionsClearing Corporation (‘‘OCC’’).323

Consequently, any trading system thatwants to trade standardized optionsissued by the OCC would have toregister as an exchange and become amember of the OCC.

Finally, if a trading system chooses toregister as an exchange, it could allowbroker-dealers that are members ofexchanges with off-board tradingrestrictions to trade certain securities onthe trading system pursuant to unlistedtrading privileges. The Commissionbelieves that if a trading system isregistered and regulated as an exchange,it should be considered to be anexchange, rather than an over-the-counter market, for purposes ofexchange off-board trading.324

As discussed in the ProposingRelease, the Commission views certainobligations of exchanges as fundamentalto fair and efficient operation in themarketplace and critical for theprotection of investors. The Commissiondid not propose any relief from thecurrent obligations of registeredexchanges under the Exchange Act.Nevertheless, the Commission requestedcomment on whether any exemptionsfrom exchange regulatory provisionswould be necessary or appropriate toenable alternative trading systems toregister as exchanges. Commenters,however, generally thought that anytrading system that chooses to registeras an exchange should be subject to thesame requirements as currentlyregistered exchanges and cautioned theCommission against relieving registeredexchanges from any requirementsbecause of their for-profit structure.Consequently, at this time theCommission has determined that thosetrading systems choosing to register asexchanges should satisfy allrequirements that apply to nationalsecurities exchanges under theExchange Act.325

Many, if not all, alternative tradingsystems currently operating areproprietary, rather than not-for-profitentities. The Commission does notbelieve that there is any overridingregulatory reason to require exchangesto be not-for-profit membershiporganizations, and believes thatalternative trading systems may retaintheir proprietary structure even if theychoose to register as exchanges. TheExchange Act does not require nationalsecurities exchanges to be not-for-profitorganizations. As the Commission statedin the Proposing Release, it believes thatCongress clearly intended the 1975Amendments to encourage innovationby exchanges and recognized that futureexchanges may adopt diversestructures.326 The Commission believesthat it is possible for a for-profitexchange to meet the standards set forthin section 6(b) of the Exchange Act.

Any system meeting the definition setforth in Rule 3b–16 may apply forregistration as a national securitiesexchange by filing an application withthe Commission on Form 1.327 TheCommission, in Rule 6a–1, set forth theprocedure for filing such anapplication.328 All Exhibits mustaccompany Form 1, including audited


329 17 CFR 202.3(b)(2). The Commission is notrequired to propose changes to its Rules of Practiceprior to adoption. See 5 U.S.C. 553(b)(3)(A).

330 Section 6(b) of the Exchange Act, 15 U.S.C.78f(b).

331 Section 6(b)(1) of the Exchange Act, 15 U.S.C.78f(b)(1).

332 15 U.S.C. 78c(a)(39). See also 15 U.S.C. 78o(b).

333 See Section 12(d) of the Exchange Act, 15U.S.C. 78l(d); Rule 12d2–2, 17 CFR 240.12d2–2(requiring national securities exchanges to file anapplication with the Commission to strike asecurity from listing and registration).

334 See 15 U.S.C. 78f(b)(9).335 Section 6(b)(5) of the Exchange Act, 15 U.S.C.

78f(b)(5). See also Section 6(b)(8) of the ExchangeAct, 15 U.S.C. 78f(b)(6).

336 The Commission notes that, according to theaudited financial statements for 1997, the NYSEhad total assets of $1,174,887,000 and totalexpenses of $488,811,000; the Amex had total assetsof $195,547,000 and total expenses of $173,742,000;the PCX had total assets of $67,622,000 and totalexpenses of $60,636,000; the CSE had total assets

of $13,124,585 and total expenses of $5,343,403;and the Boston Stock Exchange (‘‘BSE’’) had totalassets of $33,339,961 and total expenses of$16,106,837.


338 15 U.S.C. 78q and 78s. See also 17 CFR240.17d-2; 17 CFR 240.19g2–1.

339 With respect to a common member, section17(d)(1) of the Exchange Act authorizes theCommission, by rule or order, to relieve an SRO ofthe responsibility to receive regulatory reports, toexamine for and enforce compliance withapplicable statutes, rules, and regulations, or toperform other specified regulatory functions. 15U.S.C. 78q(d)(1).

financial statements prepared inaccordance with United StatesGenerally Accepted AccountingPrinciples.

The Commission has adopted anamendment to its rules of practiceregarding the processing of filings.Applications for registration as anational securities exchange, as well asapplications for exemption fromregistration due to the limited volume oftransactions, will not be consideredfiled until all necessary information,including financial statements and otherrequired documents, have beenfurnished in the proper form.329

Further, under section 6(b) of theExchange Act, the Commission mustmake certain determinations beforeregistering an exchange.330 In reviewingapplications for registration as anational securities exchange, theCommission will not register anexchange unless it is satisfied that theexchange meets the requirementsdiscussed below.

1. Self-Regulatory ResponsibilitiesAs a prerequisite for the

Commission’s approval of an exchange’sapplication for registration, theexchange must be organized and havethe capacity to carry out the purposes ofthe Exchange Act. Specifically, anexchange must be able to enforcecompliance by its members, and personsassociated with its members, with thefederal securities laws and the rules ofthe exchange.331 The Commissionbelieves that the self-regulatory role ofregistered exchanges is fundamental tothe enforcement of the federal securitieslaws. Congress has delegated to theSROs certain quasi-governmentalfunctions and responsibilities, and hascharged the Commission withoverseeing the SROs to make sure theyhave the ability and resources to complywith those obligations. In this regard,the Commission believes that personsresponsible for operating an SRO shouldnot have a disciplinary history, and willseriously question the ability of anexchange to carry out its SRO functionsif the founders or prospective managersof an applicant for registration as anational securities exchange are subjectto a statutory disqualification, as thatterm is defined in section 3(a)(39) of theExchange Act.332 The Commissionbelieves that persons who, for example,

have willfully violated the federalsecurities laws or have been convictedwithin the past ten years of a felony ormisdemeanor involvingmisappropriation of funds, or securitiesfraud, larceny, theft, robbery, extortion,or other related crimes would beinappropriate selections to fill the roleof director, officer, or manager of anexchange.

An alternative trading system wishingto register as a national securitiesexchange may choose to set listingstandards for its system. If an applicantchooses to set listing standards, it musthave written listing and maintenancestandards, as well as an adequateregulatory staff to apply thosestandards.333 The applicant must alsohave rules restricting the listing ofsecurities issued in a limitedpartnership rollup transaction.334 Theability to carry out these functions mustbe adequately represented on anexchange’s application for registrationbefore the Commission will register theexchange.

An applicant for registration as anexchange must also have rules designedto prevent fraudulent and manipulativeacts and practices, to promote just andequitable principles of trade, and torefrain from imposing any unnecessaryor inappropriate burdens oncompetition, among other things.335 Forexample, an exchange must maintainprocedures to surveil for securities lawviolations, such as insider trading andmanipulation on the exchange. TheCommission understands thatsurveillance procedures can vary andwill depend on the nature of, and typesof securities traded, on a particularexchange. Thus, while the Commissionwill require all applicants forregistration as an exchange to haveadequate measures in place, they willnot have to use the same procedures.The Commission will also require anapplicant for registration as a nationalsecurities exchange to show that it hassufficient resources, including both staffexpertise and capital, to support itssurveillance function.336 Consistent

with these requirements, an applicantshould, at a minimum, demonstrate thatthe officers charged with day-to-daymanagement of the exchange arefamiliar with the federal securities lawsand the role of a registered exchange asan SRO. In addition, an applicant forregistration as a national securitiesexchange must demonstrate that it hasthe capability to maintain an audit trailof the transactions on its system.Furthermore, an applicant mustestablish rules providing for theallocation of fees for the use of itssystem.337

An exchange must also have generalconflict of interest rules regarding, forexample, trading on the exchange by itsemployees, owners, or exchangeofficials. Moreover, an exchange musthave rules that ensure that no member’sorder is unfairly disadvantaged. Forexample, if an exchange has priorityrules, those rules need to treat allexchange members fairly. Finally, anexchange must have rules establishingprocedures for the clearance andsettlement of trades effected on theexchange. Alternatively, an exchangemust have rules requiring members tomake their own arrangements forclearance and settlement of trades.

While exchanges are required toenforce compliance by their members,and persons associated with theirmembers, with applicable laws andrules, the Commission has used itsauthority under sections 17 and 19 ofthe Exchange Act to allocate toparticular SROs oversight of broker-dealers that are members of more thanone SRO (‘‘common members’’).338 Forexample, in order to avoid unnecessaryregulatory duplication, the Commissionappoints a single SRO as the designatedexamining authority (‘‘DEA’’) toexamine common members forcompliance with the financialresponsibility requirements.339 When anSRO has been named as a commonmember’s DEA, all other SROs to whichthe common member belongs arerelieved of the responsibility to examinethe firm for compliance with applicable


340 See Securities Exchange Act Release No.23192 (May 1, 1986) 51 FR 17426 (May 12, 1986).Moreover, section 108 of NSMIA, supra note 7,adds a provision to section 17 of the Exchange Actthat calls for improving coordination of supervisionof members and elimination of any unnecessary andburdensome duplication in the examinationprocess.

341 For example, the Commission has approved aregulatory plan filed by the Amex, CBOE, NASD,NYSE, PCX, and the Philadelphia Stock Exchange(‘‘Phlx’’) that divides the oversight responsibilitiesamong these SROs for common members, bydesignating each participating SRO as the optionsexamination authority for a portion of the commonmembers. This designated SRO has sole regulatoryresponsibility for certain options-related tradingmatters. See Securities Exchange Act Release No.20158 (Sept. 8, 1983), 48 FR 41265 (Sept. 14, 1983).The SRO designated under the plan as a broker-dealer’s options examination authority isresponsible for conducting options-related salespractice examinations and investigating options-related customer complaints and terminations forcause of associated persons. The designated SRO isalso responsible for examining a firm’s compliancewith the provisions of applicable federal securitieslaws and the rules and regulations thereunder, itsown rules, and the rules of any SRO of which thefirm is a member. Id.

342 17 CFR 240.17d–2. Securities Exchange ActRelease No. 12935 (Oct. 28, 1976), 41 FR 49093(Nov. 8, 1976). In addition to the regulatoryresponsibilities it otherwise has under the ExchangeAct, the SRO to which a firm is designated underthese plans assumes regulatory responsibilitiesallocated to it. Under Rule 17d–2(c), theCommission may declare any joint plan effective if,after providing notice and opportunity forcomment, it determines that the plan is necessaryor appropriate in the public interest and for theprotection of investors, to foster cooperation andcoordination among the SROs, to removeimpediments to, and foster the development of, anational market system and a national clearanceand settlement system, and in conformity with thefactors set forth in Exchange Act section 17(d). 15U.S.C. 78q(d). The Commission has approved plansfiled by the equity exchanges and the NASD for theallocation of regulatory responsibilities pursuant toRule 17d–2. See, e.g., Securities Exchange ActRelease Nos. 13326 (Mar. 3, 1977), 42 FR 13878(Mar. 14, 1977) (NYSE/Amex); 13536 (May 12,1977), 42 FR 26264 (May 23, 1977) (NYSE/BSE);14152 (Nov. 9, 1977), 42 FR 59339 (Nov. 16, 1977)(NYSE/CSE); 13535 (May 12, 1977), 42 FR 26269(May 23, 1977) (NYSE/CHX); 13531 (May 12, 1977),42 FR 26273 (May 23, 1977) (NYSE/PSE); 14093(Oct. 25, 1977), 42 FR 57199 (Nov. 1, 1977) (NYSE/Phlx); 15191 (Sept. 26, 1978), 43 FR 46093 (Oct. 5,1978) (NASD/BSE, CSE, CHX and PSE); and 16858(May 30, 1980), 45 FR 37927 (June 5, 1980) (NASD/BSE, CSE, CHX and PSE).

343 See section 6(b)(6) of the Exchange Act, 15U.S.C. 78f(b)(6). See also section 6(b)(7) of theExchange Act, 15 U.S.C. 78f(b)(7).

344 See, e.g. section 19 of the Exchange Act, 15U.S.C. 78s


346 Id.347 See NASD 21(a) Report, supra note 4.348 See Delta Release, supra note 32, at 1900. In

Board of Trade of the City of Chicago v. Securitiesand Exchange Commission, 923 F.2d 1270 (7th Cir.1991) (‘‘Delta II’’), the court stated that:

The Delta system cannot register as an exchangebecause the statute requires that an exchange becontrolled by its participants, who in turn must beregistered brokers or individuals associated withsuch brokers. So all the financial institutions thattrade through the Delta system would have toregister as brokers, and (the system sponsors) wouldhave to turn over the ownership and control of the

financial responsibility rules.340

Consistent with past Commissionaction, the Commission may continue todesignate one SRO, such as the NASDor the NYSE, as the primary DEA forcommon members of exchanges.

In addition, the Commission haspreviously permitted existing SROs tocontract with each other to allocate non-financial regulatory responsibilities.341

Rule 17d–2 under the Exchange Actpermits SROs to establish joint plans forallocating the regulatory responsibilitiesimposed by the Exchange Act withrespect to common members.342 AnSRO participating in a regulatory plan isrelieved of regulatory responsibilities

with respect to a broker-dealer memberof such SRO, if those regulatoryresponsibilities have been designated toanother SRO under the regulatory plan.Alternative trading systems registered asexchanges would also be able toestablish joint plans with respect tocommon members.

A registered exchange would also beexpected to maintain an audit trail oftrading. A fully automated exchange,however, can produce comprehensive,instantaneous automated records thatcan be monitored remotely. Therefore,fully automated exchanges might beable to contract with other SROs toperform certain oversight activities,while retaining ultimate responsibilityfor ensuring that these activities areperformed.

Further, the Commission also believesthat the ultimate responsibility forenforcement and disciplinary actions forviolations relating to transactionsexecuted in an SRO’s market or rulesunique to that SRO should continue tobe retained by that SRO. In addition,these exchanges must establish adisciplinary process includingappropriate sanctions for violations ofthe rules and a fair procedure foradministering the disciplinaryprocess.343 Existing exchanges generallyemploy personnel and establishextensive programs to fulfill thisresponsibility. However, it may bepossible for an exchange to contractwith another SRO to perform its day-to-day enforcement and disciplinaryactivities. Nevertheless, a registeredexchange would retain ultimateresponsibility for this function.344 Inconsidering an exchange’s applicationfor registration the Commission willconsider whether allowing the exchangeto contract with another SRO to performits day-to-day enforcement anddisciplinary activities would beconsistent with the public interest.

2. Fair Representation

Section 6(b)(3) of the Exchange Actrequires that registered exchanges haverules that: (1) Provide that one or moredirectors is representative of issuers andinvestors, and not associated with amember of the exchange, or with anybroker-dealer; and (2) ‘‘assure a fairrepresentation of its members in theselection of its directors andadministration of its affairs.’’ 345

(i) Public Directors

Congress adopted the requirementthat at least one director berepresentative of issuers and investorsbecause of the public’s interest inensuring the fairness and stability ofsignificant markets.346 Publicrepresentation on an exchange’s boardof directors helps to achieve this goal.The Commission believes that, underthis structure, representation of thepublic on an oversight body that hassubstantive authority and decisionmaking ability is critical to ensure thatan exchange actively works to protectthe public interest and that no singlegroup of investors has the ability tosystematically disadvantage othermarket participants through use of theexchange governance process.347

Therefore, the Commission wouldexpect alternative trading systems thatapply for registration as exchanges tohave public representation on theirboards of directors.

(ii) Fair Representation of ExchangeMembers

The second requirement, that of fairrepresentation of an exchange’smembers, also serves to ensure that anexchange is administered in a way thatis equitable to all market members andparticipants. Because a registeredexchange is not solely a commercialenterprise, but also has significantregulatory powers with respect to itsmembers, competition betweenexchanges may not be sufficient toensure that an exchange carries out itsregulatory responsibilities in anequitable manner. The fair applicationof an exchange’s authority to bring andadjudicate disciplinary procedures maybe particularly important, because theseactions can have significant and far-reaching ramifications for broker-dealers.

Historically, the fair representationrequirement was one of the majorobstacles to the regulation of alternativetrading systems as exchanges because ofthe concern that it would beincompatible with their proprietarystructures.348 In the Proposing Release,


system to the institutions. The system would bekaput.

Id. at 1272–73.349 See Securities Exchange Act Release No.

28335 (Aug. 13, 1990), 55 FR 34106 (Aug. 21, 1990)(order approving rule change establishing electronicaccess memberships on the PCX).

350 The New Amex Board consists of eighteentotal governors. Floor governor nominees will beproposed by either the Amex NominatingCommittee (consisting of three floor members andtwo public members) or a petition signed by twentyfive members and will be selected by a plurality ofthe Amex Regular and Options Principal membersvoting together as a single class. The Amexmembership elects the members of the AmexNominating Committee.

351 The Chief Executive Officer of New Amex willalso be a governor on the NASD Board.

352 The New Amex Floor Governor is nominatedby the Amex Membership and will be able todirectly express the Amex members’ viewpoint andconcerns within the NASD Board forum. Inaddition, the Chief Executive Officer of New Amex

will be able to provide information about, andcommunicate the needs of, New Amex to the NASDBoard.

353 See Securities Exchange Act Release No.40622 (Oct. 30, 1998), 63 FR 59819 (Nov. 5, 1998).

354 15 U.S.C. 78q–1(b)(3)(c). These methodsinclude: (1) Solicitation of board of directorsnominations from all participants; (2) selection ofcandidates for election to the board of directors bya nominating committee which would be composedof, and selected by, the participants orrepresentatives chosen by participants; (3) directparticipation by participants in the election ofdirectors through the allocation of voting stock toall participants based on their usage of the clearingagency; or (4) selection by participants of a slate ofnominees for which stockholders of the clearingagency would be required to vote their share. SeeSecurities Exchange Act Release No. 14531 at 24(Mar. 6, 1978), 43 FR 10288 (Mar. 10, 1978). Seealso Securities Exchange Act Release No. 16900(June 17, 1980), 45 FR 41920 (June 23, 1980).

355 The proprietary foreign exchange Easdaq, arecognized secondary market in Belgium, hasestablished a ‘‘regulatory authority’’ that has adegree of independence from Easdaq’s board ofdirectors.

356 The Commission in the past has approvedexchange rules limiting the voting rights of ‘‘specialaccess’’ or non-equity members as consistent withsection 6(b)(3) of the Exchange Act, 15 U.S.C.78f(b)(3). See, e.g., Securities Exchange Act ReleaseNo. 22959 (Feb. 28, 1986), 51 FR 8060 (Mar. 7,1986) (approving rule change by NYSE establishing‘‘electronic access membership’’ with restrictedvoting rights).

357 See CBOE Letter at 5–6; NASD Letter at 4–5.358 American Century Letter at 6.359 See Ashton Letter at 4 (for-profit exchanges

should be afforded considerable flexibility in theirformative business stages in meeting fairrepresentation obligations); OptiMark Letter at 3–4(users of alternative trading systems should betreated fairly, but are not entitled to exercise anyformal rights in regard to the management of thesystem, and are adequately protected through acombination of regulatory safeguards and marketforces); Lee Letter at 1–2 (owners of exchangesalready have incentives to create suitablegovernance structures).

however, the Commission proposed toallow non-membership, for-profitalternative trading systems that chooseto register as exchanges some flexibilityin satisfying this ‘‘fair representation’’requirement.

The Commission notes that it has not,in the past, interpreted an exchange’sobligation to provide fair representationof its members to mean that all membersmust have equal rights. Instead, theCommission has allowed registeredSROs a degree of flexibility incomplying with this requirement. Forexample, PCX ‘‘electronic accessmembers’’ (‘‘ASAP Members’’) do nothave voting rights, and therefore are notrepresented on the board of thatexchange.349

More recently, the Commissionapproved the merger between the Amexand the NASD. As a result of the merger,Amex, reorganized as New Amex LLC(‘‘New Amex’’), is now a subsidiary ofthe NASD. In reviewing the merger, theCommission considered several fairrepresentation issues. Specifically, theCommission considered, among otherthings, Amex member representation onthe Board of Governors of New Amex,Amex member representation on theBoard of the NASD, the voting rights ofthe Amex membership, andrepresentation of the Amex membershipin the disciplinary process.

The Commission found that thecomposition of the New Amex Boardsatisfied the fair representationrequirement by providing the Amexmembership with the opportunity tonominate four Amex floor governors tothe New Amex Board.350 Further, theCommission found that the inclusion ofone New Amex floor governor on theNASD Board 351 helped to fulfill the fairrepresentation requirement by providingfor New Amex input on the parentBoard.352 In addition, the Commission

believes that the fair representationrequirement was furthered by thecorporate governance provisions of NewAmex’s constitution that require theconsent of either Amex (through aMembership vote), the Amex Committee(a committee designed specifically torepresent the interests of the Amexmembership), or both, in situationsimpacting certain membership interestsor material market changes to NewAmex. Lastly, the Commission foundthat the disciplinary procedures of NewAmex met the fair representationrequirement by providing for review ofall disciplinary matters by a committeecomposed of both Amex members andpublic representatives. Specifically, theAmex Adjudicatory Council, which isempowered to act for the full NewAmex Board in reviewing appeals fromdisciplinary proceedings, is composedof three Public Members and three FloorGovernors, all of whom are nominatedby the Amex Nominating Committee (orby petition signed by twenty-fiveMembers) and elected by a full AmexMembership vote.353

In addition, with respect to clearingagencies, the Commission has statedthat registered clearing agencies mayemploy several methods to comply withthe fair representation standard.354 TheCommission believes that otherstructures may also provideindependent, fair representation for anexchange’s constituencies in its materialdecision making processes if theexchange is not owned by itsparticipants. For example, a proprietaryalternative trading system that registersas an exchange might be able to fulfillthis requirement by establishing anindependent subsidiary that has final,binding responsibility for bringing andadjudicating disciplinary proceedingsand making rules for the exchange, andensuring that the governance of suchsubsidiary equitably represents the

exchange’s participants.355 As anotherpossibility, certain directors appointedto the board to represent the interests oftrading members or participants couldbe limited to considering certain topicsrelating to system use and rules, whileconsideration of ownership issues couldbe restricted to board membersrepresenting the interests of the ownersor stockholders.356

Some commenters expressed concernthat the flexibility afforded alternativetrading systems in complying with their‘‘fair representation’’ requirement notextend so far as to result in unequalregulation of alternative trading systemsregistered as exchanges and traditionalexchanges. In addition, thesecommenters expressed concern that theefficiency of the markets not becompromised.357 American Centuryalso expressed its support for structuresin which an alternative trading system’sboard included both owners andparticipants.358 On the other hand,several commenters stated that members(or participants) of a proprietaryexchange should not have any right toparticipate in the governance of theexchange and that imposing constraintson the manner in which alternativetrading systems are governed mayundermine the factors that lead to theirefficiency and innovativeness.359

The Commission believes alternativetrading systems should be required toassure fair representation of theirmembers if they choose to register asexchanges. As discussed above,registered exchanges have specialresponsibilities under the Exchange Act,regardless of whether they are not-for-profit or for-profit. Accordingly, theCommission continues to believe thatexchange participants—including


360 NASD Letter at 4–5.361 15 U.S.C. 78s(a).362 15 U.S.C. 78f(a) and 78s(a). See NASD Letter

at 4–5 (commenting that the public should have anopportunity to comment on the proposedgovernance structure of an exchange before theCommission approves its application forregistration).

363 15 U.S.C. 78f(b)(3)–(4) and 78f(c).364 15 U.S.C. 78f(c)(1). Section 6(c)(1), adopted in

1975, prohibits exchanges from granting newmemberships to non-broker-dealers. At the time thisSection was adopted, one non-broker-dealermaintained membership on an exchange. This non-broker-dealer was not affected by the prohibitionand continues to maintain its membership.

365 CBOE Letter at 6 (‘‘it would be difficult, if notimpossible, for the Commission to adequatelyregulate or oversee the array of non-broker-dealerinstitutions that currently are, or may become,participants on (alternative trading systems)’’);NASD Letter at 8 (institutions should not bemembers of alternative trading systems that registeras exchanges); IBEX Letter at 13 (institutional andindividual investors should be granted exchangeaccess through the sponsorship of discount or full-service broker-dealers).

366 American Century Letter at 4.367 Sections 6(f) and 15(e) of the Exchange Act, 15

U.S.C. 78f(f) and 78o(e), would permit theCommission to subject institutional members to allexchange rules and relevant Exchange Actprovisions.

368 The Commission could adopt suchrequirements pursuant to its authority underSection 15(c) of the Exchange Act, 15 U.S.C. 78o(e).

369 The Commission notes that institutionscurrently have the option to establish a broker-dealer affiliate, which can become a member in anexchange. The institution can then direct its orderflow through its affiliated entity. Many investmentcompanies already have affiliated broker-dealers.

370 15 U.S.C. 78f(c)(1).

participants in a for-profit exchange—need to have substantive input intodisciplinary and other key processes toprevent these processes from beingconducted in an inequitable,discriminatory, or otherwiseinappropriate fashion.

The NASD asked the Commission toprovide more specific guidance on thedetails of the flexibility the Commissionproposes to allow alternative tradingsystems applying for registration asexchanges.360 The Commission hasprovided several examples of ways inwhich fair representation requirementscan be met in non-traditional ways andbelieves that there may be otheracceptable ways. The Commission,however, does not believe it is necessaryto specify in greater detail what types ofstructures would be acceptable to it.What constitutes fair representation fora particular exchange will bedetermined in the context of thatsystem’s application for registrationunder sections 6(a) and 19(a) of theExchange Act. Under section 19(a) ofthe Exchange Act, notice of anapplication for registration as anexchange is published for commentbefore approval.361 This will provideinterested persons with notice of, andan opportunity to comment on, themanner in which a particular exchangeproposes to meet its fair representationobligations.362

3. Membership on a National SecuritiesExchange

An applicant for registration as anational securities exchange must haverules to admit members and personsassociated with those members.363

Section 6(c)(1) of the Exchange Act 364

prohibits exchanges from granting newmembership to any person notregistered as a broker-dealer, orassociated with a broker-dealer. In theConcept Release, the Commissionsolicited commenters’ views on whetherto allow institutional membership onnational securities exchanges. Becausemost commenters were opposed toinstitutional membership on exchanges,

the Commission did not propose toexempt registered exchanges from thelimitations in section 6(c)(1).Nevertheless, in the Proposing Release,the Commission asked for comment onwhether institutions should bepermitted to be members of nationalsecurities exchanges.

Most commenters expressing a viewon institutional membership onregistered exchanges agreed that suchexchanges should be prohibited fromhaving non-broker-dealer members.365

One commenter, however, believed thatdirect institutional access to exchangesis a choice that would benefit marketparticipants by providing lowerexecution costs for the shareholders ofinstitutional funds. Although thiscommenter noted the Commission’sconcerns about the regulatory burden aninstitution might face if it chose to be adirect member of an exchange, itthought that membership should be achoice available to those institutionsthat feel they have the economies ofscale to warrant direct access or believethat anonymity is worth the regulatorycost of membership.366

As discussed in the ProposingRelease, the Commission believes that,in order to ensure the central goals ofexchange regulation, direct institutionalmembers or participants in exchangeswould have to be subject to the majorityof rules and regulations to whichbroker-dealers are currently subject.367

Moreover, because institutions that weregranted exchange membership or directaccess to exchanges would likely needto become members in one or more ofthe national clearance and settlementcorporations in order to clear and settletheir trades, these institutions wouldneed to demonstrate and maintainfinancial creditworthiness. Insufficientnet capital and incomplete books andrecords could compromise financialsoundness, audit trails, and othergeneral risk management objectives thatare critical to sound markets andclearance and settlement systems.Consequently, the Commission wouldneed to require non-broker-dealer

institutions to comply with financialresponsibility obligations, including therequirements to maintain certainminimum levels of net capital andappropriate books and records.368

Without such requirements,institutional membership on anexchange may also conflict with anexchange’s obligation to have rules thatfoster the efficient clearance andsettlement of securities transactions.

The Commission believes that non-broker-dealer institutions essentiallywould be required to comply with thesame requirements imposed onregistered broker-dealers and, therefore,undermine most benefits an institutionreceives by virtue of not registering asa broker-dealer.369 Thus, theCommission does not believe thatallowing institutional membership onexchanges would be any less costly toan institution than establishing a broker-dealer affiliate, which can become amember in a registered exchange. At thesame time, it would impose ad-hocregulatory burdens on the Commissionand the exchanges as they tried toimpose critical rules and regulations oninstitutions. Further, the Commissiondoes not believe that it is currentlypractical or serves the best interests ofinvestors or the markets generally toallow non-broker-dealers to be membersof national securities exchanges,because of the potential lack ofregulatory oversight the Commissionwould have over these entities.Therefore, just as currently registeredexchanges are required to limitmembership to broker-dealers,alternative trading systems that chooseto register as exchanges would beprohibited from extending membershipto non-broker-dealers.

Accordingly, the Commission believesthat exchange membership shouldcontinue to be limited to registeredbroker-dealers and persons associatedwith registered broker-dealers inaccordance with section 6(c)(1) of theExchange Act.370 Institutions, however,would be able to access alternativetrading systems registered as exchangesthrough a registered broker-dealermember of such a trading system,including an affiliate of the institution.Institutions currently have efficientaccess to the NYSE through SuperDOT


371 Exchange members are subject to regulatoryaction by the NYSE for violations of NYSE rules bytheir customers entering orders through themembers’ SuperDOT terminals.

372 See infra note 452.373:NASD Letter at 8.374 15 U.S.C. 78f(b)(6)–(7) and 15 U.S.C. 78s(g).

These provisions require that a registered exchangebe able to enforce compliance by its members withthe federal securities laws, appropriately disciplineits members for violations of such laws, andprovide a fair disciplinary procedure. TheCommission notes, however, that unless a broker-dealer effects transactions in securities solely on anational securities exchange of which it is amember, it must become a member of a nationalsecurities association or another national securitiesexchange. Section 15(b)(8) of the Exchange Act, 15U.S.C. 78o(b)(8).

375 15 U.S.C. 78f(b)(2).376 15 U.S.C. 78f(c).

377 A denial of access would be reasonable, forexample, if it were based on objective standards,such as capital and credit requirements, and if thesestandards were applied fairly.

378 IBEX Letter at 13–14.379 Section 6(b)(8) of the Exchange Act, 15 U.S.C.

78f(b)(8); section 15A(b)(9) of the Exchange Act, 15U.S.C. 78o–3(b)(9).


381 Section 23(a) of the Exchange Act, 15 U.S.C.78w(a).


383 PCX Letter at 7–8.

terminals given to them by NYSEmembers,371 and the OptiMarkSystem 372 will enable institutions todirectly enter orders in the OptiMarkSystem through use of an exchangemember give-up. Access of this natureshould not impose significant costs orburdens on institutions or on broker-dealers providing the access. TheCommission believes if institutionscontinue to have indirect access toexchanges, their needs can be metwithout compromising importantregulatory objectives.

Finally, while the NASD agreed withthe Commission’s views thatinstitutions should not be ‘‘members’’ ofregistered exchanges, it asked theCommission to provide guidance onwhether a registered exchange may setup a broker-dealer subsidiary to providesponsored access to retail andinstitutional customers. Further, theNASD asked whether the registeredexchange could be the SRO for itsbroker-dealer subsidiary. The NASDbelieves that there is an inherentconflict of interest in such anarrangement and that the Commissionshould explain its views and provideSROs with guidance on theresponsibilities for oversight of thebroker-dealer in such circumstances.373

In this regard, a registered exchange isnot explicitly prohibited fromestablishing a broker-dealer subsidiarythrough which it can provide sponsoredaccess to its non-broker-dealercustomers. Nonetheless, theCommission recognizes concerns aboutthe potential conflict of interest if aregistered exchange were the SRO for itssubsidiary, and believes that it may bedifficult for an exchange to fulfill itsobligations under sections 6(b)(6),6(b)(7), and 19(g) with respect to sucha subsidiary.374

4. Fair AccessSections 6(b)(2) 375 and 6(c) 376 of the

Exchange Act prohibit registered

exchanges from denying access to, ordiscriminating against, members. Theobligation to ensure fair access formembers does not, however, restrict theauthority of a national securitiesexchange to maintain reasonablestandards for access.377 The securitiesindustry and the general public needaccess to exchanges to ensure the bestexecution of orders. Exchanges arevenues for trading that should be opento all qualified persons. TheCommission stated in the ProposingRelease that alternative trading systemsthat register as exchanges would berequired to comply with section 6(b)(2)and section 6(c) of the Exchange Act.IBEX was the only commenter toexpress a view on this requirement andits comment was favorable.378 Thus, theCommission would require anyalternative trading system registered asan exchange to ensure the fair access ofregistered broker-dealers.

In a similar vein, exchanges areprohibited from adopting any anti-competitive rules.379 To furtheremphasize the goal of vigorouscompetition, Congress requires theCommission to consider the competitiveeffects of exchange rules,380 as well asthe Commission’s own rules.381 The fairaccess and fair competitionrequirements in the Exchange Act areintended to ensure that nationalsecurities exchanges treat investors andtheir participants fairly, consistent withthe expectations of the investing public.For example, as discussed above, anexchange’s rules, including its rules ofpriority, must treat all members fairly.Accordingly, before granting anapplication for registration as anexchange, the Commission wouldreview the exchange’s rules forcompliance with these requirements.

5. Compliance With ARP GuidelinesAll national securities exchanges are

expected to maintain sufficient systemscapacity to handle foreseeable tradingvolume. Applicants for registration as anational securities exchange must haveadequate computer system capacity,integrity and security to support theoperation of an exchange. TheCommission believes that adequatecapacity is vital to the efficient

operation of exchanges, particularlyduring periods of high volume orvolatility, such as have beenexperienced in the past year. To thisend, all exchanges and the NASDcurrently participate in theCommission’s automation reviewprogram (‘‘ARP’’).382 Given the highlyautomated nature of most alternativetrading systems, the Commission statedin the Proposing Release that it wouldexpect any exchange applying forregistration as a national securitiesexchange to comply with the policiesand procedures outlined by theCommission in its policy statementsconcerning the automation reviewprogram, including cooperation withany reviews conducted by theCommission. In this regard, theCommission would consider theresources and ability of an applicant forregistration as an exchange to meet thestandards set forth in the automationreview program. In particular, theCommission would consider whetherthe applicant had sufficient capital tomaintain its automated systems, andstaff with technical expertise.

The Commission received onecomment letter addressing this issue.The PCX commented that registeredexchanges should only have to complywith the ARP guidelines if they reachthe threshold level that triggers theserequirements for alternative tradingsystems registered as broker-dealers.The PCX noted that, although manyexchanges do not account for twentypercent, or even ten percent, of thetrading in ITS eligible equity securities,all exchanges are required to complywith the ARP guidelines. The PCXcommented that these regulatoryrequirements impose substantial costson exchanges and that there is no basisfor imposing these types ofrequirements on exchanges when suchrequirements are not imposed onalternative trading systems registered asbroker-dealers that have substantiallygreater trading volume.383

The Commission notes that today it isadopting a requirement that alternativetrading systems with twenty percent ormore of the volume in any equitysecurity, or certain categories of debt,comply with certain systems capacity,integrity, and security requirements.While some registered exchanges mayhave less than twenty percent of thevolume in similar securities, theCommission nevertheless believes thatthese exchanges’ direct participation inthe national market system necessitates


384 In this regard, those exchanges applying forregistration in 1999 should also be prepared todemonstrate that their systems are year 2000compliant.

385 Section 12(a) of the Exchange Act makes itunlawful for any member, broker, or dealer to effectany transaction in any security (other than anexempted security) on a national securitiesexchange unless a registration statement has beenfiled with the Commission and is in effect as tosuch security for such exchange in accordance withthe provisions of the Exchange Act and the rulesand regulations thereunder. 15 U.S.C. 78l(a).Section 12(b) of the Exchange Act, 15 U.S.C. 78l(b),contains procedures for the registration of securitieson a national securities exchange. Section 12(a)does not apply to an exchange that the Commissionhas exempted from registration as a nationalsecurities exchange. See, e.g., Securities ExchangeAct Release No. 28899 (Feb. 20, 1991), 56 FR 8377(Feb. 29, 1991). See also Securities Exchange ActRelease No. 37271 (June 3, 1996), 61 FR 29145 (June7, 1996).

386 Section 12(f) of the Exchange Act, 15 U.S.C.78l(f). Under section 12(f) of the Exchange Act, 15U.S.C. 78l(f), exchanges cannot trade securities notlisted on an exchange or classified as Nasdaq NMsecurities (such as Nasdaq SmallCap or OTCsecurities) without Commission action. Section12(f) of the Exchange Act authorizes theCommission to permit the extension of UTP to anysecurity listed otherwise than on an exchange. TheOTC–UTP plan which provides UTP for NasdaqNM securities, is the only extension to dateapproved by the Commission. See OTC–UTP plan,infra note 401. Thus, registered exchanges cannotcurrently trade Nasdaq SmallCap securities orexempted securities that are not separately listed onthe exchange.

387 Rule 12f–5, 17 CFR 240.12f–5.388 See OTC–UTP plan, infra note 401 and

accompanying text.389 The OTC–UTP plan provides for the

collection, consolidation, and dissemination ofquotation and transaction information for NasdaqNM securities by its participants. Any registeredExchange where Nasdaq NM securities are tradedmay become a full participant in the OTC–UTPplan. See infra note 401. See also SecuritiesExchange Act Release Nos. 24407 (Apr. 27, 1987),52 FR 17349 (May 7, 1987); 36985 (Mar. 18, 1996),61 FR 12122 (Mar. 25, 1996).

390 OptiMark Letter at 3.

391 The CTA provides vendors and othersubscribers (including alternative trading systems)with consolidated last sale information for stocksadmitted to dealings on any exchange pursuant toa plan approved by the Commission (‘‘CTA plan’’).See, e.g., Securities Exchange Act Release Nos.10787 (May 10, 1974), 39 FR 17799 (final rulesapproving CTA plan); 16983 (July 16, 1980), 45 FR49414 (July 24, 1980); 37191 (May 9, 1996), 61 FR24842 (May 16, 1996).

392 The CQS gathers quotations from all marketmakers in exchange-listed securities anddisseminates them to vendors and other subscriberspursuant to a plan approved by the Commission(‘‘CQ plan’’). Securities Exchange Act Release No.16518 (Jan. 22, 1980), 45 FR 6521 (final rulesapproving CQ plan); 37191 (May 9, 1996), 61 FR24842 (May 16, 1996).

393 The ITS is a communications system designedto facilitate trading among competing markets byproviding each market participating in the ITSpursuant to a plan approved by the Commission(‘‘ITS plan’’) with order routing capabilities basedon current quotation information. See, e.g.Securities Exchange Act Release Nos. 37191 (May9, 1996), 61 FR 24842 (May 16, 1996); 17532 (Feb.10, 1981), 46 FR 12919 (Feb. 18, 1981); 23365 (June23, 1986), 51 FR 23865 (July 1, 1986) (CSE/ITSlinkage); 18713 (May 6, 1982) 47 FR 20413 (May 12,1982) (NASD’s CAES/ITS linkage); 28874 (Feb. 12,1991), 56 FR 6889 (Feb. 20, 1991) (CBOE/ITSlinkage).

394 See infra note 401 and accompanying text fora description of the OPRA plan.

participation in the automation reviewprogram. Moreover, while there arecosts associated with capacity planningand testing, contingency planning,stress testing, and independent reviews,as well as ensuring that automatedsystems have sufficient capacity, theseare costs that all highly automatedbusiness must bear and not merelyregulatory costs.384 The Commission’sARP guidelines are intended only toensure that short-term cost cutting byregistered exchanges does notjeopardize the operation of thesecurities markets.

6. Registration of SecuritiesUnder the Exchange Act, securities

traded on a national securities exchangemust be registered with the Commissionand approved for listing on theexchange.385 In addition, nationalsecurities exchanges are permitted totrade securities listed on otherexchanges and Nasdaq pursuant tounlisted trading privileges (‘‘UTP’’).386

These requirements ensure thatinvestors have adequate informationand that all relevant trading activity ina security is reported to, and surveilledby, the exchange on which it is listed.The Commission discussed in theProposing Release that an alternativetrading system choosing to register as anexchange would be subject to theserequirements and would be required to

have rules for trading the class or typeof securities it seeks to trade pursuantto UTP.387 Moreover, to trade NasdaqNM securities, such a system wouldhave to become a signatory to anexisting plan governing such trading.388

With regard to these securitiesregistration requirements, OptiMarkcommented that they would preclude,as a practical matter, those alternativetrading systems that trade privatelyplaced securities or unregistered foreignsecurities from choosing to register asexchanges. In addition, the variousconditions and limited scope of theNasdaq/National Market System/Unlisted Trading Privileges (‘‘OTC–UTP’’) plan 389 would impair the abilityof alternative trading systems that offercompeting facilities for securities listedon existing exchanges to register asexchanges. For example, UTP may beextended for Nasdaq NM securities, butthis does not include Nasdaq SmallCapsecurities or other over-the-countersecurities. Moreover, formally amendingthe OTC–UTP plan to admit any newmember and to allocate expenses andrevenues among competing marketcenters is a time-consuming process.

Consequently, OptiMarkrecommended that the Commissionexercise its exemptive authority toreduce the differences in regulatorytreatment between alternative tradingsystems registered as exchanges andthose registered as broker-dealers. Inparticular, OptiMark suggested that,regardless of whether they are registeredexchanges or broker-dealers, alternativetrading systems that limit their screenavailability to certain qualified personsbe permitted to trade unregisteredsecurities, including private placementsand foreign securities. Similarly,OptiMark believed that alternativetrading systems that seek to compete fororder flow with existing exchangesshould be able to do so in all securitieslisted on those exchanges, regardless ofthe alternative trading system’sregistration status.390

The issue of trading unregisteredsecurities, and in particular unregisteredforeign securities, on exchanges raisesmany difficult issues. Registration of

securities provides public informationfor investors that is prepared inaccordance with U.S. accounting andauditing standards. This assures that theissuer’s disclosures are consistentlypresented and can be easily compared tothe information provided by otherissuers. For this reason, the ExchangeAct requires securities to be registered ifthey trade on national securitiesexchanges.

The Commission has maintained thecurrent structure in the final rules:continuing to require registeredexchanges to trade only registeredsecurities, but not extending thisrequirement to alternative tradingsystems not registered as exchanges.The Commission is continuing to reviewon a broader basis the issuing andtrading of unregistered foreign securitiesin the U.S. and, as part of that review,will specifically consider whetherunregistered foreign securities shouldcontinue to be freely traded onalternative trading systems that are notregistered as exchanges.

7. National Market System ParticipationAs discussed in the Proposing

Release, any alternative trading systemthat elects to register as a nationalsecurities exchange would also beexpected to become a participant in themarket-wide transaction and quotationreporting plans currently operated byregistered exchanges and the NASD.These plans—the CQS,391 the CTA,392

the ITS,393 the Options Price ReportingAuthority (‘‘OPRA’’),394 and OTC–


395 See infra note and accompanying text for adescription of the OTC–UTP plan.

396 See Rules 11Ac1–1(b)(1) and 11Aa3–2(c), 17CFR 240.11Ac1–1(b)(1) and 240.11Aa3–2(c).

397 Both the CTA and the CQS are presentlyoperated by the eight national securities exchangesand the NASD.

398 The CTA plan also contains a provision forentities other than participants to report directly tothe CTA as ‘‘other reporting parties.’’ Pursuant tothis provision, parties other than a nationalsecurities exchange or association may be permittedto provide transaction data directly to the CTA.Alternative trading systems that do not elect toregister as exchanges would be eligible forparticipation in the CTA plan pursuant to thisprovision; however, as non-member participants,these systems would neither be obligated to pay therequired fees and expenses to the plan, nor able toshare in the plan’s profits.

399 See Securities Exchange Act Release No.37191 (May 9, 1996), 61 FR 24842 (May 16, 1996).

400 These fees represent the ‘‘tangible andintangible assets’’ provided by the plans to the newparticipant. See Proposing Release, supra note 3 atnn.342–43 (discussing entry fees for the CTA, CQS,and ITS plans).

401 Similar to the CTA and CQ plans, the OTC–UTP plan governing trading of Nasdaq NMsecurities provides for the collection, consolidation,and dissemination of quotation and transactioninformation for Nasdaq NM securities by itsparticipants. Any national securities exchangewhere Nasdaq NM securities are traded maybecome a full participant of the OTC–UTP plan.The plan also provides that new participants paya share of development costs, share ongoingoperating costs, and are entitled to share in theplan’s profits. See Joint Self-RegulatoryOrganization Plan Governing the Collection,Consolidation and Dissemination of Quotation andTransaction Information for Exchange-listedNasdaq/National Market System Securities and forNasdaq/National Market System Securities Tradedon Exchanges on an Unlisted Trading PrivilegeBasis (‘‘OTC–UTP plan’’). Securities Exchange Act

Release No. 24407 (Apr. 29, 1987), 52 FR 17349(May 7, 1987). See also Securities Exchange ActRelease No. 36985 (Mar. 18, 1996), 61 FR 12122(Mar. 25, 1996).

The OPRA plan also provides for the collectionand dissemination of last sale and quotationinformation with respect to options that are tradedon the participant exchanges. Under the terms ofthis plan, any national securities exchange whoserules governing the trading of standardized optionshave been approved by the Commission maybecome a party to the OPRA plan. The planprovides that any new party, as a condition ofbecoming a party, must pay a share of OPRA’s start-up costs. It also provides for revenue sharing amongall parties. The OPRA plan was approved pursuantto Section 11A of the Exchange Act and Rule 11a3–2 thereunder. See Securities Exchange Act ReleaseNo. 17638 (Mar. 18, 1981) (‘‘OPRA plan’’).

402 To become a participant in ITS, an exchangeor association must subscribe to, and agree tocomply and to enforce compliance with, theprovisions of the plan. See ITS plan, supra note393, at section 3(c).

403 ITS also establishes a procedure that allowsspecialists to solicit pre-opening interest in asecurity from specialists and market makers inother markets, thereby allowing these specialistsand market makers to participate in the openingtransaction. Participation in an opening transactioncan be especially important when the price of asecurity has changed since the previous close.

404 A trade-through occurs when an ITSparticipant purchases securities at a lower price orsells at a higher price than that available in anotherITS participant market. For example, if the NYSEis displaying a bid of 20 and an offer of 201⁄8 foran ITS security, the prohibition on trade-throughswould prohibit another ITS participant market frombuying that security from a customer at 197⁄8 orselling that security to a customer at 20 1⁄2. Inaddition, each participant market has in place rulesto implement the ITS Trade-Through Rule. See, e.g.NASD Rule 5262. The plan also provides amechanism for satisfying a market aggrieved byanother market’s trade-through.

405 A locked market occurs when an ITSparticipant disseminates a bid for an ITS securityat a price that equals or exceeds the price of theoffer for the security from another ITS participantor disseminates an offer for an ITS security at aprice that equals or is less than the price of the bidfor the security from another ITS participant. Theplan provides a mechanism for resolving lockedmarkets.

406 The ITS block trade policy provides that themember who represents a block size order shall, atthe time of execution of the block trade, send orcause to be sent, through ITS to each participatingITS market center displaying a bid (or offer)superior to the execution price a commitment totrade at the execution price and for the number ofshares displayed with that market center’s betterpriced bid (or offer).

407 American Century Letter at 3 (citing instancesof downtime on alternative trading systems that areattributable to SelectNet, rather than the alternativetrading system).

408 Ashton Letter at 4 (also stating that theCommission should be sensitive to the ‘‘veiled anti-competitive motives’’ of the existing planparticipants and be prepared to direct any newqualified exchanges to be accepted into all nationalmarket system plans).

UTP 395—link trading, quotation, andreporting for all registered exchangesand the NASD and are responsible forthe transparent, efficient, and fairoperation of the securities markets.These plans form the backbone of thenational market system andparticipation in these plans by allregistered exchanges is vital to thesuccess of the national market system.

Participation in effective quote andtransaction reporting plans andprocedures would, therefore, bemandatory for any newly registeredexchange, as it is now for currentlyregistered exchanges.396 The CTA andthe CQS, which make quote andtransaction information in exchange-listed securities available to thepublic,397 both have provisionsgoverning the entry of participants tothe plans,398 and allow any nationalsecurities exchange or registerednational securities association tobecome a participant.399 Newparticipants are required to pay certainentry fees to the existing participants.400

Participants in these plans share in theincome and expenses associated withthe plans’ operations.401 Because

national securities exchanges arerequired to participate in an effectivequote and transaction reporting plan,the Commission expects the participantsof existing plans to include them in theplans under reasonable conditionsadapted to the situations of the newexchanges.

In addition to requiring participationby newly registered exchanges in quoteand transaction reporting plans, theCommission would expect newlyregistered exchanges to participate inITS,402 or an equivalent system if onewere developed. ITS provides tradinglinks between market centers andenables a broker or dealer whoparticipates in one market to executeorders, as principal or agent, in an ITSsecurity at another market center,through the system.403 The ITS planrequires that the members of participantmarkets avoid initiating a purchase orsale at a worse price than that availableon another ITS participant market(‘‘trade-throughs’’).404 Participation inITS would give users of these newexchanges access to other ITSparticipant markets. Moreover,participation in ITS would require new

exchanges to adopt rules to comply withother applicable ITS plan provisionsand policies on matters such as, forexample, trade-throughs, lockedmarkets,405 and block trades.406 As withthe quote and transaction reportingplans, alternative trading systems thatregister as exchanges would have to beintegrated into ITS, or another systemthat links markets for trading purposeswould have to be created to accomplishfull integration of the newly registeredexchanges into the national marketsystem.

The Commission solicited commenton what issues were raised by thepossible integration of new exchangesinto ITS. One commenter stronglybelieved that the current votingstructure of ITS establishes barriers toentry, which leads to barriers toinnovation. This commenter wasconcerned that the network supportingITS may not be strong enough to handlesharply higher volumes of securitiestransactions and that, in an environmentwith multiple exchanges, the failure ofthese linkages would impede marketparticipants’ quest for best prices.407

Another commenter, similarly,expressed concern that the means ofaccess to, and participation in, thenational market system plans moregenerally was not clearly defined and,therefore, provided the currentparticipants in these plans anopportunity to delay and to setunreasonable terms and conditions forentry of new participants.408 TheCommission realizes that integratingnew exchanges into the national marketsystem plans may require amendmentsto these plans and notes that nationalmarket system plans may be amended


409 Securities Exchange Act Release No. 40204(July 15, 1998), 63 FR 390306 (July 22, 1998)(proposal providing for the linkage of the PCXapplication of the OptiMark system to the ITSsystem); Securities Exchange Act Release No. 40260(July 24, 1998), 63 FR 40748 (July 30, 1998)(proposal expanding the ITS/CAES linkage to alllisted securities, including non-Rule 19c-3securities).

410 See CBOE Letter at 4–5; NYSE Letter at 8–9.The NYSE also stated that consideration of thisissue can be better evaluated at the time analternative trading system registers as an exchangeand seeks to become a member of ITS. Id. But seeCHX Letter at 7 (expressing concern about a for-profit exchange becoming a full participant in thenational market system plans because suchexchanges would be subject to pressures not toexpend significant resources on maintainingsurveillance and enforcement capability and wouldnot have the same commitment to the publicinterest and the investing public as traditional not-for-profit exchanges).

411 CBOE Letter at 4–5.

412 NASD Letter at 7.413 OptiMark Letter at 4–5 (also asking that the

Commission consider how members of exchanges,other than the exchange through which analternative trading system registered as a broker-dealer disseminates its quotations, could accesssuch alternative trading system’s quotes).

414 Letter from Gerald D. O’Connell,Susquenhanna Investment Group to Jonathan G.Katz, Secretary, SEC, dated July 23, 1998(‘‘Susquehanna Letter’’) at 1–2. See also OptiMarkLetter at 4 (asking the Commission to clarify thatparticipation in national market system plans is notconditioned on any universal public displayrequirement).

415 Instinet Letter at 1–2, 3, 6.

416 See supra note 409.417 The Commission may suspend trading in any

security for up to 10 days, and all trading on anynational securities exchange or otherwise, for up to90 days pursuant to sections 12(k)(1)(A) and (B) ofthe Exchange Act, 15 U.S.C. 78l(k)(1)(A) and (B).

418 For example, a newly registered exchangewould be required under Rule 11Ac1–1, 17 CFR240.11Ac1–1, to halt trading when neitherquotation nor transaction information can bedisseminated.

419 The Commission has found that trading haltrules instituted by a national securities exchange ora national securities association are consistent withthe objectives of Section 6(b)(5) of the ExchangeAct, 15 U.S.C. 78f(b)(5). See, e.g., SecuritiesExchange Act Release Nos. 39582 (Jan. 26, 1998),63 FR 5408 (Feb. 2, 1998); 26198 (Oct. 19, 1988),53 FR 41637 (Oct. 24, 1988). See, e.g., Amex Rule117, NASD Rule 4120(a)(3), and NYSE Rules 80Band 717. There is no requirement that exchanges orassociations of securities dealers employ identicaltrading halt rules, and these rules may varyaccording to the needs of the individual market.

420 15 U.S.C. 78f.

either by vote of the participants, or byCommission action.409

The Commission also requestedcomment on whether any changes werenecessary to incorporate alternativetrading systems registered as exchangesinto the national market system plans.In this regard, the Chicago BoardOptions Exchange (‘‘CBOE’’) and theNYSE stated that they did not believethat there would need to be significantchanges to these plans, and that anychanges that would be necessary toaccommodate alternative tradingsystems registered as exchanges into ITSwould be relatively easy to resolve.410

The CBOE, however, did state thatalternative trading systems registered asexchanges should be subject to the samerequirements regarding access to thenational market system plans as areapplicable to traditional exchanges,including payment of participationentry fees.411

The NASD suggested that, before theCommission approves an alternativetrading system’s application forregistration as an exchange, theCommission address more completelythe manner in which such an alternativetrading system registered as an exchangemay participate in national marketsystem plans. The NASD noted threeareas in which the Proposing Releasewas silent. First, the Commission didnot address what mechanism would beused for access among any newexchange and other exchanges ormarkets. For example, in the context ofNasdaq securities, the NASD thought itwas unclear whether the existingapproach to linkage and executionshould continue to occur throughNasdaq’s SelectNet system or itssuccessor, or whether there should be anew ITS-like entity formed with acompletely new approach to access. TheNASD expressed a preference for using

the current approach to linkages.Second, the NASD noted that theCommission did not address whetheralternative trading systems registered asexchanges could continue to charge anaccess fee, and believed strongly thatsuch alternative trading systems shouldnot be allowed to charge for anothermarket accessing displayed interest.Third, the Commission did not addressthe intermarket linkage issues raised byaccess to traditional exchanges by non-broker-dealers that have indirect accessto alternative trading systems registeredas exchanges.412

OptiMark asked the Commission toconsider the effect of an alternativetrading system’s ability to charge anexecution fee on its choice to register asan exchange or as a broker-dealer.OptiMark noted that the ProposingRelease only contemplated thatalternative trading systems operating asbroker-dealers would be able to chargea fee to non-subscribers; alternativetrading systems registered as exchangesand participating in ITS would not.413

Susquehanna Investment Group(‘‘Susquehanna’’) expressed concernabout potentially integrating manyalternative trading systems registered asexchanges into the national marketsystem mechanisms. Susquehannacommented that integrating newexchanges’ quotations into the nationalmarket system should be done only withcareful consideration for thepreservation of the ITS trade-throughrule.414 Instinet also stated that in orderfor an alternative trading system tomake a determination about thefeasibility of registering as an exchange,the Commission needs to address thoseunresolved issues relating to ITS,including the rules governing time/pricepriority within a multiple exchangestructure. In addition, Instinet statedthat inter-exchange rules need to be setforth for both the listed and over-the-counter securities markets.415

The Commission agrees that access tonational market system systems is of keyimportance. It currently has outstandingproposals for incorporation of one

linkage into ITS of an alternative tradingsystem—OptiMark—and a traditionalexchange—PCX—and has soughtcomment on organizational and otherchanges to ITS to make it moreresponsive to changing conditions.416

The precise arrangements for inclusionof new exchanges into these plansdepends on the structure of theseexchanges, and will be addressed whenan applicant seeks registration as anexchange.

8. Uniform Trading StandardsIn addition to participation in

national market system mechanisms, analternative trading system that registersas an exchange would be required tocomply with any Commission-institutedtrading halt relating to securities tradedon or through its facilities.417 Newlyregistered exchanges would be requiredin some instances to adopt trading haltrules to comply with certainCommission rules.418 A newlyregistered exchange would also have theauthority and be expected to imposetrading halts for individual securities,for classes of securities, and for itssystem as a whole under the appropriatecircumstances.419 The Commission doesnot believe that this requirement wouldpresent any undue burden foralternative trading systems that elect toregister as national securities exchangesbecause most alternative tradingsystems are already subject to theimposition of trading halts as membersof the NASD.

In addition, to promote the orderlyoperation of the securities markets inaccordance with Section 6 of theExchange Act,420 the Commissionwould expect all newly registerednational securities exchanges toimplement circuit breaker rules totemporarily halt trading during periods


421 If circuit breakers are imposed in one market,but not in another, overall market disruptionscaused by trading imbalances can migrate from onemarket to the next, and efforts to stabilize suchimbalances during periods of heavy trading andextreme volatility would be subverted. See alsoSecurities Exchange Act Release No. 39846 (Apr. 9,1998), 63 FR 18477 (Apr. 15, 1998) (approvingproposed changes to SRO rules regarding circuitbreakers).

422 Section 19(b) of the Exchange Act, 15 U.S.C.78s(b).

423 17 CFR 240.6a–1, 240.6a–2 and 240.6a–3.424 Exhibit E requires an exchange to describe,

among other things, the means of access to theelectronic trading system, the procedures governingdisplay of quotes and/or orders, execution,reporting, clearance, and settlement. Exhibit Lrequires an exchange to describe its criteria for

membership, conditions under which members maybe subject to suspension or termination, andprocedures that would be involved in suchsuspension or termination.

425 Exhibit K requires non-member ownedexchanges to provide a list of direct owners andcontrol persons.

426 See NYSE Letter at 11; Amex Letter at 6.

of extraordinary market volatility orunusual market declines. TheCommission believes that for circuitbreakers to be effective, all markets mustimpose corresponding circuitbreakers.421

9. Proposed Rule Changes

Under Section 19(b)(1) of theExchange Act, SROs are required to fileall proposed rule changes with theCommission.422 Thus, once registered asan exchange, an alternative tradingsystem would have to submit copies ofany proposed rule changes to theCommission for approval.

C. Application for Registration as anExchange

The Commission proposed to reviseRules 6a–1, 6a–2 and 6a–3 under theExchange Act 423 to clarify therequirements for registration as anexchange and to accommodate theregistration as exchanges of automatedand proprietary trading systems.Additionally, the Commission proposedto revise Form 1, the application usedby exchanges to register or to apply foran exemption based on limited volume,and to repeal Form 1–A. Afterconsidering the comments, theCommission is adopting the

amendments to Rule 6a–1, Rule 6a–2,Rule 6a–3 and Form 1 as proposed.

1. Revisions to and Repeal of Form 1–A

The Commission is adopting therevisions to Form 1 and repealing Form1–A as proposed. Form 1 is revised byreorganizing and redesignating theStatements and the exhibits. Becausethe Commission expects most futureapplicants for registration as anexchange to be fully or partiallyautomated, the Commission revisedsome of the information requested inForm 1 to be more applicable toautomated exchanges. Specifically, theCommission is adding two new exhibitsrequiring an applicant for registration asan exchange to describe the way any ofits electronic trading systems operate,and the criteria used by the exchange inadmitting members.424 In addition, theCommission is adding a new exhibit toForm 1 to reflect the possibility that anexchange is owned by shareholders,rather than members.425 TheCommission is also adopting otherchanges to the information requested onForm 1 to reflect the fact that a for-profitexchange would have participants orsubscribers trading, rather thanmembers.

Both the NYSE and the Amexexpressed concern that these newExhibits would require new andadditional information.426 Exhibits Eand L, however, need only accompanythe application for registration as anexchange and, therefore, areinapplicable to currently registeredexchanges. In addition, Exhibit Kapplies only to non-member ownedexchanges. Therefore, because allcurrently registered exchanges aremember-owned, new Exhibit K does notapply to them. The Commission hasclarified that Exhibit K exclusivelyapplies to non-member ownedexchanges. If, however, a currentlyregistered, member-owned exchangewere to convert to a for-profit structure,it would have to comply with therequirement to update Exhibit K.

Exchanges currently registered withthe Commission are required to useamended Form 1 in complying withRules 6a–2 and 6a–3. The informationregistered exchanges are required toupdate under Rules 6a–2 and 6a–3 isnot substantially different from whatregistered exchanges are required toupdate today. The Commission hasprovided the chart below to assistcurrently registered exchanges incomplying with the filing obligationsunder amended Rules 6a–2 and 6a–3.

Amended form 1 Filing requirements under amended rules 6a–2 and 6a–3

Corresponding part offormer Form 1 on

which information wasrequested

Questions 1–7 of the Execution Page ................ File an amendment within 10 days after any action is taken that ren-ders the information previously filed inaccurate (Rule 6a–2((a)(1)).

Questions 1–6 of theStatement.

Exhibit A .............................................................. File an amendment every three years (Rule 6a–2(c)) or make infor-mation available by publication, upon request, or via an InternetWeb site (Rule 6a–2(d)).

Exhibit A(1).

Exhibit B .............................................................. File an amendment every three years (Rule 6a–2(c)) or make infor-mation available by publication, upon request, or via an InternetWeb site (Rule 6a–2(d)).

Exhibit A(2).

Exhibit C ............................................................. File an amendment every three years (Rule 6a–2(c)) or make infor-mation available by publication, upon request, or via an InternetWeb site (Rule 6a–2(d)).

Question 7 of theStatement.

File an amendment within 10 days after any action is taken that ren-ders the information previously filed inaccurate (Rule 6a–2(a)(2)).

Exhibit A(3) Exhibit H.

Exhibit D ............................................................. File an annual amendment (Rule 6a–2(b)(1)) ....................................... Exhibit F.Exhibit E .............................................................. No requirement to update; only required on application for registrationExhibit F .............................................................. File an amendment within 10 days after any action is taken that ren-

ders the information previously filed inaccurate (Rule 6a–2(a)(2)).Exhibit B.

Exhibit G ............................................................. File an amendment within 10 days after any action is taken that ren-ders the information previously filed inaccurate (Rule 6a–2(a)(2)).

Exhibit C.

Exhibit H ............................................................. File an amendment within 10 days after any action is taken that ren-ders the information previously filed inaccurate (Rule 6a–2(a)(2)).

Exhibit D.

Exhibit I ............................................................... File an annual amendment (Rule 6a–2(b)(1)) ....................................... Exhibit E.


427 A technical modification was made to theamendments as proposed to include Exhibit H inRule 6a–2(a)(2).

428 Rule 6a–2(a), 17 CFR 240.6a–2(a).

429 A technical modification was made to theamendments as proposed to remove Exhibit I fromRule 6a–2(a)(2) and to include Exhibit I in Rule 6a–2(b)(1).

430 A technical modification was made to theamendments to include Exhibit N in Rule 6a–2(b)(2).

Amended form 1 Filing requirements under amended rules 6a–2 and 6a–3

Corresponding part offormer Form 1 on

which information wasrequested

Exhibit J .............................................................. File an amendment every three years (Rule 6a–2(c)) or make infor-mation available by publication, upon request, or via an InternetWeb site (Rule 6a–2(d)). File an amendment within 10 days afterany action is taken that renders the information previously filed in-accurate (Rule 6a–2(a)(2)).

Exhibit G.

Exhibit K .............................................................. Only for-profit exchanges are required to file an annual amendment(Rule 6a–2(b)(2)) or make information available by publication,upon request, or via an Internet Web site (Rule 6a–2(d)), and to filean amendment within 10 days after any action is taken that rendersthe information previously filed inaccurate (Rule 6a–2(a)(2)).

Exhibit L .............................................................. No requirement to update; only required on application for registrationas an exchange.

Exhibit M ............................................................. File an amendment (Rule 6a–2(b)(2)) or make information availableby publication, upon request, or via an Internet Web site (Rule 6a–2(d)).

Question 8 of theStatement.

File an amendment within 10 days after any action is taken that ren-ders the information previously filed inaccurate (Rule 6a–2(a)(2)).

Question 9(a) of theStatement.

Exhibit I.Exhibit J.

Exhibit N ............................................................. File an amendment (Rule 6a–2(b)(2)) or make information availableby publication, upon request, or via an Internet Web site (Rule 6a–2(d)).

Exhibit K.Exhibit L.Exhibit M.

Deleted ................................................................ ................................................................................................................. Question 9(b) of theStatement.

2. Amendments to Rules 6a–1, 6a–2,and 6a–3 Under the Exchange Act

In order to reduce some of the filingburdens for exchanges and to allowexchanges to comply with the filingrequirements by posting information onan Internet web page, the Commission isamending Rules 6a–1, 6a–2, and 6a–3under the Exchange Act.

a. Rule 6a–1 Application forRegistration as an Exchange orExemption Based on Limited Volume ofTransactions

The Commission proposed to amendRule 6a–1 to clarify that Form 1 shouldonly be used by an exchange to applyfor registration as a national securitiesexchange or for an exemption fromregistration under section 5 of theExchange Act based on such exchange’slimited volume of transactions. TheCommission received no comments onthese proposed changes and is adoptingthem as proposed.

b. Rule 6a–2 Periodic AmendmentsParagraph (a) of amended Rule 6a–2

requires an exchange to file anamendment to Form 1 within 10 days ofchanges to: (1) Information filed on theExecution Page of Form 1, oramendment thereto; (2) informationregarding all affiliates and subsidiaries(Exhibit C); (3) application formembership, participation orsubscription to the exchange or for aperson associated with a member,participant, or subscriber of theexchange (Exhibit F); (4) financial

statements, reports or questionnairesrequired of members, participants orsubscribers (Exhibit G); (5) listingapplications, any agreements required tobe executed in connection with listingand a schedule of listing fees (ExhibitH); 427 (6) officers, governors, membersof all standing committees, or personsperforming similar functions, whopresently hold or have held their officesor positions during the previous year(Exhibit J); (7) persons with directownership and control for non-memberowned exchanges (Exhibit K); and (8)any members, participants, subscribersor other users and the informationpertaining thereto (Exhibit M).428

Additionally, rather than exchangesfiling these changes in the form of anotice, as is currently required underparagraph (a) of Rule 6a–3, the changeswill be filed in the form of anamendment on Form 1.

These amendments to Rule 6a–2relieve exchanges from some of thefiling requirements to which exchangesare currently subject. Specifically, aregistered exchange no longer has to filenotice within 10 days of changes to: (1)Its constitution, articles of incorporationor association, or by-laws (Exhibit A);(2) written rulings or settled practices ofany governing board or committee of theexchange that have the effect of rules orinterpretations (Exhibit B); and (3) the

schedule of securities listed on theexchange (Exhibit N).

Paragraph (b) of amended Rule 6a–2requires an exchange to file annually anamendment to Form 1 with thefollowing information: (1)Unconsolidated financial statements foreach subsidiary or affiliate or theexchange for latest fiscal year (ExhibitD); (2) audited consolidated financialstatements for last fiscal year of theexchange prepared in accordance with,or reconciled to, United States generallyaccepted accounting principals (ExhibitI); 429 (3) a list of persons with directownership and control for non-memberexchanges (Exhibit K); (4) a list of allmembers, participants, subscribers orother users and the informationpertaining thereto (Exhibit M); and (5) aschedule of securities listed on theexchange, securities admitted tounlisted trading privileges andsecurities admitted to trading on theexchange which are exempt fromregistration under Section 12(a) of theAct (Exhibit N).430 These amendmentsremove exchanges’ obligations toinclude the following as part of theannual amendment: (1) The exchange’saffiliates and subsidiaries (Exhibit C)and (2) a list of officers, governors, andmembers of standing committees be


431 A technical modification was made to theamendments to include Exhibit J in Rule 6a–2(c).

432 Rule 6a–2(d), 17 CFR 240.6a–2(d).433 Securities Exchange Act Release No. 35123

(Dec. 20, 1994), 59 FR 66692 (Dec. 28 1994).

434 17 CFR 240.6a–3. This rule is now found atparagraph (c) of Rule 6a–3.

435 In addition, the owner of the alternativetrading system would continue to be liable forsecurities law violations.

436 But see supra note 374.437 Section 3(a)(2) of the Exchange Act, 15 U.S.C.

78c(a)(2). See also supra note 48 (discussing theOptiMark System as a facility of the PCX); 35030(Nov. 30, 1994), 59 FR 63141 (Dec. 7, 1994)(discussing the Chicago Match system as a facilityof the CHX); 29237 (May 24, 1991), 56 FR 24853(May 31, 1991) (discussing the Off-Hours Tradingsystem as a facility of the NYSE).

438 17 CFR 240.17a–23.

439 The term ‘‘internal broker-dealer system’’ isdefined as ‘‘any facility, other than a nationalsecurities exchange, an exchange exempt fromregistration based on limited volume, or analternative trading system as defined in RegulationATS * * * that provides a mechanism, automatedin full or in part, for collecting, receiving,disseminating, or displaying system orders andfacilitating agreement to the basic terms of apurchase or sale of a security between a customerand the sponsor, or between two customers of thesponsor, through use of the internal broker-dealersystem or through the broker or dealer sponsor ofsuch system.’’ Rule 17a–3(a)(16)(ii)(A), 17 CFR240.17a–3(a)(16)(ii)(A).

440 17 CFR 240.17a–3 and 240.17a–4.441 Only one commenter addressed the

Commission’s proposal to repeal Rule 17a–23 andamend Rules 17a–3 and 17a–4. This commenteragreed that amended Rules 17a–3 and 17a–4 wouldimpose similar obligations as current Rule 17a–23.TBMA Letter at 25–26.

included as part of an annualamendment (Exhibit J).

Paragraph (c) of amended Rule 6a–2requires an exchange to file anamendment to Form 1 every three yearswith the following information: (1) Acopy of the constitution, articles orincorporation or association and by-laws (Exhibit A); (2) a copy all writtenrulings, settled practices having effect ofrules and interpretations of anygoverning board or committee of theexchange (Exhibit B); (3) informationregarding all affiliates and subsidiaries(Exhibit C); and (4) a list of officers,governors, members of all standingcommittees, or persons performingsimilar functions, who presently hold orhave held their offices or positionsduring the previous year (Exhibit J).431

Paragraph (d) of amended Rule 6a–2provides exchanges with alternatives tothe annual filing requirement forExhibits K, M, and N, and to the threeyear filing requirement for Exhibits A,B, C, and J. Pursuant to Rule 6a–2(d)exchanges have the following options,in lieu of paper filing: (1) To publish orcooperate in the publication of thisinformation on an annual or morefrequent basis, and to certify to theaccuracy of the information; (2) to keepthe information up to date, and certifythat the information is up to date andavailable to the Commission and thepublic upon request; or (3) to make theinformation available continuously onan Internet web site controlled by anexchange, indicate the location of theInternet Web site where suchinformation may be found, and to certifythat the information available at suchlocation is accurate as of its date.432

Comments from the NYSE and theAmex suggested that the amendments toRule 6a–2 and Form 1, as adopted,reimpose some of the annual filingrequirements previously eliminated.433

As discussed above, Rule 6a–2 andForm 1, as adopted, relax the currentfiling burdens without reimposing anyfiling requirements. The technicalmodifications to the amendments toRule 6a–2 clarify the operation of therule, as adopted.

c. Rule 6a–3 Supplemental Material

Paragraph (b) of Rule 6a–3 currentlyrequires registered exchanges, orexchanges exempt from registrationbased on their limited volume oftransactions, to furnish to theCommission copies of all materials

issued or made available to members.The Commission proposed to continueto require exchanges to provide theCommission with the informationcurrently required under the rule.However, as an alternative to filing suchinformation on paper, the Commissionproposed to permit exchanges to makethe information available on an Internetweb site and provide the Commissionwith the location of the web site. TheCommission did not receive commentsaddressing these proposed changes, andis adopting the amendments to Rules6a–3(b) as proposed.434

D. National Securities ExchangesOperating Alternative Trading Systems

National securities exchanges could,under the rules the Commission isadopting today, form subsidiaries oraffiliates that operate alternative tradingsystems registered as broker-dealers.435

If a national securities exchange choseto form such a subsidiary or affiliate, theexchange itself could remain registeredas a national securities exchange, whilethe subsidiary or affiliate operated as abroker-dealer. Such subsidiaries oraffiliates would of course be required tobecome members of a national securitiesassociation or another nationalsecurities exchange.436 In addition, anysubsidiary or affiliate of a registeredexchange could not integrate, orotherwise link the alternative tradingsystem with the exchange, includingusing the premises or property of suchexchange for effecting or reporting atransaction, without being considered a‘‘facility of the exchange.’’ 437

V. Broker-Dealer Recordkeeping andReporting Obligations

A. Elimination of Rule 17a–23Under the regulatory framework

adopted in this release, alternativetrading systems are required to registeras exchanges or broker-dealers, andcomply with the requirements underRegulation ATS. These systems arecurrently subject to recordkeeping andreporting requirements under Rule 17a–23 of the Exchange Act.438 Becausethese alternative trading systems are

now subject to recordkeeping andreporting requirements relating to theiroperations, either as registeredexchanges or as broker-dealers underproposed Regulation ATS, theCommission is eliminating duplicativerecordkeeping and reporting obligationsfor these systems by repealing Rule 17a–23. Only the recordkeepingrequirements in Rule 17a–23 as theyapply to broker-dealers that are not alsoalternative trading systems, are beingmoved to the broker-dealerrecordkeeping rules, Rules 17a–3 and17a–4 under the Exchange Act.

B. Amendments to Rules 17a–3 and17a–4

Certain trading systems operated bybroker-dealers are not alternativetrading systems, and therefore are notrequired to register as exchanges orcomply with Regulation ATS under theframework the Commission is adoptingtoday. This group of internal broker-dealer systems 439 will continue to beregulated under the traditional broker-dealer regulatory scheme. TheCommission is amending Rules 17a–3and 17a–4 under the Exchange Act 440 torequire broker-dealers to continuallymake and keep records regarding theactivities of internal broker-dealersystems for non-alternative tradingsystems. These recordkeepingrequirements are similar to therecordkeeping requirements under Rule17a–23, which the Commission today isrepealing.441 The Commission believesthat these recordkeeping requirementscontinue to be valuable to the oversightand inspections of internal broker-dealer systems by the Commission andthe SROs.

These amendments ensure thatbroker-dealers continue to keep recordsof any of their customers that haveaccess to their internal broker-dealersystem, as well as any affiliationsbetween those customers and the


442 Rules 17a–3(a)(16)(i)(B) and (C), 17 CFR240.17a–3(a)(16)(i)(B) and (C).

443 See supra note 439.444 The term ‘‘sponsor’’ is defined as ‘‘any broker

or dealer that organizes, operates, administers, orotherwise directly controls an internal broker-dealersystem or, if the operator of the internal broker-dealer system is not a registered broker or dealer,any broker or dealer that, pursuant to contract,affiliation, or other agreement with the systemoperator, is involved materially on a regular basiswith executing transactions in connection with useof the internal broker-dealer system, other thansolely for its own account or as a customer withaccess to the internal broker-dealer system.’’ Rule17a–3(a)(16)(ii)(B), 17 CFR 240.17a–3(a)(16)(ii)(B).

445 The term ‘‘system order’’ is defined as ‘‘anyorder or other communication or indicationsubmitted by any customer with access to theinternal broker-dealer system for entry into atrading system announcing an interest inpurchasing or selling a security,’’ but specificallyexcludes ‘‘inquiries or indications of interest thatare not entered into the internal broker-dealersystem.’’ Rule 17a–3(a)(16)(ii)(C), 17 CFR 240.17a–3(a)(16)(ii)(C).

446 Rules 17a–4(b)(1) and (10), 17 CFR 240.17a–4(b)(1) and (10).

447 See Concept Release, supra note 2, 62 FR at30518–19.

448 See Proposing Release, supra note 3(discussing comments responding to the ConceptRelease).

449 Id. at n.252.450 15 U.S.C. 78s(b).451 The Commission is also adopting measures to

relieve SROs of the requirement to file rule changeswith the Commission when an SRO wishes to listor trade new derivative securities products.Securities Exchange Act Release No. 40761 (Dec. 8,1998).

452 For example, in November 1990, the NYSEsubmitted a rule filing proposing an after-hourscrossing system to automate the execution of singlestock orders and baskets of securities and receivedCommission approval in May 1991. See SecuritiesExchange Act Release Nos. 29237 (May 24, 1991),56 FR 24853 (May 31, 1991); 32368 (May 25, 1993),58 FR 31565 (June 3, 1993). In August 1993, theCHX submitted a rule filing to operate the ChicagoMatch system, an electronic matching system thatcrossed orders entered by the CHX’s members andnon-members including institutional customers,and obtained Commission approval in November1994. See Securities Exchange Act Release No.35030 (Nov. 30, 1994), 59 FR 63141 (Dec. 7, 1994).More recently, in May 1997, the PCX submitted arule filing for approval of the OptiMark System andreceived Commission approval in September 1997.See Securities Exchange Act Release No. 39086(Sept. 17, 1997), 62 FR 50036 (Sept. 24, 1997).

453 See ICI Letter at 5; Corporate Capital Letter at2; CBOE Letter at 8; CHX Letter at 11; NASD Letterat 13; Amex Letter at 1–2; NYSE Letter at 9;American Century Letter at 6. See also AshtonLetter at 2; CME Letter at 4; SIA Letter at 15; PCXLetter at 8.

454 Section 19(b)(1) of the Exchange Act, 15 U.S.C.78s(b)(1), requires an SRO to file with theCommission any proposed rule or any proposedrule change (‘‘proposed rule change’’) accompaniedby a concise general statement of the basis andpurpose of the proposal. Once a proposed rulechange has been filed, the Commission is requiredto publish notice of it and provide an opportunityfor public comment. The proposed rule change maynot take effect unless it is approved by theCommission or is otherwise permitted to becomeeffective under Section 19(b) of the Exchange Act.Section 19(b)(2) of the Exchange Act, 15 U.S.C.78s(b)(2), sets forth the standards and time periodsfor Commission action either to approve a proposedrule change or to institute and conclude aproceeding to determine whether a proposed rulechange should be disapproved. The Commissionmay also approve a proposed rule change on anaccelerated basis if the Commission finds goodcause for so doing and publishes its reasons for sofinding. Section 19(b)(2) of the Exchange Act, 15U.S.C. 78s(b)(2)(B).

455 See paragraph (c) of Rule 19b–5, 17 CFR240.19b–5(c), for the definition of ‘‘pilot tradingsystem.’’

456 17 CFR 249.821.

broker-dealer. Broker-dealers are alsorequired to keep daily tradingsummaries, including information onthe types of securities for whichtransactions have been executedthrough the internal broker-dealersystem, and transaction volumeinformation.442 In addition, to clarifythe application of Rule 17a–3, theCommission is defining, for thepurposes of the rule, the terms ‘‘internalbroker-dealer system,’’ 443 ‘‘sponsor,’’ 444

and ‘‘system order.’’ 445

The Commission is also amendingRule 17a–4 under the Exchange Act torequire that the records required underthe amendments to Rule 17a–3 bepreserved for three years, the first twoyears in an accessible place.446 Thisamendment also requires thepreservation of all notices regarding aninternal broker-dealer system providedto its participants, whethercommunicated in writing, through theinternal broker-dealer system, or byother automated means. Such noticesinclude notices concerning the internalbroker-dealer system’s hours ofoperations, malfunctions, proceduralchanges, maintenance of hardware andsoftware, and instructions for accessingthe system.

VI. Temporary Exemption of PilotTrading System Rule Filings

A. IntroductionThe Commission recognizes that

registered exchanges, unlike alternativetrading systems registered as broker-dealers, must submit rule filings forCommission approval. In the ConceptRelease, the Commission generallysought comment on ways to expeditethe rule filing process and specificallysought comment on whether theCommission should exempt new SRO

trading systems or mechanisms fromrule filing requirements.447 Commenterspointed out that, under the currentregulatory structure, registeredexchanges and alternative tradingsystems compete on a ‘‘playing fieldthat is far from level,’’ 448 and attributedthis, in part, to exchanges’ inability toimplement new trading systems beforesubmitting a rule filing and receivingCommission approval.449 In response tocommenters’ concerns and to makeexisting markets more competitive, theCommission proposed Rule 19b–5, atemporary exemption for SROs thatwould defer the rule filing requirementsof Section 19(b) under the ExchangeAct 450 for pilot trading systems (‘‘pilottrading system rule’’).451

In formulating the pilot tradingsystem rule, the Commission drew onits prior experience with SROs’ attemptsto operate new pilot trading systems fortheir members.452 In the ProposingRelease, the Commission soughtcomment on whether the proposed pilottrading system rule would provideappropriate regulation and would levelthe competitive playing field betweenSROs and alternative trading systems.As an alternative, the Commissionsought comment on the benefits anddisadvantages of allowing SROs to fileproposed rule changes relating to pilottrading systems under an expeditedapproval process pursuant to section19(b)(3)(A) of the Exchange Act. Overall,comments on the proposed pilot tradingsystem rule were supportive of it as away to ease the regulatory disparity

between registered exchanges andalternative trading systems.

The Commission received nocomments opposing proposed Rule 19b–5. In general, commenters supported theproposal, stating that it wouldencourage further innovation andreduce some of the regulatory burdensthat make it difficult for SROs tocompete with broker-dealer operatedtrading systems. Some commenters,while generally supporting thetemporary exemption, suggestedmodifying proposed Rule 19b–5. Thesecomments focused on the proposeddefinition of a pilot trading system, thetypes of securities the Commissionproposed to allow SROs to trade onpilot trading systems, and theconfidential treatment of informationfiled by SROs regarding their pilottrading systems.453 After consideringthe comments, the Commission isadopting Rule 19b–5 substantially asproposed.

Currently, SROs are required tosubmit a rule filing to the Commissionand undergo a public notice, comment,and approval process before theyoperate any new trading system.454 Asadopted, the pilot trading system rulepermits SROs that develop separate,new systems that qualify as ‘‘pilottrading systems,’’ 455 to begin theiroperation shortly after submitting newForm PILOT to the Commission ismerely an informational filing and anSRO does not need to await Commissionapproval to begin operating its pilottrading system.456 During the operationof the pilot trading system, the


457 Rule 19b–5(f)(1) and (f)(2), 17 CFR 240.19b–5(f)(1) and (f)(2). See also infra Section VI.C.

458 Rule 19b–5(c)(3), 17 CFR 240.19b–5(c)(3).459 See infra Section VI.B.460 See Proposing Release, supra note 3, at

ns.256–61 and accompanying text.461 See Proposing Release, supra note 3, at n.261.462 See Ashton Letter at 2; SIA Letter at 15; CME

Letter at 3; Amex Letter at 1; Bloomberg Letter at6.

463 Rule 19b–5(c)(2), 17 CFR 240.19b–5(c)(2).464 A pilot trading system is ‘‘independent’’ of

other trading systems if it meets one of thestandards set forth in paragraph (d) of Rule 19b–5.

465 Rule 19b–5(c)(1), 17 CFR 240.19b–5(c)(1).466 Rule 19b–5(c)(3), 17 CFR 240.19b–5(c)(3). See

also infra Section VI.C.

467 Rule 19b–5(d), 17 CFR 240.19b–5(d). Forpurposes of the pilot trading system rule, aspecialist means any member subject to arequirement of an SRO that such member regularlymaintain a market in a particular security. Rule19b–5(a), 17 CFR 240.19b–5(a).

sponsoring SRO must submit to theCommission quarterly reports, as well asamendments to Form PILOT concerningany material changes to the pilot tradingsystem. Rule 19b–5 exempts an SROfrom the requirement to file rulechanges for the pilot trading systemwith the Commission for two years.Before two years expire, the SRO mustsubmit a rule filing to obtain from theCommission permanent approval of thepilot trading system or must ceaseoperation of the trading system.457 Inaddition, the temporary exemptionunder Rule 19b–5 expires sixty daysafter a pilot trading system exceedscertain volume levels. A pilot tradingsystem that exceeds these volume levelsmust file for permanent approval beforethe two-year period expires.458

The Commission believes the pilottrading system rule addresses many ofthe concerns raised by commenters.459

Inherent in the rule filing process ispublic disclosure of SROs’ businessplans for trading systems prior to theiroperation. Consequently, SROs’competitors are informed about theproposed pilot trading system and havean avenue to copy, delay, or obstructimplementation of the trading systembefore it can be tested in themarketplace.460 The rule filing processalso hinders innovation becauseregistered exchanges do not realize thefull competitive benefits of theirefforts.461 In contrast, alternative tradingsystems that offer similarly innovative,start-up services do not have the samerule filing obligations and, thus, have asignificant advantage in their flexibilityto devise, implement, and modify newpilot trading systems. Comments to theProposing Release echo theseconcerns.462 By deferring the rule filingprocess, the pilot trading system ruleallows SROs to better compete withalternative trading systems, whilecontinuing to ensure that investors areprotected and the pilot trading system isoperated in a manner consistent withthe Exchange Act.

Finally, the Commission recognizesthat domestic markets must competewith less regulated foreign markets andbroker-dealers. The Commission agreeswith commenters that excessiveregulation of traditional exchanges,alternative trading systems, or other

markets hinders these exchanges’ abilityto compete and survive in the globalarena. The pilot trading system ruleresponds to SROs’ need for a morebalanced competitive playing field.

B. Rule 19b–5The Commission is adopting Rule

19b–5 to provide a temporaryexemption from Section 19(b) of theExchange Act for SRO proposed rulechanges concerning the operation ofpilot trading systems.

1. Types of Systems Eligible forExemption Under Rule 19b–5

a. Definition of Pilot Trading System.The Commission is adopting thedefinition of pilot trading systemsubstantially as proposed. Underparagraph (c) of Rule 19b–5, a tradingsystem operated by an SRO would be a‘‘pilot trading system’’ if it met one oftwo definitions. First, a trading systemwould be a ‘‘pilot trading system,’’ evenif it traded the same securities oroperated during the same hours as anSRO’s existing trading system, if theSRO operated it for less than two years,and during at least two of the last fourconsecutive calendar months, it tradedno more than one percent of the U.S.average daily trading volume of eachsecurity traded on the trading system. Inaddition, the trading system could nothave an aggregate share trading volumeof more than twenty percent of theaverage daily trading volume of alltrading systems operated by the SRO.463

Second, a trading system would also beconsidered a ‘‘pilot trading system’’ if itwere independent 464 of any othertrading system operated by the SRO, theSRO operated it for less than two years,and, during at least two of the last fourconsecutive calendar months, it tradedno more than five percent of the U.S.average daily trading volume of eachsecurity traded on the trading system. Inaddition, under this second definition,the trading system would have to haveaggregate share trading no more thantwenty percent of the average dailytrading volume of all trading systemsoperated by the SRO.465

If at any time within the two-yearperiod a pilot trading system exceedsthe volume thresholds, it would beallowed to continue to operate for 60more days under this exemption.466

During this 60 day period, if the SROintended to continue operating the

trading system, it would have to file forpermanent approval under Section 19(b)of the Exchange Act of the rules relatedto the trading system.

The Commission received severalcomments asking the Commission torelax or eliminate the proposedrequirement that, to be a pilot tradingsystem with five percent of the tradingvolume in a security, the pilot tradingsystem would have to be‘‘independent.’’ As proposed, a pilottrading system would be independent ifit trades securities different from theissues of securities traded on any othertrading system that is operated by thesame SRO and that has been approvedby the Commission. A pilot tradingsystem would also be deemedindependent if it does not operateduring the same trading hours as anyother trading system that is operated bythe same SRO and that has beenapproved by the Commission. Finally, apilot trading system would be deemedindependent if no market maker orspecialist on any other trading systemoperated by the SRO trades on the pilottrading system the same securities inwhich they act as a market maker orspecialist.467 The Commissionemphasized that a pilot trading systemneed only satisfy one of the threecriteria to qualify the pilot tradingsystem as independent. Afterconsidering the comments, theCommission continues to believe suchcriteria are not unduly restrictive andare necessary for the protection ofinvestors, and is adopting it asproposed.

b. Response to Comments on theProposed Definition of Pilot TradingSystem. In its proposed definition of apilot trading system, the Commissionsought to impose limits that were in thepublic interest and for the protection ofinvestors, while still providing SROswith the flexibility to innovate. TheCommission requested comment on thisproposed definition, and specificallyasked whether the proposed two-yeartime period, trading volume limits, andindependence criteria were appropriate.Commenters were asked to providespecific reasons for any concerns aboutthe proposed definition and to suggestalternatives. Several commentersfocused on particular aspects of theproposed pilot trading systemdefinition.

The NYSE commented that thespecific provisions of proposed Rule


468 NYSE Letter at 9.469 ICI Letter at 5.470 See CBOE Letter at 2, 9; CHX Letter at 11; CME

Letter at 4; PCX Letter at 8–10.471 See CME Letter at 4; PCX Letter at 9–10.472 See NASD Letter at 13; PCX Letter at 9–10.473 PCX Letter at 9–10.

474 Amex Letter at 1, 3.475 See CBOE Letter at 9; CHX Letter at 11.476 See CBOE Letter at 9; NASD Letter at 2, 14.477 CHX Letter at 11.478 15 U.S.C. 78f(b)(5).

479 See supra note 467 and accompanying text.480 Rule 19b–5(b), 17 CFR 240.19b–5(b).

19b–5 were carefully crafted. Inaddition, the NYSE agreed with theCommission’s proposal to distinguishbetween systems that are ‘‘independent’’of other SRO trading systems andsystems that work together with existingSRO trading systems.468 The ICIsupported the proposed limitedexemption for pilot trading systems. TheICI, however, discouraged any furtherexpansion of the criteria that wouldconstitute a pilot trading system andencouraged the Commission to carefullymonitor pilot trading systems as theyoperate under the exemption.469

On the other hand, severalcommenters stated that Rule 19b–5should be liberalized to provide SROswith a meaningful opportunity todevelop pilot trading systems on acomparable basis to alternative tradingsystems.470 For example, the CMEgenerally asserted that the numerousproposed restrictions on what wouldqualify as a pilot trading system wouldrender the proposal of little practicalvalue to exchanges.471 With regard tothe volume thresholds proposed by theCommission, the NASD and the PCXstated that the volume thresholds weretoo low. 472 The PCX stated that thevolume restrictions did not make sensebecause they limited the ability ofregistered exchanges to introduce newtrading systems—particularly whenneither alternative trading systems northird market makers are subject tosimilar volume limitations. Instead, thePCX stated that Rule 19b–5 should treatexchange pilot trading systems asthough they were alternative tradingsystems for two years, provided thetrading systems did not exceed a fairlyhigh percentage (perhaps ten percent) oftotal trading volume in any security.473

Moreover, the Amex said the volumethresholds for individual securitieswould limit the utility of the exemptionfor primary markets. In particular, theAmex suggested that the Commissionapply only an aggregate volumethreshold whereby volume in an SROpilot trading system could not exceed aspecified percentage of total volume inall such SRO’s trading systems. Thisapproach, the Amex believed, wouldeliminate the administrative burden onSROs monitoring the one percent or fivepercent thresholds and would avoid thepotentially adverse impact on theoperation and success of a pilot trading

system that could occur by removingsecurities from the system that exceededa specified threshold.474

Other commenters thought the criteriaestablishing the independence of a pilottrading system from other tradingsystems operated by the same SRO weretoo restrictive.475 In particular, theCBOE and NASD asserted that theindependence criteria unnecessarilyprecluded exchange specialists andmarket makers from participating inpilot trading systems.476 Similarly, theCHX stated that it was too limiting torequire a pilot trading system to tradedifferent securities or operate duringdifferent hours than the sponsoringSRO’s other trading systems in order tobe ‘‘independent.’’ 477

c. Adopted Definition of Pilot TradingSystem. The Commission hasconsidered these comments. Asdiscussed above, it believes that,because the proposed definition of apilot trading system, including theproposed volume thresholds andindependence criteria is novel anduntried, the criteria are appropriate. TheCommission notes that, pursuant toparagraph (b)(5) under section 6 of theExchange Act, rules of a registeredexchange should be designed, amongother things, to prevent fraudulent andmanipulative acts and practices, topromote just and equitable principles oftrade and, in general, to protectinvestors and the public interest.478 TheCommission believes that the desire ofthe registered exchanges to innovate andcompete with alternative tradingsystems must be balanced with theirstatutory obligations under section 6 ofthe Exchange Act. Therefore, thevolume thresholds and other standardsare designed to ensure that once a pilottrading system’s activities reach asignificant level, the pilot tradingsystem will be subject to the publicnotice and comment process undersection 19(b) of the Exchange Act. TheCommission recognizes that thedefinition of ‘‘pilot trading system’’ ismore narrow than some SROs wouldprefer, but notes that this does notprevent registered exchanges fromdeveloping trading systems that do notmeet the definition of ‘‘pilot tradingsystem’’ and filing proposed rulechanges relating to those systems undersection 19(b) of the Exchange Act.

Similarly, through the independencecriteria, the Commission identifiedcharacteristics that render pilot trading

systems sufficiently distinct from thesponsoring SRO’s other trading systemsso that a five percent, rather than onepercent volume level, is acceptable.‘‘Independent’’ pilot trading systemspose less risk of substantially changingthe existing markets in a mannerdetrimental to investors and, therefore,the Commission believes should be ableto operate under the exemption athigher volume thresholds than their‘‘non-independent’’ counterparts beforehaving to submit proposed rule filingsunder section 19(b) of the ExchangeAct.479 The Commission will monitoruse of the pilot trading systemexemption, and will consider modifyingthese criteria in the future based on itsexperience with SRO’s use of theexemption.

2. Scope of Pilot Trading RuleExemption

The Commission is adopting Rule19b–5 to provide a temporaryexemption from Section 19(b) of theExchange Act for SRO proposed rulechanges concerning the operation ofpilot trading systems. This temporaryexemption includes all rules related tothe operation of pilot trading systems.The Commission defines trading systemin paragraph (b) of Rule 19b–5 toinclude the rules of a self-regulatoryorganization that: (i) Determine how theorders of multiple buyers and sellers arebrought together; and (ii) establish non-discretionary methods under whichsuch orders interact with each other andunder which the buyers and sellersentering such orders agree to the termsof trade.480 The Commission intendsthis exemption to provide SROs withflexibility to establish and modify thepilot trading system without obtainingprior approval from the Commission.However, this exemption does notinclude any SRO rules that wouldfundamentally affect the relationshipbetween an SRO’s members and thosemembers’ customers, or an SRO’soversight of its members.

The Commission notes that Rule 19b–5 does not relieve SROs from anyobligation under the federal securitieslaws, other than the requirement to fileproposed rule changes relating to theoperation of a pilot trading system. Rule19b–5, therefore, does not provide anexemption for SRO rules relating toother requirements imposed under otherprovisions of the Exchange Act, such assections 11(a) and 10(a), and Rule 10a–1 thereunder. In addition, an SRO mustensure that securities listed and tradedon any pilot trading system comply



482 See Section 6(b)(2) of the Exchange Act, 15U.S.C. 78f(2). See also Order Handling RulesAdopting Release, supra note.

483 The Commission is not adopting therequirement concerning the procedures to ensurethe confidential treatment of trading informationbecause SROs are not currently required to do thiswith regard to their other trading systems.

484 See discussion infra VI.B.3.i.

485 CBOE Letter at 10.486 Examples include computer companies that

design and maintain systems and clearing agencies.487 Rule 19b–5(e)(1), 17 CFR 240.19b–5(e)(1).

488 Rule 19b–5(g), 17 CFR 240.19b–5(g).489 Rule 19b-5(e)(1), 17 CFR 240.19b–5(e)(1). The

Commission requires that SROs identify filingsmade pursuant to Rule 19b–5 by including a filenumber on Form PILOT that appears as follows:PILOT—name of SRO—year—file number.

490 CBOE Letter at 9.491 NYSE Letter at 9.492 Amex Letter, p. 2.493 American Century Letter, p. 6.

with, among other things, theregistration requirements of theExchange Act.481 An SRO alsocontinues to be required to enforcecompliance with its own rules and thefederal securities laws, includingmembers’ compliance with the OrderHandling Rules.482 SROs, similarly, areexpected to operate the pilot tradingsystems in compliance with rulesgoverning market-wide trading halts.

3. SROs’ Continuing ObligationsRegarding Pilot Trading Systems

In order to ensure that pilot tradingsystems are operated in a mannerconsistent with the Exchange Act, theCommission proposed requiring SROsto comply with certain conditionsbefore a pilot trading system would beeligible for the temporary exemption. Inparticular, the Commission proposedthat SROs comply with the followingwith regard to pilot trading systems: (1)Notify and periodically file informationabout the pilot trading system with theCommission, (2) implement tradingrules and procedures, (3) establisheffective surveillance, (4) establishreasonable clearance and settlementprocedures, (5) limit the types ofsecurities traded, (6) cooperate withinspections and examinations by theCommission, and (7) have procedures toensure the confidential treatment oftrading information.483

The Commission sought comment onwhether there were any additionalconditions with which SROs should berequired to comply in order to betemporarily exempt from the rule filingrequirements under Rule 19b–5.Commenters did not recommend anyadditional conditions. The Commissionnotes, however, that, as discussedbelow, it is adding a requirement thatSROs make publicly available the rulesrelating to the operation of the pilottrading system.484

In the Proposing Release, theCommission stated that SROs wouldhave to ‘‘ensure’’ that these conditionswere satisfied in order to rely on thetemporary exemption under proposedRule 19b–5. One commenter raisedconcerns regarding the requirement thatSROs ‘‘ensure’’ that the conditions weremet in order to rely on the proposedpilot trading system rule. Specifically

the CBOE requested that an SRO beallowed to rely on proposed Rule 19b–5 if the SRO acts in good faith indetermining that the requirements of thepilot trading system rule have beenmet.485 Based upon the Commission’sexperience with reviewing new pilottrading system proposals submitted bySROs, the Commission continues tobelieve that SROs operating pilottrading systems should satisfy theproposed requirements in order tooperate such systems in a mannerconsistent with the Exchange Act.Nonetheless, the Commissionrecognizes that full compliance withsome of the conditions may be beyondthe SROs’ control. The Commissionagrees it is not practical to hold SROsstrictly liable for the failure ofunaffiliated entities to satisfy certainrequirements of the proposed pilottrading system rule. Therefore, theCommission will consider an SROexempt from rule filing requirementsunder Rule 19b–5 if the SRO acts ingood faith in determining that theoperation of the pilot trading systemmeets the conditions set out inparagraph (e) of that rule, and inoperating the pilot trading system.

a. Notice and Filings to theCommission. The Commission proposedthat SROs be required to provide writtennotice of, and information about, theoperation of a pilot trading system to theCommission on new Form PILOT. OnForm PILOT, an SRO would have toprovide general information about thepilot trading system, including: (1) Thedate the SRO expects to commenceoperation of the pilot trading system; (2)a list of securities to be traded; (3) a listof anticipated members to the pilottrading system; and (4) the names ofentities assisting in the operation of thepilot trading system.486 The SRO couldstart operation of the pilot tradingsystem twenty days after this filing iscomplete. If the SRO materially changesits proposed pilot trading system priorto commencing operation, the SROwould be required to file an amendmentto Form PILOT and wait twenty daysbefore commencing operation. TheCommission is adopting the noticerequirement and Form PILOT asproposed.487

The twenty day period following anSRO’s filing of Form PILOT is intendedto provide the Commission with time toreview the form for compliance by theSRO with the pilot trading system rule.In addition, after reviewing Form PILOT

the Commission may determine, afternotice to the SRO and an opportunityfor the SRO to respond, that theoperation of a particular pilot tradingsystem would not be necessary orappropriate in the public interest orconsistent with the protection ofinvestors without the SRO filingproposed rule changes under section19(b) of the Exchange Act.488

The Commission also proposed torequire an SRO to file an amendment toForm PILOT at least twenty days beforeit implements any material change tothe operation of the pilot tradingsystem. The Commission wouldconsider a material change to the pilottrading system to include the additionof new types of securities, or a new datefor commencing operation of the pilottrading system. The Commissionproposed that an SRO also submitquarterly reports on Form PILOT thatwould include information about thetrading volume effected on the pilottrading system during the most recentcalendar quarter. The Commissionreceived no comments on theserequirements and is adopting them asproposed.489

The Commission proposed that allnotices and reports filed on Form PILOTbe kept confidential. The Commission,however, requested comment onwhether all information on Form PILOTshould be publicly available or whether,as an alternative, information on FormPILOT should be publicly available,unless an SRO specifically requestsconfidential treatment. The Commissionreceived several comments on theconfidential treatment of information onForm PILOT. The CBOE recommendedthat all information about a pilot tradingsystem filed quarterly on Form PILOTbe deemed confidential.490 The NYSEsuggested only limited confidentialityfor filings on Form PILOT, that is, pilottrading system information should bepublicly available shortly prior to, or onthe date of, launch of a new system.491

Another commenter offered that theCommission make public only certaininformation on Form PILOT.492 Onecommenter suggested that theconfidential treatment of Form PILOTinformation be at the filer’sdiscretion.493


494 Rule 19b–5(e)(11), 17 CFR 240.19b–5(e)(11).495 The Commission notes that registered

exchanges and national securities associationsalready have obligations to ensure that theirmarkets treat investors and other marketparticipants fairly. The Exchange Act requiresregistered exchanges and national securitiesassociations to consider the public interest inadministering their markets and to establish rulesdesigned to admit members fairly. Sections 6(b)(2)and 6(c) of the Exchange Act, 15 U.S.C. 78f(b)(2)and (c); section 15A(b)(8) of the Exchange Act, 15U.S.C. 78o–3(b)(8). See also supra notes 241–244and accompanying text.

496 Rule 19b–5(e)(2)(i), 17 CFR 240.19b–5(e)(2)(i).

497 Rule 19b–5(e)(2)(ii), 17 CFR 240.19b–5(e)(2)(ii).

498 Rule 19b–5(e)(2)(iii), 17 CFR 240.19b–5(e)(2)(iii).

499 Rule 19b–5(e)(3), 17 CFR 240.19b–5(e)(3).500 The Commission believes that a

comprehensive ISA requires that the parties provide

to each other, upon request, information aboutmarket trading, clearing activity, and the identity ofthe ultimate purchasers and sellers of securities.See Securities Exchange Act Release No. 31529(Nov. 27, 1992), 57 FR 57248 (Dec. 3, 1992).Similarly, an SRO that operates a pilot tradingsystem that trades securities, or derivatives ofsecurities that are listed or traded on a foreignmarket, should have a comprehensive ISA withsuch foreign markets. In addition, the SRO shouldensure there are no blocking or secrecy laws in theforeign country that would prevent or interfere withthe transfer of information under thecomprehensive ISA. If securing a comprehensiveISA is not possible, the SRO should contact theCommission. In such instances, the Commissionmay determine that it is appropriate instead to relyon a Memorandum of Understanding (‘‘MOU’’)between the Commission and the foreign regulator.Generally, the Commission has permitted an SROto rely on an MOU in the absence of acomprehensive ISA only if the SRO receives anassurance from the Commission that such an MOUcan be relied on for surveillance purposes andincludes, at a minimum, the transaction, clearing,and customer information necessary to conduct aninvestigation. See Securities Exchange Act ReleaseNo. 35184 (Dec. 30, 1994), 60 FR 2616 (Jan. 10,1995). In addition, an SRO should endeavor todevelop comprehensive ISAs with foreignexchanges even if the SRO receives priorCommission approval to rely on an MOU in placeof a comprehensive ISA.

501See ISG Agreement, dated July 14, 1983,amended Jan. 29, 1990. The ISG members are:Amex, BSE, CBOE, CHX, NASD, NYSE, PCX, andPhlx. The major stock index futures exchangesjoined the ISG as affiliate members in 1990.

After considering commenters’suggestions, the Commission hasdetermined that the confidentialtreatment of Form PILOT information isan important element in reducing thedisparate regulatory treatment of SROsand alternative trading systems and thatsuch confidentiality is critical in theperiod prior to a pilot trading systemcommencing operations. However, theCommission also considers importantthe public’s interest in having access toaccurate information about the pilottrading system. Accordingly, theCommission is modifying proposedRule 19b–5, so that information reportedby an SRO on Form PILOT isconfidential until the pilot tradingsystem commences operation.494

Thereafter, Form PILOT informationwill be made available to the public. b.Fair Access

b. Fair Access. Because informationand access advantages of certain SROmembers could subvert the fair andorderly trading of securities on a pilottrading system or the primary market,the Commission is adding a specificcondition to the pilot trading systemrule requiring that the SRO provide fairaccess to the pilot trading system to allmembers of the SRO. The Commissionis adding this fair access requirement inorder to ensure that markets treat theirmembers fairly.495 In particular, theSRO shall establish written standardsfor granting access to the pilot tradingsystem and apply those standards fairlyto all members. Fair access does notrequire an SRO to allow every memberto trade on a pilot trading system or togive each member trading on the pilottrading system the same privileges.However, this requirement does prohibitan SRO from unfairly discriminating inthe access it does give its members tothe pilot trading system. In addition, theSRO must ensure that informationregarding orders on the pilot tradingsystem is equally available to allmembers of the SRO with access to thepilot trading system.496 However, aspecialist may have preferred access toinformation regarding orders itrepresents in its capacity as specialist

on the pilot trading system.497 Thismeans that such SRO rules need notrequire a member acting as a specialiston the pilot trading system to expose itsorders to all members, that is maintainan ‘‘open book.’’ Such rules establishedby the SRO will be considered part ofthe pilot trading system for purposes ofthe temporary exemption.498

c. Trading Rules and Procedures. TheCommission proposed to require SROsoperating pilot trading systems underRule 19b–5 to adopt and implementtrading rules and procedures necessaryto operate the pilot trading system in amanner consistent with the ExchangeAct. The Commission received nocomments specifically addressing thiscondition and is adopting itsubstantially as proposed. As adopted,an SRO must have appropriate tradingrules and procedures to promote the fairand orderly trading of securities on thepilot trading system, including: (1)Margin requirements; (2) listingstandards; (3) sales practice guidelines,such as rules regarding communicationswith the public; and (4) disclosurerequirements. The trading rules andprocedures should be appropriate for,and ensure the fair and orderly tradingof, each type of security to be traded onthe pilot trading system.499

d. Surveillance. Under the proposal,an SRO would have to establishprocedures for the effective surveillanceof trading activity on a pilot tradingsystem. In the Proposing Release, theCommission noted the importance of anSRO being able to obtain informationnecessary to detect and deter marketmanipulation, illegal trading, and othertrading abuses. To satisfy thisrequirement, the Commission proposedthat an SRO have to develop andimplement internal surveillanceprocedures to monitor transactionseffected on the pilot trading system, andobtain surveillance information fromother markets, both domestic andforeign.

Specifically, in the Proposing Release,the Commission discussed itsexpectation that there be acomprehensive information sharingagreement (‘‘ISA’’) in place between theSRO operating a pilot trading systemand any other market trading thesecurities, or trading the underlyingsecurities of derivative securitiesproducts, traded on such pilot tradingsystem.500 Such agreements provide a

necessary deterrent to manipulationbecause they facilitate the availability ofinformation needed to fully investigatea potential manipulation. An SROoperating a pilot trading system tradingU.S. securities, or new derivativesecurities products overlying U.S.securities, would have to continue toensure that all exchanges on which theU.S. securities trade are members of theIntermarket Surveillance Group(‘‘ISG’’).501 The ISG was formed tocoordinate, among other things,effective surveillance and investigativeinformation sharing arrangements in thestock and options markets.

The Commission received nocomments specifically addressing thesurveillance requirement under theproposed pilot trading system rule. TheCommission continues to believe that inorder for an SRO to operate a pilottrading system in a manner consistentwith the Exchange Act, the SRO must beable to obtain information necessary todetect and deter market manipulation,illegal trading, and other trading abuses.Therefore, the Commission is adopting,as proposed, the requirement that anSRO develop and implement internalsurveillance procedures to monitortransactions effected on the pilot tradingsystem, and obtain surveillanceinformation from other markets, both


502 Rule 19b–-5(e)(4), 17 CFR 240.19b–5(e)(4).503 Rule 19b–5(e)(5), 17 CFR 240.19b–5(e)(5).504 15 U.S.C. 78l(f).505 See Securities Exchange Act Release No.

39505 (Dec. 31, 1997), 63 FR 1515 (Jan. 9, 1998 ).

506 Rule 19b–5(e)(6), 17 CFR 240.19b–5(e)(6).507 See, e.g., Securities Exchange Act Release Nos.

21759 (Feb. 14, 1985), 50 FR 7250 (Feb. 21, 1985)(order approving NYSE proposal to trade options onNYSE-listed stocks in a separate physical locationfrom the equity trading floor); 26147 (Oct. 3, 1988),53 FR 39556 (Oct. 7, 1988) (order approving thetrading on the Amex of options on Amex-listedstocks, concluding that side-by-side trading orintegrated market-making issues did not arisebecause the Amex proposed to trade stocks andrelated options in physically separate locations);and 28556 (Oct. 19, 1990), 55 FR 43233 (Oct. 26,1990) (order approving rule changes to establishrules governing the trading of stocks, warrants, andother securities instruments and contracts on theCBOE conditioned on the fact that trading insecurities other than options will take place on atrading floor separate from the location whereoptions are traded).

508 Amex Letter at 4.

509 CBOE Letter at 10.510 Rule 19b–5(e)(3), 17 CFR 240.19b–5(e)(3).511 Rule 19b–5(e)(7)(iii), 17 CFR 240.19b–

5(e)(7)(iii), defines related securities to mean anytwo securities in which the value of one securityis determined, in whole or significant part, by theperformance of the other security; or the value ofboth securities is determined, in whole orsignificant part, by the performance of a thirdsecurity, combination of securities, index, indicator,interest rate or other common factor.

512 A specialist, for purposes of the pilot tradingsystem rule, means any member that is subject toan SRO requirement to regularly maintain a marketin a particular security. Rule 19b–5(a), 17 CFR240.19b–5(a). The definition of specialist is meantto preclude member firms with exclusiveinformation about buy and sell orders from usingunfairly such non-public material marketinformation to their competitive advantage. Forinstance, a member acting as a specialist on theNYSE also could not simultaneously act as aspecialist in related securities on a pilot tradingsystem sponsored by the NYSE. Similarly, amember acting as a designated primary marketmaker on the CBOE also could not simultaneouslyact as a designated primary market maker in relatedsecurities on a pilot trading system sponsored bythe CBOE.

domestic and foreign by means of anISA.502

e. Clearance and Settlement. In theProposing Release, the Commissionobserved that the integrity of the tradingmarkets depends on the prompt andaccurate clearance and settlement ofsecurities transactions. For this reason,the Commission proposed that, as acondition of the exemption under Rule19b–5, an SRO establish reasonableclearance and settlement procedures fortransactions effected on the pilot tradingsystem. For example, to ensure thatadequate linkages have been formed,part of the user agreement should, at aminimum, request information aboutthe name of the clearing agency memberthrough which the user will clear itstrades. The Commission received nocomments specifically addressing theclearance and settlement requirementunder the proposed pilot trading systemrule. Therefore, the Commission isadopting as proposed, the requirementthat an SRO operating a pilot tradingsystem ensure that the necessarylinkages to clearing agencies exist for allpilot trading system users.503

f. Types of Securities. TheCommission proposed to limit the typesof securities an SRO could trade on apilot trading system. Two separatelimitations were proposed. First, underthe proposal a pilot trading systemwould only be permitted to tradesecurities listed on a national securitiesexchange or to which unlisted tradingprivileges was extended pursuant to arule, regulation, or order of theCommission under section 12(f) of theExchange Act. In general, section 12 ofthe Exchange Act requires an exchangeto trade only those securities that theexchange lists, except that section 12(f)of the Exchange Act provides UTPunder certain circumstances.504 Forexample, under the OTC–UTP plan,exchanges are permitted to trade certainover-the-counter securities pursuant to aCommission order.505 As proposed, apilot trading system operated by aregistered exchange or a nationalsecurities association would be limitedto trading listed securities or securitiesto which UTP has been extended undersection 12(f) of the Exchange Act.Because national securities associationscurrently trade securities that areneither exchange listed or subject toUTP, this provision was unnecessarilyrestrictive. Consequently, theCommission is modifying the limitation

on the types of securities a pilot tradingsystem may trade from that proposed. Inparticular, Rule 19b–5(e)(6), as adopted,only restricts pilot trading systems byrequiring that securities traded beregistered under section 12 of theExchange Act.506 Registered exchangeswill still be required to comply withsections 12(a) and 12(f) of the ExchangeAct, and therefore, can only tradesecurities listed on that exchange, orsecurities it is permitted to trade underthe OTC–UTP Plan.

g. Activities of Specialists. Asproposed, an SRO’s pilot trading systemwould not be eligible for the exemptionin Rule 19b-5 if it traded derivativesecurities, such as options, warrants, orhybrid products, the value of whichwere based, in whole or in part, uponthe performance of any security tradedon another trading system operated bythat SRO. Similarly, the proposedexemption excluded SRO pilot tradingsystems that traded any security orinstrument, such as an equity security,the derivative of which traded onanother trading system operated by thatSRO. The Commission, in proposingthese limitations, intended to precludean SRO from relying on the temporaryexemption if a pilot trading systemsimultaneously traded a securityoverlying or underlying a securitytraded on that SRO’s primary market.The Commission has always consideredthis type of trading to raise specialconcerns that should be resolvedthrough the normal rule filingprocess.507

In commenting on proposed Rule19b–5, the CBOE and the Amexconsidered these limitations overlyrestrictive. The Amex suggestedremoving this limitation and insteadrequiring SROs to specify on FormPILOT their rules and procedures fortrading such securities on the pilottrading system.508 The CBOE suggestedan alternative to the limitation that pilottrading systems may not trade securities

that overlie or underlie securities tradedon another trading system operated bythe same SRO. In particular, the CBOEsuggested requiring the SRO to createfirewalls or other safeguards betweenpersons trading the derivative and theunderlying or overlying securities,rather than flatly prohibiting it.509

After considering the commenters’recommendations, the Commission hasdetermined that SROs may operate pilottrading systems under Rule 19b–5 thatsimultaneously trade a security that isoverlying or underlying a securitytraded on another trading systemoperated by that market, provided thatsuch trading remains separate. Thismeans that, as part of the SRO’s generalrequirement to have written tradingrules and procedures to operate the pilottrading system,510 an SRO must haveadequate rules and procedures to traderelated securities simultaneously. Inaddition, the Commission is adopting amore narrow prohibition than itproposed, which prohibits a memberfirm that is a specialist in a securityfrom acting as a specialist on a pilottrading system operating during thesame hours in a related security.511 Forexample, a member firm may not be aspecialist in a security, such as anequity security, on the pilot tradingsystem when it is also a specialist in aderivative of that security, such as anoption or equity-linked note, whosevalue, in whole or significant part, isbased on the performance of thatsecurity.512 The Commission would notconsider listed options in a singleunderlying instrument to be relatedsecurities, for purposes of the pilottrading system exemption. The


513 An SRO also may request an exemption fromthe limitation under Rule 19b–5(e)(7)(i) by filing anapplication for an order for exemptive relief undersection 36. See 17 CFR 240.0–12.

514 Rule 19b–5(e)(7), 17 CFR 240.19b–5(e)(7).515 Rule 19b–5(e)(8), 17 CFR 240.19b–5(e)(8).516 Rule 19b–5(e)(9), 17 CFR 240.19b–5(e)(9).

517 Rule 19b–5(e)(10), 17 CFR 240.19b–5(e)(10).This specific requirement is necessary because Rule6a–2, as amended, requires exchanges to file itstrading rules and procedures only once every threeyears, while national securities associations have nosuch publication requirement except through therule filing process under section 19(b) of theExchange Act.

518 Rule 19b–5(f)(1), 17 CFR 240.19b–5(f)(1).519 Rule 19b–5(f)(1) and (f)(2), 17 CFR 240.19b–

5(f)(1) and (f)(2).

520 It was recognized at the time the Exchange Actwas enacted that a regulatory structure for securitiesexchanges would ‘‘be of little value tomorrow if itis not flexible enough to meet new conditionsimmediately as they arise and demand attention inthe public interest.’’ See SEC, Report of the SpecialStudy of the Securities Markets of the Securitiesand Exchange Commission, H.R. Doc. No. 95, 88th

Cong., 1st Sess. Pt. 1 (1963) (‘‘Special Study’’), at6. See also S. Rep. No. 792, 73rd Cong., 2d Sess.(1934) at 5 (noting that ‘‘exchanges cannot beregulated efficiently under a rigid statutoryprogram,’’ and that ‘‘considerable latitude isallowed for the exercise of administrative discretionin the regulation of both exchanges and the over-the-counter market.’’)

521 15 U.S.C. 78c(a)(1).522 Delta Release, supra note 32. In 1988, the

Commission granted Delta temporary registration asa clearing agency to allow it to issue, clear, andsettle options executed through a trading systemoperated by RMJ Securities (‘‘RMJ’’). Concurrently,the Commission’s Division of Market Regulationissued a letter stating that the Division would notrecommend enforcement action against RMJ if itssystem did not register as a national securitiesexchange. Subsequently, the Board of Trade of theCity of Chicago and the Chicago MercantileExchange petitioned the U.S. Court of Appeals forthe Seventh Circuit for review of the Commission’sactions. Both challenges were premised on the viewthat RMJ’s system unlawfully failed to register as anexchange or obtain an exemption from registration.The Seventh Circuit vacated Delta’s temporaryregistration as a clearing agency, pendingpublication of a reasoned Commission analysis ofwhether or not RMJ’s system was an exchangewithin the meaning of the Exchange Act. Board ofTrade of the City of Chicago v. Securities andExchange Commission, 883 F.2d 525 (7th Cir. 1989)(‘‘Delta I’’). In 1989, the Commission solicitedcomment on the issue, and in 1990 published itsinterpretation of the term ‘‘exchange’’ and itsdetermination that RMJ’s system did not meet thatinterpretation.

523 See Delta Release, supra note 32. TheCommission also identified the following factors assupporting the conclusion that the system in Deltashould not be classified as an exchange. Unlike atraditional exchange, the system (1) was not opento the participation of retail investors on an agencybasis; (2) did not offer limit order protection; and(3) provided a forum for trading instruments thatlacked certain indicia of standardization. Thesefactors were admittedly outside the Commission’s‘‘central focus’’ in Delta. Id. Moreover, mostalternative trading systems that will fall now under

limitation under Rule 19b-5(e)(7)(ii)does not preclude any member firmfrom being a specialist on a pilot tradingsystem in a security related to a securityin which the member firm is a specialiston the SRO’s other trading systems,when such related securities trade atdifferent times.513 Also, a member maybe a specialist in related securities that,the Commission, upon application bythe SRO, later determines is necessaryor appropriate in the public interest andconsistent with the protection ofinvestors.514

The Commission notes that Rule 19b–5 does not prohibit an SRO fromdeveloping a trading system thatpermits a member firm to be a specialistin related securities that tradesimultaneously on trading systemsoperated by the same SRO. However,the SRO could not avail itself of theRule 19b–5 temporary exemption, andinstead would have to file proposed rulechanges with the Commission underSection 19(b) of the Exchange Act forpublic notice and comment and obtainCommission approval prior to operatingsuch trading system.

h. Inspections and Examinations. Asa condition to the exemption, theCommission proposed that an SROcooperate with any examination orinspection by the Commission ofpersons effecting transactions on thepilot trading system. The Commissionreceived no comments on thisrequirement and is adopting it asproposed.515 As adopted, the SRO shallcooperate with the examination,inspection, or investigation by theCommission of transactions effected onthe pilot trading system. TheCommission staff will review SROcompliance with the conditions in Rule19b–5 through its routine inspections.In order for the Commission staff todetermine whether an SRO has properlyrelied on the exemption under Rule19b–5, the SRO must maintain at itsprincipal place of business all relevantrecords and information pertaining tothe pilot trading system and the basisfor which the SRO relied on theexemption from the rule filingrequirement.516 The Commission notesthat if an SRO outsources the operationor maintenance of any aspect of a pilottrading system, such vendor would beconsidered to be operating a facility ofan SRO and therefore would also be

subject to Commission examination orinspection.

i. Public Availability of Pilot TradingSystem Rules. Although pilot tradingsystem rules do not need to be approvedby the Commission, the Commissionbelieves the current trading rules andprocedures of the pilot trading systemshould be publicly available.Accordingly, the Commission isadopting a requirement that the SROmake its trading rules and procedures ofthe pilot trading system publiclyavailable.517

C. Rule Filing Under Section 19(b)(2) ofthe Exchange Act Required Within TwoYears

Within two years of a pilot tradingsystem commencing operation, an SROmust submit a rule filing under section19(b)(2) of the Exchange Act to obtainapproval for the pilot trading system tooperate on a permanent basis.518 Inaccordance with section 19(b) of theExchange Act, after a formal notice andcomment period, the Commission willdecide whether to approve the proposedrule changes relating to a pilot tradingsystem on a permanent basis or whetherto institute proceedings to disapprovethe proposed rule changes.Simultaneous with its request forCommission approval under to section19(b)(2) of the Exchange Act, an SROmay request Commission approvalpursuant to Section 19(b)(3)(A) of theExchange Act, effective immediate uponfiling, to continue to operate the tradingsystem for a period not to exceed sixmonths.519

VII. The Commission’s Interpretation ofthe ‘‘Exchange’’ Definition

A. The Commission’s Interpretation inDelta

In the Exchange Act, Congressprovided a broad definition of the term‘‘exchange,’’ permitting the Commissionto apply the definition flexibly as thesecurities markets evolve over time.520

Section 3(a)(1) of the Exchange Actprovides that:

The term ‘‘exchange’’ means anyorganization, association, or group ofpersons, whether incorporated orunincorporated, which constitutes,maintains, or provides a market place orfacilities for bringing together purchasers andsellers of securities or for otherwiseperforming with respect to securities thefunctions commonly performed by a stockexchange as that term is generallyunderstood, and includes the market place ormarket facilities maintained by suchexchange.521

Although the statutory definition of‘‘exchange’’ is quite broad, in the 1990Delta Release,522 the Commissioninterpreted the definition narrowly toinclude only those organizations thatare ‘‘designed, whether through tradingrules, operational procedures orbusiness incentives, to centralizetrading and provide buy and sellquotations on a regular or continuousbasis so that purchasers and sellers havea reasonable expectation that they canregularly execute their orders at thoseprice quotations.’’ 523 Based on this


the Commission’s new interpretation in Rule 3b–16allow broker-dealer subscribers to act on behalf ofretail customers in placing and executing orders onthe system; function as limit order books whereorders are executed according to time, price, andsize priority; and trade standard securities.

524 Board of Trade of the City of Chicago v. SEC,923 F.2d 1270 (7th Cir. 1991).

525 For a list of no-action letters issued to systemsponsors until the end of 1993 and a short historyof the Commission’s oversight of such systems, seeSecurities Exchange Act Release No. 33605, 59 FR8368, 8369–71 (Feb. 18, 1994). See also Letters fromthe Division of Market Regulation to: Tradebook(Dec. 3, 1996); The Institutional Real EstateClearinghouse System (May 28, 1996); ChicagoBoard Brokerage, Inc. and Clearing Corporation forOptions and Securities (Dec. 13, 1995).

526 Delta Release, supra note 32, at 1899.527 Id.528 Id.529 See supra note 7.

530 The rules adopted today reflect and facilitatemultiple sources of liquidity. Increasing thelinkages among markets where significant tradingactivity occurs—both exchanges and alternativetrading systems—will make the overall market forsecurities more transparent and liquid.

531 See Order Handling Rules Adopting Release,supra note 177 at Section III.

532 In fact, an alternative trading system that postsfirm orders to buy or sell a security does raise acertain expectation of execution at those quotedprices. The expectation is based on the life of theoutstanding orders in the system, rather than oncontinuous two-sided quotations published byspecialists or market makers.

533 See Delta Release, supra note 32, at 1900.

534 Delta Release, supra note 32, at 1895 (quotingDelta I, supra note 522, at 535).

535 Delta II, supra note 348, at 1273. The courtheld that, because the statutory provision isambiguous, the Commission had the discretion tointerpret the definition the way it did.

536 See Division of Market Regulation, Market2000: An Examination of Current Equity MarketDevelopments app IV (1994) (‘‘Market 2000Study’’).

interpretation, which was upheld by theSeventh Circuit on review,524 theCommission staff has given operators oftrading systems that do not enhanceliquidity in traditional ways throughmarket makers, specialists, or a singleprice auction structure, assurances thatit would not recommend enforcementaction if those systems operated withoutregistering as exchanges.525

Several concerns compelled theCommission in 1990 to narrowlyinterpret the definition of the term‘‘exchange.’’ First, the Commission wasconcerned that a broad interpretationwould place ‘‘evolving (alternative)trading systems within the ‘strait jacket’of exchange regulation,’’ thus stiflinginnovation.526 Second, the Commissionwas concerned that a broad definitionwould subject brokers, dealers, andother statutorily defined entities to theregulatory scheme prescribed forexchanges.527 Third, the Commissionwas concerned that ‘‘an expansivedefinition of the term ‘exchange’ wouldforce a non-member, for-profit,proprietary trading system into aregulatory scheme for which it is ill-suited, thus ignoring the Congressionaland judicial mandate to apply flexiblythe definition of the term ‘exchange’ tothe economic realm.’’ 528 Theseconcerns, however, are largelyeliminated by Congress’ broad grant ofexemptive authority in 1996,529 whichhas permitted the Commission to craft aregulatory framework for markets whichexcludes other statutorily definedentities (e.g., broker-dealers operatinginternal matching systems) and flexiblyregulate markets to accommodate theirdiverse business structures. In addition,while the Delta interpretation wasappropriate at the time, its emphasis onthe ‘‘expectation’’ of regular executionof orders at quoted prices no longerreflects today’s markets wherealternative trading systems compete

directly with registered exchanges andNasdaq. The Delta approach hasresulted in the anomaly of regulating asexchanges small volume entities thatraise an expectation of liquidity withintheir system (such as AZX), whileregulating as broker-dealers highervolume entities (such as Instinet).

More fundamentally, althoughtraditional exchanges still provideliquidity through two-sided quotationsand, hence, raise an expectation ofexecution at the quoted price, this is nolonger the essential characteristic of asecurities market where stock and othersecurities exchange hands. Today’stechnology enables market participantsand investors to tap simultaneous andmultiple sources of liquidity fromremote locations. Market makers andspecialists may be important liquidityproviders on a particular exchange, butliquidity now comes from many sourcesacross multiple markets.530 Forexample, the public exposure ofinvestor limit orders means that it isnow easier to access liquidity in tradingvenues that do not have market makersor specialists.531 Today, through theircomputer terminals and othercommunication links, brokers acting onbehalf of their customers or institutionstrading for themselves can see what thequoted price is on an exchange orNasdaq and check it against the priceavailable for the same security on one ormore alternative trading systems.532

Notably, in Delta, the Commissionindicated that the Exchange Act doesnot preclude an alternative tradingsystem from coming within the‘‘exchange definition.’’ 533 TheCommission recognized that itsinterpretation of the term ‘‘exchange’’could be subject to change as thesecurities markets continued to change:

In order to permit the Commission to applyflexibly the (Exchange) Act’s definition of theterm ‘‘exchange’’ to innovative tradingsystems in securities, Congress imbued the(Exchange) Act’s definition of the term‘‘exchange’’ with a certain ‘‘plasticity’’ * * *;‘‘it invites reinterpretation as the way the

term * * * ‘generally understood’evolves.’’ 534

Moreover, on review, although theUnited States Court of Appeals for theSeventh Circuit Court accepted theCommission’s interpretation of the term‘‘exchange’’ and affirmed theCommission’s determination that Deltawas not an ‘‘exchange,’’ the courtnevertheless stated that the‘‘Commission could have interpretedthe section to embrace the DeltaSystem’’ but that it was not compelledto do so.535

B. The Growing Significance ofAlternative Trading Systems in theNational Market System

Within the past six years, thesignificance of alternative tradingsystems in the securities markets hasincreased dramatically. In 1994, theCommission’s Division of MarketRegulation reported that alternativetrading systems accounted for thirteenpercent of the volume in Nasdaqsecurities and 1.4 percent of the tradingvolume in NYSE-listed securities.536 Inthe Proposing Release, the Commissionestimated that, as of the end of 1996, thetrading volume on alternative tradingsystems amounted to almost twentypercent of the trades in Nasdaq stocks,and almost four percent of orders insecurities listed on the NYSE.

In addition to the general increase inthe volume of trading occurring onalternative trading systems, the actualnumber of alternative trading systemshas skyrocketed. In 1991, theCommission was aware of only a fewsuch systems. Today, over forty suchsystems are currently operating. Theviability of this number of alternativetrading systems indicates that thesesystems account for an increasingproportion of trading and that a growingnumber of investors use these systems.Moreover, the arrival of trading serviceson the Internet portends an increasinglevel of retail interest in alternativemeans for trading.

As more alternative trading systemshave developed to offer varying servicesto diverse customer bases, theavailability of trading information andthe accessibility of trading opportunitieshave become increasingly fragmented.The national market system relies oncentralized sources of trading


537 See Proposing Release, supra note 3, at n.290.538 For example, the evidence in the

Commission’s report on the NASD and the Nasdaqmarket pursuant to section 21(a) of the ExchangeAct suggests that widespread use of Instinet bymarket makers as a private market has had asignificant impact on public investors and theoperation of the Nasdaq market. See NASD 21(a)Report, supra note 4.

539 Courts have consistently upheld an agency’sdiscretion to revise earlier interpretations when arevision is reasonably warranted by changedcircumstances. See, e.g., Rust v. Sullivan, 500 U.S.173, 186 (1991). In Rust, the Court stated that ‘‘aninitial agency interpretation is not instantly carvedin stone, and the agency, to engage in informedrulemaking, must consider varying interpretationsand the wisdom of its policy on a continuing basis.’’Id. at 186 (quoting Chevron v. Natural ResourcesDefense Council, 467 U.S. 837, 844–45 (1984)). TheCourt also stated that ‘‘an agency is not required to‘establish rules of conduct to last forever,’ but rather‘must be given ample latitude to adapt its rules andpolicies to the demands of changingcircumstances.’ ’’ Id. at 186–87 (quoting MotorVehicles Mfrs. Ass’n of United States v. State FarmMut. Automobile Ins. Co., 463 U.S. 29, 42 (1983)).See also Arkansas AFL–CIO v. FCC, 11 F.3rd 1430,1441 (8th Cir. 1993) (deferring to FederalCommunications Commission decision to alter itsinterpretation of the statutory term ‘‘operated in thepublic interest’’ to meet the changing realities of thebroadcast industry).

540 See Concept Release, supra note 2, at nn.125–133 and accompanying text.

541 This broad conception of ‘‘bringing together’’buyers and sellers is consistent with the DeltaRelease, which emphasized that the meansemployed for bringing together buyers and sellers‘‘may be varied, ranging from a physical floor ortrading system * * * to other means ofintermediation (such as a formal market makingsystem or systemic procedures such as aconsolidated limit order book or regular single priceauction).’’ Delta Release, supra note 32, at 1899.

542 The elements of the interpretation arediscussed in greater detail in Section III, supra.

543 See TBMA Letter at 3–4.

544 The Commission also notes that the statutorydefinition of ‘‘exchange’’ is written in thedisjunctive: facilities for bringing togetherpurchasers and sellers or facilities performingfunctions commonly performed by stock exchanges.Section 3(a)(1) of the Exchange Act, 15 U.S.C.78c(a)(1). See TBMA Letter, at 8–9 (recommendingthat the Commission continue to rely on itsinterpretation in the Delta Release); SIA Letter at 2,6–7 (a significant characteristic of exchanges isstructural features that create a reasonableexpectation of the regular execution of orders atposted prices). See also Letter from Christopher J.Carroll, Managing Director, Deutsche BankSecurities, Inc. to Jonathan G. Katz, Secretary, SEC,dated July 31, 1998 (‘‘DBSI Letter’’) at 2; NYSELetter at 2–3, 4–5, 8 (commenting that onlyalternative trading systems meeting the Deltainterpretation of exchange should have the abilityto register with the Commission as an exchange);Instinet Letter at 8 (recommending that theCommission retain its current interpretation of‘‘exchange’’); CBB Letter at 3 (recommending thatif the Commission believed its currentinterpretation of ‘‘exchange’’ in the Delta Releasewas inadequate, that the Commission shouldsimply withdraw that interpretation and rely solelyon the statutory definition of ‘‘exchange’’).

545 For example, at the time of the Delta Release,the Commission sought to avoid interpreting theterm ‘‘exchange’’ in a way that couldunintentionally and inappropriately subject manybroker-dealers to exchange regulation. One keyfactor in the Commission’s decision not to regulatethe Delta system as an exchange was the concernthat doing so would subject traditional broker-dealer activities to exchange regulation. DeltaRelease, supra note 32.

546 Pub. L. 104–290, 110 Stat. 3416 (1996). 15U.S.C. 78mm.

547 Throughout the past 60 years, the Commissionhas attempted to accommodate market innovationswithin the existing statutory framework to the

opportunities and trading information.Exchange regulation is designed tofacilitate centralization and enhance thegeneral public’s opportunities to obtaintrading information and to accesstrading interest.

The narrow interpretation of the term‘‘exchange’’ in Delta has eroded theeffectiveness of the Commission’soversight of markets. For example, asdiscussed in the Concept Release, it isclear that regulatory concerns may beraised by entities that constitute amarket where buyers and sellersinteract, but do not necessarily ensure atwo-sided market by design.537

Moreover, the Commission’s traditionalapproach to broker-dealer regulation isnot designed to substitute for marketregulation. Consequently, thesealternative trading systems are not fullyintegrated into the mechanisms thatpromote market fairness, efficiency, andtransparency. In addition to raisingregulatory fairness concerns, this lack ofintegration into the national marketsystem has had a negative impact on thequality and pricing efficiency ofsecondary markets.538

C. The Revised Interpretation of‘‘Exchange’’

For purposes of effectively regulatingthe securities markets, includingalternative trading systems, theCommission believes a revisedinterpretation of what constitutes anexchange is in order.539 Although theCommission has considered manycharacteristics of the modern exchange

in revising its interpretation,540 itbelieves two elements most accuratelyreflect the functions and uses of today’sexchange markets. Under theinterpretation in Rule 3b–16, the firstessential element of an exchange is thebringing together of orders of multiplebuyers and sellers. This reflects thestatutory concept of bringing togetherpurchasers and sellers and also reflectsthe reality of today’s marketplace—where supply and demand originatefrom a variety of sources, not simplyfrom individual brokers and dealers.541

The second essential element is thattrading on an exchange takes placeaccording to established, non-discretionary rules or procedures. Asdiscussed above, an essential indicationof the non-discretionary status of rulesand procedures is that those rules andprocedures are communicated to thesystem’s users. Thus, participants havean expectation regarding the manner ofexecution—that is, if an order isentered, it will be executed inaccordance with those procedures andnot at the discretion of a counterparty orintermediary.542

Some commenters thought theCommission should retain its currentinterpretation of an exchange. Forexample, TBMA advocated a lessexpansive definition of exchange, andrecommended that the Commissioncontinue to regulate alternative tradingsystems within the broker-dealerframework, crafting appropriateregulations to address particular issuespresented by unique operations as theydevelop.543 TBMA also raised aquestion about whether, by eliminatingthe requirement that a system provide areasonable expectation of liquidity to beconsidered an exchange, theCommission’s proposal conflicted withthe statutory definition of ‘‘exchange’’because liquidity is ‘‘generallyunderstood’’ to be a fundamentalcharacteristic of an exchange. As notedabove, however, today’s technologygives market participants the ability toaccess multiple markets for liquidity atany given time. As a result, assuringliquidity within a single market by

posting continuous two-sidedquotations is no longer the essentialcharacteristic of a market wheresecurities exchange hands.544

Accordingly, the Commission believesthat new Rule 3b–16 more accuratelydescribes the range of markets thatperform exchange functions asunderstood today. At the same time, theCommission’s exemption from theexchange definition for many alternativetrading systems provides a flexibleframework, permitting each participantto choose the regulatory approach thatbest serves its own business needs.

D. Other Practical Reasons for Revisingthe Current Interpretation

1. Additional Flexibility Provided bythe National Securities MarketsImprovement Act of 1996

As stated above, one principal reasonthe Commission, to date, has interpretedthe term ‘‘exchange’’ narrowly has beento avoid the imposition of unnecessaryand burdensome regulatory obligationson small and emerging trading systems,which could stifle innovation.545 Theenactment of NSMIA,546 however,alleviates the concern that an expandedinterpretation of the term exchange willinhibit innovation.547 Specifically,


extent possible in light of investor protectionconcerns, without imposing regulation that wouldstifle or threaten the commercial viability of suchinnovations. For example, at various times, theCommission considered the implications ofevolving market conditions on exchange regulation.See Securities Exchange Act Release Nos. 8661(Aug. 4, 1969), 34 FR 12952 (initially proposingRule 15c2–10); 11673 (Sept. 23, 1975), 40 FR 45422(withdrawing then-proposed Rule 15c2–10 andproviding for registration of securities informationprocessors); 26708 (Apr. 13, 1989), 54 FR 15429(reproposing Rule 15c2–10); 33621 (Feb. 14, 1994),59 FR 8379 (withdrawing proposed Rule 15c2–10).

548 15 U.S.C. 78mm(a)(1).549 Prior to the addition of section 36 to the

Exchange Act, the Commission could only exemptan exchange from the registration provisions ofsections 5 and 6 on the basis of an exchange’slimited volume of transactions. See Section 5 of theExchange Act, 15 U.S.C. 78e.

550 See S. Rep. No. 104–293, 104th Cong. 2d Sess.15 (1996).

551 See supra Section IV.A.552 See supra IV.A.2.

553 Because the rules and rule amendmentsregarding Regulation ATS, exchange registration,and Rule 19b–5 constitute ‘‘major rules’’ within themeaning of the Small Business RegulatoryEnforcement Act of 1996, 5 U.S.C. 801 et seq., therules and rule amendments cannot take effect until60 days after the date of publication in the FederalRegister. Although the amendments to Rules 17a–3 and 17a–4 and repeal of Rule 17a–23 and Form17A–23 do not constitute ‘‘major rules,’’ they willbecome effective at the same time as RegulationATS because they operate in an integrated fashionwith Regulation ATS.

NSMIA added section 36(a)(1) to theExchange Act, which provides that:the Commission, by rule, regulation, or order,may conditionally or unconditionally exemptany person, security, or transaction, or anyclass or classes of persons, securities, ortransactions, from any provision orprovisions of (the Exchange Act) or of anyrule or regulation thereunder, to the extentthat such exemption is necessary orappropriate in the public interest, and isconsistent with the protection of investors.548

Prior to adoption of NSMIA, theCommission’s authority under theExchange Act to reduce or eliminatecertain consequences of exchangeregistration was limited.549 Section 36,however, allows the Commission greaterflexibility in regulating new tradingsystems by giving the Commissionbroad authority to exempt any personfrom any provision of the Exchange Act.As a result, the Commission now hasgreater authority to adopt a moreconsistent regulatory approach tosecurities markets in general, andparticularly for alternative tradingsystems that do not neatly fit into theexisting regulatory framework.550

2. No-action Approach to AlternativeTrading Systems Is No Longer Workable

The Commission also believes that theproliferation of new trading systemsnecessitates the revision of theinterpretation of the term ‘‘exchange.’’The no-action review process that theCommission has used to date to addresshybrid systems that incorporate featuresof both exchanges and broker-dealersworked well and was consistent withthe protection of investors whenrelatively few systems applied for no-action treatment. The no-action processallowed the Division to review thesystem’s services and mechanisms andto monitor the impact of such systemson a case-by-case basis. This is nolonger practicable. Absent a revisedinterpretation of ‘‘exchange,’’ the

Commission would have to continue torespond to an increasing volume of no-action requests from developingalternative trading systems that seek toavoid the burdens associated withregistration as a national securitiesexchange. The Commission’s revisedinterpretation eliminates the need forthis no-action approach. By codifying aregulatory framework that does not relyon Commission staff review of eachnovel system development, theCommission believes that technologicalimprovements and enhanced serviceswill become available more rapidly.

3. More Rational Treatment of RegulatedEntities

The Commission believes that therevised interpretation of the termexchange, in combination with theadoption of Regulation ATS, whichallows alternative trading systems toregister as broker-dealers,551 isconsistent with other goals andprovisions of the Exchange Act. Thenew regulatory framework, includingthe revised interpretation of ‘‘exchange’’avoids the need for the Commission todraw what are now arbitrarydistinctions between organizations thatperform similar functions, avoidsclassifying alternative trading systemsin a manner that does not fit thestructure of these systems, and squarelyaddresses the regulatory concerns raisedby these systems.

Moreover, the Commission’s newframework helps assure consistencywith existing broker-dealer regulations.For those alternative trading systemsthat wish to participate in the marketsas exchanges, regulation as a nationalsecurities exchange is available.However, the Commission expects thatmany alternative trading systems willnot elect to register as nationalsecurities exchanges. Under theCommission’s proposal, these systemswould have to maintain a structuremore akin to that of traditional broker-dealers and comply with regulatoryobligations more appropriately tailoredto their chosen business structure.These obligations include the newrequirements for more significantalternative trading systems to addressthe transparency, fair access, andsystems capacity, integrity, and securityconcerns raised by these particularsystems.552

VIII. Effective Dates and ComplianceDates

The rules and rule amendmentsadopted in this release are effective on

April 21, 1999, except for Exchange ActRules 301(b)(5)(D) and (E) and Rules301(b)(6)(D) and (E), which shallbecome effective on April 1, 2000.Alternative trading systems, however,will only have to comply with thepublic display requirement in Rule301(b)(3) for fifty percent of thesecurities subject to this requirementson April 21, 1999. Alternative tradingsystems will have to comply with Rule301(b)(3) for all such securities byAugust 30, 1999.553 Prior to April 21,1999, the Commission will publish aschedule of those securities for whichalternative trading systems must complywith Rule 301(b)(3) on April 21, 1999.

IX. Costs and Benefits of the Rules andAmendments

To assist the Commission in itsevaluation of the costs and benefits thatmay result from the rules andamendments, commenters wererequested to provide analysis and data,if possible, relating to the costs andbenefits associated with the proposals.The Commission initially identifiedcertain costs and benefits associatedwith its changes in the ProposingRelease. Although the Commissionreceived seventy comment letters, as ofDecember 1, 1998 concerning theproposed rules, none of the commentersresponded specifically to the request forcomment on the cost/benefit analysis.Some commenters did raise relatedissues and the Commission will addressthose comments in this analysis. Afterconsidering the comments, theCommission continues to believe thatthe benefits of the rules andamendments justify the associated costs.

A. Costs and Benefits of the Rules andAmendments Regarding AlternativeTrading Systems

The Commission identified severalbenefits and costs to investors andmarket participants in the ProposingRelease with regard to alternativetrading systems. The Commission is notmaking any changes to the rules oramendments that increase the costestimates for alternative trading systemnotice, reporting and recordkeepingobligations. The most significant change


554 See ICI Letter at 4 (stating that requirementswould be overly burdensome for alternative tradingsystems); IBEX Letter at 13 (arguing that appealprocess should begin at the SRO level); InstinetLetter at 19 (stating that a right of appeal to theCommission could lead to frequent frivolousappeals).

555 TBMA Letter at 16.

556 SIA Letter at 17–18. But see IBEX Letter at 5(stating that the reporting requirements underproposed Regulation ATS were not inappropriatelyburdensome).

557 CBB Letter at 4.558 Instinet Letter at 20.559 Instinet Letter at 10.

560 See supra Section IV.A.2.c.561 See IBEX Letter at 5; SIA Letter at 18;

American Century Letter at 6.562 See TBMA Letter at 6–7, 21; SIA Letter at 3,

11; DBSI Letter at 1; MSDW Letter at 13.563 See NYSE Letter at 6; IBEX Letter at 2–3.564 Rule 301(b)(5), 17 CFR 242.301(b)(5).565 Rule 301(b)(6), 17 CFR 242.301(b)(6).

the Commission is making in the rulesas adopted is to revise the fair accessprovisions. The rules and amendmentsin the Proposing Release providedinvestors with a right of appeal to theCommission and required alternativetrading systems to provide investorsdenied or limited access to the systemwith notice of that action and their rightto appeal the decision to theCommission. The Commission hasdecided not to adopt the right of appealprovisions and the requirement ofnotice to investors denied or limitedaccess. Instead, alternative tradingsystems with significant volume will berequired to provide quarterly notices tothe Commission on Form ATS–R of allgrants, denials, and limitations of accessas well as descriptive informationregarding those access decisions. Thenet effect of these changes to the fairaccess requirements is a decrease,relative to the original proposal, in theburdens on alternative trading systemswith significant volume. Severalcommenters objected to the proposedfair access rules on various grounds.554

Several commenters had generalcomments with regard to the burdensimposed on respondents underRegulation ATS. One commenter arguedthat the Commission should imposeonly minimal requirements on start-upor smaller trading systems.555 Thealternative trading system rules havebeen tailored to minimize their burdenon alternative trading systems generallyand small systems specifically. Becausemany of the provisions in the rules aretriggered by a volume threshold, theCommission expects that smallalternative trading systems will not havesufficient volume to trigger thosethresholds and will, therefore, not haveto comply with those provisions. Therecordkeeping and reportingrequirements with which smaller, lowervolume alternative trading systems willhave to comply under Regulation ATSare substantially similar to those withwhich alternative trading systemscurrently comply. Consequently thecosts for smaller alternative tradingsystems should remain unchanged.

One commenter argued that materialchanges on Form ATS should bereported twenty days after such achange is made rather than twenty days

before.556 The Commission believes thatis important to have some advancenotice of significant changes in order topermit it to carry out its marketoversight and investor protectionfunctions. By requiring notice beforesuch changes are made, the Commissionhas an opportunity to make inquiries toclarify any questions that might arise.Currently, alternative trading systemsare required to give twenty days priornotice of material changes on Part 1–Aof Form 17A–23. This burden remainsunchanged under the new rules.

Several commenters pointed out areasfor possible reductions of regulatoryoverlap. One commenter argued that theCommission should eliminate thosebroker-dealer requirements that wouldbe irrelevant for alternative tradingsystems.557 The Commission, however,does not believe that the broker-dealerrequirements as they apply toalternative trading systems, areirrelevant or overly burdensome.Another commented that recordkeepingburdens should be coordinated with theNASD’s OATS program.558 Theserecordkeeping rules do not specify themanner in which such records must bemaintained, but only that they must bemade available upon request. Suchrecords may be required for otherpurposes, but it is important to assurethat all alternative trading systemsmaintain records sufficient to constructan audit trail.

One commenter argued that theCommission’s rules and amendmentsimpose costs and burdens on marketinnovators rather than encouraging suchsystems.559 As discussed above,however, the Commission does notintend its new regulatory framework toimpose a penalty on systems because oftheir use of technology. TheCommission’s new framework is basedon the functions performed by a tradingsystem, not on its use of technology.

Finally, a large number ofinstitutional subscribers to alternativetrading systems submitted commentswithin the last two weeks. Thesecommenters expressed a number ofconcerns about the public displayrequirement. Among the concernsvoiced by these commenters was aconcern about decreasing liquidity,limiting a potentially advantageoustrading strategy, being able to providebest execution for their clients, andincreasing costs to execute trades. The

Commission responds to these concernsbelow.560

The Commission solicited commenton the feasibility of permittingalternative trading systems to file formselectronically. Three commenterssupported electronic filing as an optionto reduce the burdens onrespondents.561 While not feasible atthis time, the Commission intends tomake electronic filing an option when itis possible.

Three commenters argued that theCommission’s rules should not apply todebt securities, in part, due to theburdens that such requirements wouldplace on a largely decentralizedmarket.562 Other commenters supportedincluding debt securities withinRegulation ATS.563 The Commissioncontinues to believe that many of thesame concerns about the trading ofequity securities on alternative tradingsystems apply equally to the trading offixed income securities on alternativetrading systems. Debt securities areincreasingly being traded on alternativetrading systems, similar to the way thatequity securities are traded.Accordingly, the Commission’s newregulatory framework would requirealternative trading systems trading debtsecurities, other than alternative tradingsystems trading solely government andrelated securities, to register as anexchange or register as a broker-dealerand comply with Regulation ATS. If analternative trading system chooses toregister as a broker-dealer, RegulationATS applies the same notice,recordkeeping, and reportingrequirements on debt alternative tradingsystems as apply to equity alternativetrading systems. Because of the way thedebt market currently operates,however, the transparency provisionsdo not apply to alternative tradingsystems that trade debt securities. Onlythose alternative trading systems thattrade at least twenty percent of certaincategories of debt are be subject to thefair access requirements 564 and theprovisions governing systems capacity,security, and integrity.565

Under the rules and amendments inthis release, alternative trading systemshave a choice between registering as anational securities exchange orregistering as a broker-dealer andcomplying with Regulation ATS. Thechoice between these two options is


566 The Office of Management and Budget hasrecognized that although it may be difficult toquantify the benefits of price transparency, ‘‘[t]hereis a strong consensus among economists thatregulations requiring the disclosure of informationabout the price and quality of products and services

can produce significant benefits for consumers andimprove the functioning of markets when thisinformation would not otherwise be available.’’Office of Management and Budget, Draft Report toCongress on the Costs and Benefits of FederalRegulations, 63 FR 44034 (Aug. 17, 1998).

complex and each alternative tradingsystem will make a choice based on itsbusiness plan and the role it wishes toplay in the market. There are severalfactors that will have an impact on eachalternative trading system’s decision.

First, the regulatory costs associatedwith registering and operating as anational securities exchange are higherthan the regulatory costs associated withregistering as a broker-dealer andcomplying with Regulation ATS.Second, registered exchanges havenational market system obligations thatrequire those exchanges to bear theexpenses associated with joining theCTA, CQS, and ITS plans. To offsetsome of those costs, however, registeredexchanges also participate in therevenue generated from the sale ofquotation information. Third, registeredexchanges are SROs and, therefore, haveobligations to surveil trading activityand member conduct on the exchange.These obligations can be significant interms of time, personnel, and financialresources. However, a significantadvantage to a registered exchange ofbeing an SRO is that it is not subject tooversight by a competitor. Fourth,registered exchanges are subject to thestatutory requirement to provide fairaccess, which requires a commitment ofresources to consider membershipapplications and to report denials to theCommission and defend any denialdecisions before the Commission if anappeal is made.

Because of the range of obligations ofregistered exchanges, operation as anexchange requires a significantinvestment of financial resources. Arelatively high volume of trading may berequired to justify this financialinvestment. While the advent of for-profit and non-member ownedexchanges may make it easier to raisethe financial resources necessary tooperate as a registered exchange, theCommission does not expect that manyalternative trading systems will chooseto register as exchanges.

On the other hand, alternative tradingsystems that register as broker-dealersmust comply with the filing andconduct obligations associated withbeing a registered broker-dealerincluding membership in an SRO andcompliance with that SRO’s rules. Theymust also comply with Regulation ATS,which includes filing, recordkeepingand reporting obligations. Unlikeregistered exchanges, alternative tradingsystems are subject to oversight by anSRO, which may operate a competingmarket. Regulation ATS is designed toimpose few requirements on lowervolume alternative trading systems.Only alternative trading systems with

significant volume are required to linkto an SRO and publicly display orders,provide investors with fair access, andcomply with systems capacity, integrity,and security requirements. Theseobligations for alternative tradingsystems with significant volume aresimilar, although not identical, toobligations of registered exchanges.Therefore, it is more likely that a highvolume alternative trading system willconsider the costs and benefits ofregistering as an exchange to be morecomparable to the costs and benefits ofregulation as a broker-dealer alternativetrading system. The costs associatedwith regulation as a registered exchange,and with operating as a broker-dealerand complying with Regulation ATS arediscussed more fully below.

1. Benefitsa. Improved Market Transparency.

The Commission’s amendments andrules enhance transparency of tradingon alternative trading systems.Transparency of orders helps ensurethat publicly available prices fullyreflect overall supply and demand andhelps reduce the negative consequencesof market fragmentation (e.g., the chancethat an order for a security in onemarket will be executed at a priceinferior to that available at the sametime in another market). TheCommission has been particularlyconcerned that the development of so-called ‘‘hidden markets,’’ in which amarket participant privately publishesquotations at prices superior to thequotation information it disseminatespublicly, impedes national marketsystem objectives. Some systems thatpermit this activity have becomesignificant markets in their own right,but are not currently required tointegrate their orders into the publicquote because they are not registered asnational securities exchanges ornational securities associations.

For alternative trading systemschoosing to register as broker-dealers,the Commission’s amendments andrules improve the transparency of ordersin systems that account for a significantportion of the trading volume in anysecurity. The amendments and ruleshelp to incorporate alternative tradingsystem quotes into the national marketsystem, thus reducing fragmentation,improving liquidity, facilitating pricediscovery, and narrowing the quotedspread.566

Because non-market maker broker-dealers and institutions at times enterthe best priced orders in an alternativetrading system, the Commission expectsthat display of these orders in the publicquote will also improve the NBBO. Forexample, of all orders on ECNs by non-market maker broker-dealers andinstitutions that could improve theNBBO if included in the public quotestream, only about six percent of thoseorders were actually entered into thepublic quote stream. Consequently,about ninety-four percent of thoseorders that could have improved theNBBO were not included in the publicquote stream and thus did not impactthe NBBO. These orders were thereforeunavailable to some investors, inparticular, retail investors, who do nothave direct access to ECNs. Theunavailability of these quotes continuesto effectively result in a two-tieredmarket. While the Commission is unableto precisely quantify the market impactof these changes, it does believe that thebenefit for investors will be significantbased on preliminary estimates.

Based on an analysis of ECN tradingactivity during a four day period in June1997 (June 23, 1997 to June 27, 1997),the staff estimates that spreads coulddecrease by as much as four percent forNasdaq issues when non-market makerbroker-dealer and institutional ordersare displayed in the public quote. Inmaking this estimate, the staff hasassumed an average spread of 35 centsper share, a maximum increase ofeleven percent for the times that ECNscould narrow the inside, and amaximum of 12.5 cents per shareimprovement. In addition to the effectson the bid-ask spread, retail investorsand other non-subscribers will gainaccess to the liquidity and better pricesnow available only to alternative tradingsystem subscribers. Moreover, becausemany broker-dealers offer retailcustomers automatic execution of theirsmall orders at the publicly quotedprice, a better price in the public quotepotentially improves the price receivedby thousands of broker-dealercustomers. Larger orders negotiatedbetween institutions and broker-dealersalso potentially benefit because theprice negotiated will reflect a smallerspread. For these reasons, theCommission believes that new displayand access requirements will result insignificant benefits to investors.


567 See supra note 177. Under the Order HandlingRules, market makers who enter orders on ECNs arerequired to reflect those prices in their publicquotations. In the alternative, the ECN can make thebest market maker prices publicly available throughan SRO. 568 See supra note 5.

The above data is consistent with theresults of the transparencyimprovements achieved through theimplementation of the Order HandlingRules.567 The NASD studied the effectof the Order Handling Rules on theNasdaq market by comparing variousmeasures between a pre-period oftwenty days in the beginning of 1997(December 18, 1997 to January 17, 1998)and a post-period of twenty days in thebeginning of 1998 (January 5, 1998 toFebruary 2, 1998). The success of theOrder Handling Rules further supportsthe view that the amendments and rulesthe Commission is adopting today willfurther investors’ opportunities to tradeat the best prices.

In its study, the NASD also found thatquoted spreads in the Nasdaq marketdecreased by an average of forty-onepercent. The NASD estimates that thisreduction in spreads resulted in annualsavings to investors of between $284million and $673 million. Because ofthe increased market transparencyprovided by the display of institutionaland non-market maker broker-dealerorders, the Commission believes that therules and amendments in this releasewill also further shrink spreads.

Finally, the Commission believes thatimproved transparency of orders inalternative trading systems will reducethe potential for alternative tradingsystem subscribers to manipulate thepublic market. It has been alleged thatinstitutions and non-market makersintentionally influence the market bydisplaying an order in an alternativetrading system that locks the pricedisplayed in the public market. Forexample, if the public market isdisplaying a bid of 20 and an offer of 21,an institution or non-market makermight display an offer of 20 in analternative trading system. Marketparticipants often then assume that theorder in the alternative trading systemindicates the direction in which themarket is moving and begin selling tomarket makers bidding 20, pushing thepublic market lower. The price in thealternative trading system is thencanceled and the institution or non-market maker buys securities at a lowerprice. This type of activity is possibleonly because institution and non-marketmaker orders in alternative tradingsystems are not displayed to the publicmarket. The Commission believes thatthe integrity of the public markets isthreatened when institutions and non-

market makers can affect the publicmarkets without participating in them.

The transparency of trading onalternative trading systems that chooseto register as exchanges will alsoimprove. All registered exchanges areexpected to participate in the nationalmarket system plans, such as the CTA,CQS, and ITS. These plans form anintegral part of the national marketsystem, and contribute greatly to theoperation of linked, transparent,efficient, and fair markets. In addition toimproving transparency, alternativetrading system participation in thesemarket-wide mechanisms will benefitinvestors by reducing tradingfragmentation.

b. Improved Investor Protections. TheCommission’s amendments and rulesprovide benefits to investors byimproving the surveillance of trading onalternative trading systems. Adequatesurveillance of the trading on alternativetrading systems is critical to thecontinued integrity of our markets. Thisis particularly the case with regard toalternative trading systems that have asignificant percentage of the tradingvolume in one or many issues ofsecurities. The oversight of tradingactivities on alternative trading systemsthat choose to register as broker-dealerswill improve because the proposalsclarify the relationship between SROsand alternative trading systems.

The notice, reporting, andrecordkeeping requirements underRegulation ATS also contribute to theCommission’s and the SROs’ ability toeffectively oversee alternative tradingsystems regulated as broker-dealers. TheCommission believes that theseenhancements to the surveillance andoversight of alternative trading systemsregulated as broker-dealers benefit thepublic by helping to prevent fraud andmanipulation.

The surveillance of trading onalternative trading systems that chooseto register as exchanges under theCommission’s proposal will also beimproved. All registered exchanges areSROs, which have direct obligations tosurveil the trading on their ownmarkets. The Commission believes that,through improved surveillancemechanisms, it will be better able todetect fraud and manipulation thatcould occur on alternative tradingsystems. For example, alternativetrading systems can be used toartificially narrow the NBBO spreads forthe sole purpose of trading through abroker-dealer’s automatic executionsystem at the artificial prices.568 TheCommission and the SROs will be able

to more readily detect such activitythrough enhanced surveillance. TheCommission believes that this moredirect oversight of trading activities willtherefore benefit investors and themarket generally by helping to preventfraud and manipulation.

c. Fair Access. The Commission’srules require alternative trading systemswith significant volume to provide a fairopportunity to participate in alternativetrading systems. Fair and non-discriminatory treatment of potentialand current subscribers by alternativetrading systems is important, especiallywhen an alternative trading systemcaptures a large percentage of tradingvolume in a security. Although analternative trading system withsignificant volume is required toprovide access to orders that it isrequired to display in the public quotestream, there are other benefits to directparticipation on an alternative tradingsystem. In particular, participation onan alternative trading system allows aninvestor to enter its own orders, viewcontingent orders not publiclydisplayed (such as all or none orders)and use special features of an alternativetrading system, such as a negotiationfeature or reserve size feature.Accordingly, the rules preventdiscriminatory denials of access andensure that market participants are notprevented from gaining access tosignificant sources of liquidity.

d. Systems Capacity, Integrity, andSecurity. The Commission believes thatits rules regarding systems capacity,integrity, and security of alternativetrading systems provide several benefitsto the marketplace and to investors.Marketplaces are increasingly reliant ontechnology and most of their functionsare becoming highly automated.Alternative trading systems are subjectonly to business incentives to avoidsystem breakdowns that may disrupt themarket. In the past, alternative tradingsystem failures have affected the publicmarket, particularly during periods ofhigh trading volume. Some alternativetrading systems have had prolongedshut-downs during the busiest tradingsessions due to systems problems. Forexample, during the past year, Instinet,Island, Bloomberg, and Archipelago(operated by Terra Nova) have allexperienced systems outages due toproblems with their automated systems.On a number of occasions, ECNs havehad to stop disseminating market makerquotations in order to keep from closingaltogether, including during the marketdecline of October 1997 when onesignificant ECN withdrew its quotesfrom Nasdaq because of lack of capacity.Similarly, a major IDB in non-exempt


569 This estimate is based on filings made withthe Commission under Rule 17a–23. At the time ofthe Proposing Release, the Commission estimatedthat forty-three alternative trading systems wouldbe required to register as exchanges or broker-dealers and comply with Regulation ATS. TheCommission now estimates that there are forty-fivealternative trading systems operating.

570 Based on the Commission’s experience overthe last three years with Rule 17a–23, it appearsthat there are more than three new alternativetrading systems per year. However, we expect thatin the future, there will be approximately three newalternative trading systems per year. The rapidgrowth experienced over the last several years isunlikely to continue in perpetuity.

571 A number of ECNs, however, currently displaythe best order in their system in the public quote,regardless of whether that order is entered by aninstitution, market maker or another broker-dealeralthough the Commission’s Order Handling Rulesonly require the display of market maker orders.Thus, institutional orders sent to these systems arealready displayed to the public.

securities experienced serious capacityproblems in processing the largenumber of transactions in October 1997and had to close down temporarily.

The Commission’s rules requirealternative trading systems that handlea significant volume of trades toestablish reasonable capacity estimates,conduct stress tests, implementprocedures to monitor systemdevelopment, review systemsvulnerability, and establish adequatecontingency plans. Investors will benefitfrom the rules because significantsystems will be less likely to shut downas a result of systems failures and willbe better equipped to handle marketdemand and provide liquidity duringperiods of market stress. The ability ofalternative trading systems to providemore reliable and consistent service inthe market benefits investors and thepublic markets generally. TheCommission also believes that investorswill benefit from robust system securityprovided by ensuring that significantalternative trading systems maintainsufficient security measures to preventunauthorized access.

All currently registered exchangesparticipate in the Commission’sautomation review program. Alternativetrading systems that choose to registeras exchanges will similarly be expectedto participate in this program. Under theautomation review program, exchangesare expected to maintain sufficientsystems capacity to meet current andanticipated volume levels. The benefitsto investors and the public generally, aswith significant alternative tradingsystems, will be the assurance thatsystems are reasonably equipped tohandle market demand and provideliquidity during periods of marketstress.

2. CostsThe alternative trading system rules

and amendments have been tailored tominimize their burden on alternativetrading systems and especially smallsystems. Many of the provisions in therules and amendments are triggered bya volume threshold. The Commissionexpects that small alternative tradingsystems will not have sufficient volumeto trigger those thresholds and willtherefore not have to comply with thoseprovisions. The recordkeeping andreporting requirements with whichsmaller, lower volume alternativetrading systems have to comply underRegulation ATS are substantially similarto those with which alternative tradingsystems currently comply. Consequentlythe costs for smaller alternative tradingsystems should remain materiallyunchanged. The paperwork, filing, and

recordkeeping costs are discussed in thePaperwork Reduction Act sectionbelow.

a. Notice, Reporting, andRecordkeeping. All alternative tradingsystems that will be subject to notice,reporting, and recordkeepingrequirements under the Commission’snew rules are currently subject tosimilar requirements under Rule 17a–23. The requirements under RegulationATS, however, require some additionalinformation that is not currentlyrequired under Rule 17a–23.

Under Regulation ATS, alternativetrading systems file an initial operationreport, notices of material systemschanges, and quarterly reports. Therules also include new Forms ATS andATS–R to standardize reporting of suchinformation and make it more useful forthe Commission. The rules requireinformation that is not currentlyrequired under Rule 17a–23, such asgreater detail about the systemoperations, the volume and types ofsecurities traded, criteria for grantingaccess to subscribers, proceduresgoverning order execution, reporting,clearance and settlement, procedures forreviewing systems capacity andcontingency procedures, and theidentity of any other entities involved inoperating the system.

Regulation ATS requires staff time tocomply with the initial notice andamendment requirements. While theCommission has designed therequirements in an effort to balance thecosts of filing with the benefits to begained from the information, some effortwill be necessary to gather and file thisinformation. Most of the information,however, already exists. Alternativetrading systems will only be required togather this information and supply it inthe required format to the Commission.The periodic updating requirementswill also require staff time over the lifeof the alternative trading system tocomply with the rules.

The Commission estimates that thereare currently about forty-five alternativetrading systems that will be required toregister as exchanges or register asbroker-dealers and comply withRegulation ATS.569 The Commissionalso estimates that, over time, there willbe approximately three new alternativetrading systems each year that choose toregister as broker-dealers and comply

with Regulation ATS.570 TheCommission also estimates that, overtime, there will be approximately threealternative trading systems that filecessation of operations reports eachyear. Thus, the Commission anticipatesthat, over time, if all forty-five currentalternative trading systems choose toregister as broker-dealers and complywith Regulation ATS, there will beapproximately forty-five alternativetrading systems operating each year.

b. Public Display of Orders and EqualExecution Access. Regulation ATSrequires that alternative trading systemswith significant volume display theirbest-priced orders for securities inwhich they have 5 percent or more oftotal trading volume in the public quote.The Commission identified theanticipated benefits of this requirementabove. Below is a discussion of possiblecosts associated with this requirement.

One possible cost is the impact oninstitutional order flow to alternativetrading systems generally. Institutionshave several options available to themto execute trades. They can send ordersto block trading desks, a number ofdifferent types of alternative tradingsystems, or directly to registeredexchanges through broker-dealer give-ups. Although not currently displayedto the public, orders sent to analternative trading system byinstitutions are displayed to otheralternative trading systemsubscribers.571 Thus, placing largeorders, or a series of successive smallorders, in an alternative trading systemsignals to a large number ofsophisticated market participants theinterest in a particular security.

The Commission is not persuaded bycommenters that suggest thatinstitutions currently willing to usealternative trading systems to displaytheir orders to other alternative tradingsystem subscribers, including otherinstitutions, market-markers, andbroker-dealers, will be less willing touse alternative trading systems thatmust display those orders to the publicmarket. Our reasons are as follows. Theprimary group of market participants


572 When the Order Handling Rules wereimplemented on January 17, 1997, four ECNs linkedto Nasdaq. Today there are a total of nine ECNslinked to the public quote stream. See supra note178.

573 Section 11A(a)(1)(C) of the Exchange Act, 15U.S.C. 78k–1(a)(1)(C).

574 Under the Order Handling Rules, ECNs arelimited to charging non-subscribers fees consistentwith equivalent access.

575 Section 3(f) of the Exchange Act, 15 U.S.C.78c(f).

that will benefit from the public displayof institutional orders is retail investors.Retail investors are not currentlyalternative trading system subscribers.To avoid market impact, institutions tryto avoid signaling other institutions andmarket professionals, not retailinvestors. Almost all marketprofessionals and a significant numberof institutions already subscribe toalternative trading systems. Thus, theCommission believes that the additionalexposure to the market should not affectinstitutions’ use of alternative tradingsystems. Moreover, to the extent thatinstitutions want to display small sizedorders in the public market, rather thantheir entire order, they will still be ableto make use of an alternative tradingsystem’s ‘‘reserve size’’ feature. Thiswill enable institutions to avoidexposing the total size of their order tothe public market.

Nonetheless, assuming institutions dohave a preference for showing theirsized orders to other alternative tradingsystem subscribers but not the publicmarket, there may be two reactions byinstitutions. First, institutions couldchoose to move their orders to moreopaque venues, such as block tradingdesks. The cost of this movement oforders would be a loss of transparencyto the limited group of alternativetrading system subscribers who nowbenefit from the display of institutionalorders on alternative trading systems,and the loss of business to alternativetrading systems. While block tradingdesks would benefit from the increasedbusiness, it likely would increaseinstitutions’ transaction costs. For thisreason, as well as those discussedabove, the Commission believes itunlikely for institutions to react thisway. Second, because the public displayrequirement only applies to alternativetrading systems with five percent ormore of the volume in a particularsecurity, there is a possibility thatinstitutions may move their order flowto smaller alternative trading systems inorder to avoid the public displayrequirement. Such movements of orderflow could benefit some alternativetrading systems in the form of increasedrevenue and be a cost to otheralternative trading systems who loserevenue.

Currently, alternative trading systemsare able to attract subscribers becauseprices in their systems are often betterthan the prices available in the publicmarkets. Because alternative tradingsystems are now required to publiclydisplay their best priced orders forsecurities in which they represent fivepercent or more of the trading volume,the best priced orders for certain

securities will also be available throughthe public markets. Alternative tradingsystems will no longer be able toprovide subscribers with the unlimitedability to avoid public display in theNBBO and possible interaction withnon-subscribers. Consequently, somesubscribers could leave an alternativetrading system if they think there arefewer advantages than before in havingdirect access to the alternative tradingsystem.

However, the growth of ECNs sincethe Order Handling Rules wereimplemented indicates that alternativetrading systems can, and are, attractingsubscribers.572 As mentioned above,there are still significant benefits tobeing a subscriber to an alternativetrading system, including, but notlimited to: the ability to enter orders andthe use of such features as a negotiationfeature or a ‘‘reserve size’’ feature; theability to access the best priced ordersfor securities in which an alternativetrading system represents less than 5percent of the trading volume andtherefore is not subject to thetransparency requirements; and accessto the entire ‘‘book,’’ not merely the‘‘top of the book,’’ that containsimportant real-time market informationregarding depth of trading interest. Allof these benefits will be retained underthe new display requirement.

Despite the impact on high volumealternative trading systems, integratingtheir best-priced orders into the publicmarket is critical to the national marketsystem. Section 11A of the ExchangeAct directs the Commission to facilitatea national market system and to carryout Congress’ objectives of, among otherthings, assuring ‘‘the practicability ofbrokers executing investors’ orders inthe best market.’’ 573 The public displayrequirement adopted today furthers theobjectives in Section 11A of theExchange Act by ensuring that thepublic markets reflect the best pricedorders displayed in alternative tradingsystems that have a significant tradingmarket in particular securities.

Several commenters also expressedconcern about whether or notalternative trading systems will bepermitted to continue charging fees tonon-subscribers that access alternativetrading systems publicly displayedorders. Currently, alternative tradingsystems charge a range of fees tosubscribers. In particular, alternative

trading systems may allow institutionalsubscribers to select higher fees andthen have soft-dollars rebated in anamount equal to the excess above theactual cost for execution of a trade.Because of the presence of soft dollars,it is difficult to estimate the amount ofrevenue that alternative trading systemsreceive from institutional subscribers.The Commission notes, however, that itis not requiring alternative tradingsystems to change their fee structures.The Commission is merely limitingalternative trading systems to chargingnon-subscribers fees that are consistentwith equivalent access.574 TheCommission does not believe that suchlimitations will substantially affect analternative trading system’s revenues. Infact, some alternative trading systemsmay have increased revenues from thefees charged to non-subscribers.

The rules the Commission is adoptingtoday prohibit an alternative tradingsystem from charging fees that wouldeffectively deny non-subscribersequivalent access to an alternativetrading system’s publicly displayedorders. As long as a fee does not denyequivalent access, it would bepermissible under these rules. The SROswill be able to establish rules to ensurethat alternative trading system fees arenot inconsistent with the standard ofequivalent access. Any SRO ruleimpacting an alternative tradingsystem’s access fees would have to befiled with the Commission for publiccomment, review, and approval. TheCommission cannot approve any SROrule unless it finds that such rule isconsistent with the Exchange Act,including whether the rule will promote‘‘efficiency, competition, and capitalformation.’’ 575

As discussed above, one of theexpected benefits of displaying the best-priced orders in alternative tradingsystems to all investors is that spreadswill shrink. The success of the OrderHandling Rules indicates that theCommission’s current proposal shouldfurther enhance liquidity and priceimprovement opportunities in thepublic markets. Because non-marketmaker broker-dealers and institutions attimes enter the best priced orders in analternative trading system, theCommission expects that display ofthese orders in the public quote willimprove the NBBO. As a result, somemarket markers may experience a loss ofrevenue. For example, a market maker


may currently be at the NBBO evenwhen an alternative trading system isbetter than that market maker’s bid oroffer. Accordingly, if the better pricedinstitutional or non-market makerbroker-dealer order were displayed inthe public quote, that market makerwould not execute an order unless itimproved its quote. While reducedspreads may represent a cost to marketmakers, as discussed above, itrepresents a corresponding benefit toinvestors. Moreover, reduced spreadsmake the overall market more efficientby reducing transaction costs. If tradingis less expensive, all other things beingequal, investors can be expected to trademore.

The staff also notes that a marketmaker is not required to execute acustomer order at the NBBO if the bestavailable price is represented by analternative trading system quote.Instead, a market maker may attempt toexecute that customer order against thealternative trading system quote. If themarket maker acts as agent in effectingthe customer’s trade, it may be entitledto a brokerage fee. Therefore, marketmakers may be able to offset, at leastpartially, the loss of trading profits withadditional brokerage revenues.

c. Fair Access. Under Regulation ATS,alternative trading systems withsignificant volume are required toestablish and maintain standards forgranting access to their system and keeprecords of such standards. In addition,such alternative trading systems mustapply those standards in a fair and non-discriminatory manner and submitcertain information regarding grants,denials, and limitations of access withtheir quarterly reports on Form ATS–R.Based on current volume estimates, atmost two alternative trading systemswill be initially subject to thisrequirement. The Paperwork ReductionAct section of this release summarizesthe filing and recordkeeping costsassociated with the fair accessrequirement.

The fair access requirement, asadopted, differs from that proposed. Theproposal would have provided marketparticipants who believe they had beenunfairly denied or limited access to analternative trading system subject to thefair access requirement with a right toappeal that alternative trading system’saction to the Commission. Alternativetrading systems subject to the fair accessrequirement would also have beenrequired to provide investors withnotice of a denial or limitation of accessand their right to appeal that action tothe Commission. The fair accessrequirement being adopted today doesnot include any right to appeal an

alternative trading system’s accessdecisions to the Commission. Instead,the Commission intends to enforce theprohibition on alternative tradingsystems with significant volumeunfairly denying access through itsinspection and enforcement authority.The Commission believes the fair accessrequirement it is adopting will be lesscostly to alternative trading systemsthan the one proposed becausealternative trading systems will not berequired to defend their accessdecisions in appeals before theCommission. Moreover, the requirementadopted does not require alternativetrading systems to send notice of theirdecisions to market participants.

d. Systems Capacity, Integrity, andSecurity. The Commission does notbelieve that its amendments and rulesrequiring alternative trading systems tomeet certain systems related standardsimposes significant costs. The standardsthe Commission is adopting are generalstandards that are consistent with goodbusiness practices. In addition, smalleralternative trading systems will not besubject to the proposed requirements.For those alternative trading systemsthat do not, for business reasons alone,ensure adequate capacity, integrity, andsecurity of their systems, there will becosts associated with complying withthe requirements. The costs associatedwith upgrading systems to an adequatelevel may include, for example,investing in computer hardware andsoftware. In addition, alternative tradingsystems will incur costs associated withthe independent review of their systemson an annual basis. An independentreview should be performed bycompetent, independent auditpersonnel following established auditprocedures and standards. If internalauditors are used by an alternativetrading system to complete the review,these auditors should comply with thestandards of the EDPAA. If externalauditors are used, they should complywith the standards of the AICPA and theEDPAA. The review must be conductedaccording to established procedures andstandards. The costs involved may varywidely depending on the business of thealternative trading system. Alternativetrading systems will also be subject topaperwork burdens and recordkeepingand reporting requirements. Theserequirements are necessary for theCommission and the appropriate SROsto ensure compliance with systemsrelated requirements. In addition,keeping such records permits alternativetrading systems to effectively analyzesystems problems that occur. Whilealternative trading systems are not

required to file such documentationwith the Commission on a regular basis,the Commission recognizes thatgenerating and maintaining suchdocumentation will impose someadditional costs.

The notification requirement formaterial systems outages should imposerelatively little additional costs onalternative trading systems. Moreover,the Commission believes that this smallburden is justified by the need to keepCommission staff abreast of systems’developments and problems. ThePaperwork Reduction Act section of thisrelease summarizes the costs associatedwith the recordkeeping and reportingburdens of compliance with the systemscapacity, integrity, and securityrequirements.

e. Costs of Exchange Registration. Theframework the Commission is adoptingtoday for alternative trading systems isdesigned to allow such systems theoption of registering as nationalsecurities exchanges. If an alternativetrading system chooses to register as anexchange, corresponding regulatoryobligations could impose costs on suchsystems, however, the elective nature ofexchange regulation under theframework the Commission is adoptingtoday ensures that only those entities forwhom it is cost-effective will chooseexchange registration and therefore bearthe costs.

For example, exchange-registeredalternative trading systems will have tobe organized to, and have the capacityto, carry out the purposes of theExchange Act, including their owncompliance and the ability to enforcemember compliance with the securitieslaws. Consequently, any newlyregistered exchange will have toestablish appropriate surveillance anddisciplinary mechanisms. In addition,newly registered exchanges will incurcertain start-up costs associated withthis obligation, such as writing rulemanuals.

National securities exchangescurrently operating have significantassets and expenses in order to carry outtheir functions. The cost of acquiringthe necessary assets and the operatingfunds required to carry out the day-to-day functions of a national securitiesexchange are significant. For example,for the fiscal year 1997, the NYSE hadtotal assets of $1,174,887,000 and totalexpenses of $488,811,000. TheCincinnati Stock Exchange (‘‘CSE’’),currently the only completelyautomated national securities exchange,had total assets of $13,124,585 and totalexpenses of $5,343,403. Due to thesecosts, it appears that an alternativetrading system will need to have


576 The amount to be paid to the CTA plan willvary on a case-by-case basis and may reflect acurrent independent valuation of the CTA facilities,prior valuations, an assessment of costs contributed

to the plan by existing members, the estimatedusage of the plan facilities by the applicant, costsfor anticipated system modifications toaccommodate the applicant, and other relevantfactors as determined by the current participants.CTA Plan: Second Restatement of Plan Submittedto the Securities and Exchange CommissionPursuant to Rule 11Aa3–1 under the SecuritiesExchange Act of 1934, May 1974 as restated March1980 and December 1995, at 8–9. See supra note391. The terms of the CQ plan are substantiallysimilar with respect to the assessment of a paymentupon entry into the system. CQ Plan: Restatementof Plan Submitted to the Securities and ExchangeCommission Pursuant to Rule 11Ac1–1 under theSecurities Exchange Act of 1934, July 1978, asrestated December 1995, at 8–9. See supra note 392.

577 Plan for the Purpose of Creating andOperating an Intermarket Communication LinkagePursuant to Section 11A(a)(3)(B) of the SecuritiesExchange Act of 1934, Composite: Amendmentsthrough May 30, 1997, at 78–79.

578 17 CFR 240.11Ac1–1.579 The Commission estimates that each national

securities exchange or national securitiesassociation will submit information to vendorsapproximately 24,266,000 times per year, whichreporting is generally done through automatedfacilities that conduct the reporting on a continuousbasis. Due to the continuous nature of theinformation feeds, the Commission does not believethat it is feasible to estimate the average cost perresponse or annual burdens hours involved incomplying with Rule 11Ac1–1(b) for a newregistered exchange. 17 CFR 240.11Ac1–1(b).

580 See supra Section III.B.1.581 See NYSE Letter at 10; Amex Letter at 5–6.

significant volume in order to make thebenefits of exchange registrationoutweigh the costs.

As registered exchanges, alternativetrading systems will also be subject tomore frequent inspection by theCommission. As broker-dealers,alternative trading systems will beinspected on a regular basis by any SROof which they are a member, and by theCommission only on an intermittentbasis. As registered exchanges, thesesystems will be inspected moreregularly by Commission staff, but will,of course, no longer be subject toexaminations by SROs.

The Commission inspects differentSRO programs on independent reviewcycles. For example, separateinspections are conducted for an SRO’ssurveillance, arbitration, listings, andfinancial soundness programs. Whereappropriate, SROs will be examined forother programs they may operate, suchas index programs. Each type ofexamination will be performed atregular intervals, which are typicallytwo to three years. An SRO, however,may expect several examinationsthroughout a particular year, each in adifferent program. Each examinationtypically involves three to four attorneysand/or accountants from theCommission, who spend one week atthe SRO, or up to two weeks forparticularly large programs, to examinerecords and interview SRO personnel.In order to comply with section 17(b)under the Exchange Act, an SRO mustexpend resources to provide copies ofrelevant documents to, and answerquestions from, the Commission staff.The cost to an SRO of each examinationvaries greatly depending on the scope ofthe examination and the size orcomplexity of the SRO’s particularprogram.

In addition, there will also be costsassociated with meeting the obligationsset forth in section 11A of the ExchangeAct and the rules thereunder. Thesecosts include the costs of joining, orcreating new, market-wide plans, suchas the CQS, CTA, ITS, and OTC–UTP,although some of these costs will beoffset by the right to share in therevenues generated by these plans. Forexample, to join the CTA plan,applicants will be asked to pay, as acondition to entry into the plan, anamount that reflects the value of thetangible and intangible assets created bythe CTA plan that will be available tothe applicant. 576 Similarly, new

participants in ITS will have to pay ashare of the development costs, whichwill reflect a share of the initialdevelopment costs, which were$721,631, and a share of costs incurredafter June 30, 1978. 577 These costs willalso include the costs of complying withRule 11Ac1–1(b) under the ExchangeAct, 578 which requires nationalsecurities exchanges and nationalsecurities associations to make the bestbid, best offer, and aggregate quotationsize for each security traded on itsfacilities available to quotation vendorsfor public dissemination.579

The Commission notes that theremaining costs will be partially offsetbecause the alternative trading systemsassuming the costs of exchangeregistration will no longer be regulatedas broker-dealers. Consequently, theywill no longer be obligated to complywith the broker-dealer requirements,such as filing and updating Form BD,maintaining books and records inaccordance with Rules 17a–3 and 17a–4 under the Exchange Act, and payingfees for membership in an SRO. Inaddition, because exchange-registeredalternative trading systems share theresponsibilities of self-regulation, theregulatory burden carried by currentlyregistered exchanges should be reduced.Other benefits include the freedom fromoversight by a competing SRO, noobligation to comply with net capitalrequirements, the right to establishtrading and conduct rules, the right toestablish fee schedules, the ability to

directly participate in the nationalmarket system mechanisms, and theright to share in the profits and benefitsproduced by the national market systemmechanisms such as the CQS, CTA, ITSand OTC–UTP plans.580

The costs of exchange registration alsoinclude certain paperwork, filing, andrecordkeeping requirements. Thesecosts are discussed in the PaperworkReduction Act section below.

The Commission anticipates that onlya few of the existing alternative tradingsystems would consider registering as anational securities exchange. For mostof the alternative trading systemscurrently in existence, the Commissionbelieves that the costs and obligationsdiscussed above potentially makeregistering as a national securitiesexchange less commercially viable thanregistering as a broker-dealer andcomplying with Regulation ATS.

B. Amendments to Application andRelated Rules for Registration as anExchange

The Commission identified severalcosts and benefits to investors andmarket participants in the ProposingRelease with respect to amendments tothe application and rules for exchangeregistration. Only two commentersidentified areas of concern regardingexchange registration. Thesecommenters suggested that theCommission was seeking to reimposeannual filing requirements previouslyeliminated in 1994.581 In response, theCommission has made technicalmodifications to Rule 6a–2 to clarify theoperation of the rule. The Commissiondoes not believe that these filingburdens are reimposed under the rulesas adopted. These commenters alsoquestioned the value of requiringexchanges to compile and submitamendments to Form 1 that containinformation that has been provided tothe Commission throughout the year inother contexts. The Commissioncontinues to believe that it is importantto have all the required informationgathered in one place in order to makeit useful for Commission staff. Inaddition, the additional costs should beminimal because the respondents arerequired only to compile existingdocuments rather than generate newmaterial.

1. Benefits

The Commission believes that theamendments provide benefits toorganizations that are currently


582 For example, the International SecuritiesExchange, which announced its intentions toregister as a national securities exchange onNovember 10, 1998, would not be able to registeras a national securities exchange without thechanges to the rules as adopted today. SeeInternational Securities Exchange Will be First FullyElectronic Options Exchange in U.S., InternationalSecurities Exchange Press Release, Nov. 10, 1998. 583 TBMA Letter at 25–26.

584 The costs and benefits associated with theserecordkeeping requirements are discussed inSection IX.A.2.a. supra.

585 CBOE Letter at 8–9.586 See CME Letter at 3–4; PCX Letter at 8.587 The Commission estimates that the current

preparation and filing of proposed rule changespursuant to section 19(b)(2) of the Exchange Act tooperate a pilot trading system constitute majormarket impact filings requiring approximately 100hours and $10,000 to $15,000 of SRO time andmoney, respectively, for each proposal. This doesnot include the cost to the SRO of any delay inobtaining Commission approval or in disclosingbusiness information; nor does this include thebenefit to an SRO of bringing its new pilot tradingsystem to market in a shorter amount of time. Thecost per hour and per filing is derived frominformation supplied by the SROs. For the purposesof our estimates, we have valued related overheadat thirty-five percent of the value of legal work. SeeGSA Guide to Estimating Reporting Costs (1973).

registered, or in the future will apply forregistration, as national securitiesexchanges. Generally, the Commissionexpects that the regulatory frameworkdiscussed in this release accommodatesautomated and for-profit exchanges andmakes registering as a nationalsecurities exchange more commerciallyviable for possible future exchanges.582

First, the amendments to Rules 6a–1,6a–2, and 6a–3 ease complianceburdens by simplifying the rule. Bysimplifying the rule language itself, theCommission anticipates that partiesattempting to comply with Rules 6a–1,6a–2, and 6a–3 will be better able tounderstand the rules’ requirements andcomply with them. Much of theinformation required on Form 1 will notchange, but the revised form recasts thequestions and exhibits in a differentformat that will ease compliance andmake the responses more relevant toinvestors and the Commission. Whilenational securities exchanges havetraditionally been membership-owned,Form 1 also is revised to accommodateproprietary national securitiesexchanges.

Second, the amendments givenational securities exchanges the optionof complying with certain ongoing filingrequirements by posting information onan Internet web site and supplying thelocation to the Commission, instead offiling a complete paper copy with theCommission. The Commissionanticipates that exchanges will chooseto use the Internet to comply with Rules6a–2 and 6a–3 rather than filing manyexhibits on paper. The availability ofsuch information on the Internet willalso provide the public with easier andless expensive access to the informationthan requesting paper copies from theCommission or the national securitiesexchanges as currently required. Inaddition, permitting exchanges to usethe Internet as a means of compliancewill reduce expenses associated withclerical time, postage, and copying.

The amended rules also reduce thefrequency of certain ongoing filings toupdate the information in Form 1,directly reducing the complianceburden on national securities exchangeswhile still meeting investors’ and theCommission’s need for reasonablycurrent information. Specifically, theamendments eliminate exchanges’

requirement to submit changes to theirconstitution, their rules, or thesecurities listed on the exchange withinten days. The amendments also permitexchanges to file certain informationregarding subsidiaries and affiliatesevery three years rather than annually.These amendments will conserveregistered exchanges’ staff time tocomply with the rules.

2. CostsThe amendments are intended to

simplify the filing requirements andreduce the compliance burdens fornational securities exchanges and willlikely impose few additional costs onnational securities exchanges. Initially,there may be some additional personnelcosts required to review the proposedrules and revised Form 1, but theCommission believes that the simplifiedrequirements will reduce overallcompliance burdens and costs overtime. Reducing the frequency of filingsfor some requirements may result insome information being less current.The Commission, however, believes thatmuch of this type of information doesnot change frequently. Moreover, theoption of posting such information onan Internet web site should encouragemore frequent updating of currentinformation. Compliance with Rules 6a–1, 6a–2, and 6a–3 also include certainpaperwork costs, which are discussed as‘‘burdens’’ in the Paperwork ReductionAct section below.

C. Costs and Benefits of the Repeal ofRule 17a–23 and the Amendments toRules 17a–3 and 17a–4

The Commission identified severalcosts and benefits to investors andmarket participants in the ProposingRelease with respect to Rules 17a–23,17a–3, and 17a–4. One commenterstated that the transfer of recordkeepingburdens would impose no additionalburdens.583

Approximately forty-five of thebroker-dealer trading systems currentlyfiling reports under Rule 17a–23 will bealternative trading systems under theamendments and rules in this release.These trading systems will not fallwithin the definition of ‘‘internalbroker-dealer system,’’ and will,therefore, not be required to maintainrecords under the new provisions ofRules 17a–3(a)(16) and 17a–4(b)(10). Inits Paperwork Reduction Act analysis,the Commission notes that annualaggregate burdens for the recordkeepingobligations under Rule 17a–23 will beeliminated. Although the reportingrequirements under Rule 17a–23 will be

eliminated, alternative trading systemswill be subject to similar recordkeepingrequirements under Regulation ATS.584

These paperwork ‘‘burdens’’ arediscussed below in the PaperworkReduction Act section.

D. SRO Pilot Trading SystemThe Commission identified several

costs and benefits to investors andmarket participants in the ProposingRelease with respect to Rule 19b–5.While the Commission solicitedcomment on the costs and benefits ofRule 19b–5, no comments were receivedspecifically on that point. Severalcommenters did, however, address theCommission’s proposal. One commenteragreed that Rule 19b–5 would reduceregulatory costs and encourageinnovation, but believed that the rule’slimitations should be reduced.585 Twoother commenters expressed support forthe goals of Rule 19b–5, but argued thatburdens wouldn’t be reduced as apractical matter due to the limitations ofthe rule.586 In response, the Commissionnotes that it has adopted the rule withsome changes that should permit SROsmore flexibility in taking advantage ofthe temporary exemption from rulefiling requirements.

By permitting SROs to begin operatingeligible pilot trading systemsimmediately and to continue operatingfor two years under a flexible regulatoryscheme, the Commission believes thatRule 19b–5 will benefit SROs andinvestors. Rule 19b–5 will enhancecompetition in the trading marketswithout imposing significant SROcompliance burdens.587 Rule 19b–5 willpermit the timely implementation ofpilot trading systems without thewidespread dissemination of criticalbusiness information. Therefore, Rule19b–5 will reduce SRO costs associatedwith the Commission approval processand improve the competitive balancebetween SROs and alternative trading


588 The Commission estimates that under currentprocedures, a rule filing for a new pilot tradingsystem takes 90 days, on average, from the date ofthe original submission to be approved. In contrast,the expedited treatment of SRO rule changes forpilot trading systems in this release permits SROsto operate a pilot trading system twenty days aftersubmitting an initial operation report on FormPILOT, so long as such system complies with Rule19b–5 under the Exchange Act.

589 15 U.S.C. 78w(a)(2).

590 15 U.S.C. 78c(f).591 The Commission further believes that

repealing Rule 17a–23 and amending Rules 17a–3and 17a–4 under the Act will help to create a moreefficient market, encourage competition, andstimulate capital formation innovation.

592 As previously stated, alternative tradingsystems are able to attract subscribers becauseprices in their systems are often better than the

prices available in the public markets. Becausealternative trading systems are now required topublicly display their best priced orders forsecurities in which they represent more than 5percent of the trading volume, the best pricedorders for certain securities will also be availablethrough the public markets. Consequently, somesubscribers could leave an alternative tradingsystem if they think there are fewer advantages thanbefore in having direct access to the alternativetrading system. However, the growth of ECNs sincethe Order Handling Rules were implementedindicates that alternative trading systems can, andare, attracting subscribers. As mentioned above,there are still significant benefits to being asubscriber to an alternative trading system,including, but not limited to: the ability to enterorders and the use of such features as a negotiationfeature or a ‘‘reserve size’’ feature; the ability toaccess the best priced orders for securities in whichan alternative trading system represents less than 5percent of the trading volume and therefore is notsubject to the transparency requirements; andaccess to the entire ‘‘book,’’ not merely the ‘‘top ofthe book,’’ that contains important real-time marketinformation regarding depth of trading interest.

593 5 U.S.C. 604.594 17 CFR 240.3a1–1.595 17 CFR 240.3b–16.596 17 CFR 240.19b–5.597 17 CFR 242.300 et seq.598 17 CFR 242.637.

systems that are regulated as broker-dealers.588 Moreover, the Commissionbelieves that Rule 19b–5 will fosterinnovation and create a streamlinedprocedure for SROs to operate pilottrading systems and will reduce filingcosts for SROs pilot trading systems.

The costs of complying with Rule19b–5 includes certain paperwork,filing, and recordkeeping requirementsthat are discussed below in thePaperwork Reduction Act section.

X. Effects on Competition, Efficiencyand Capital Formation

Section 23(a)(2)589 of the Act requiresthat the Commission, whenpromulgating rules under the ExchangeAct, to consider the impact any rulewould have on competition and to notadopt any rule that would impose aburden on competition that is notnecessary or appropriate in the publicinterest. In the Proposing Release, theCommission solicited comment on theeffects on competition, efficiency andcapital formation of the rules andamendments. Specifically, theCommission requested commenters toaddress how the proposed rules andamendments would affect competitionbetween and among alternative tradingsystems, broker-dealers, exchanges,investors, and other market participants.The Commission received no commentsspecifically regarding these issues.

The Commission has considered therules and rule amendment in light of thestandards cited in section 23(a)(2) of theAct and believes they would not likelyimpose any significant burden oncompetition not necessary orappropriate in furtherance of theExchange Act. As discussed above inthe Cost-Benefit Section, theCommission recognizes that somealternative trading systems and theirinstitutional users will be affectedcompetitively by the rules adoptedtoday. Nonetheless, the Commissionbelieves that the rules and amendmentswill encourage innovation,accommodate the growing role oftechnology in the securities markets,improve transparency for marketparticipants and ensure the stability oftrading systems with a significant rolein the markets, thereby furthering thedevelopment of a national market

system in accordance with the goalsunder section 11A of the Exchange Act.In particular, as discussed above in theCost-Benefit Section, the Commissionbelieves that the rules and amendmentswill significantly reduce spreads,thereby benefiting all investors.

In adopting these rules andamendments, the Commission hasconsidered whether the action willprotect investors, and promoteefficiency, competition, and capitalformation.590 The Commission believesthat the rules and amendments willallow the Commission to better overseethe activities of alternative tradingsystems and integrate alternative tradingsystems into the national market system.The rules and amendments will alsobetter accommodate automated and for-profit exchanges and permit SROs tooperate pilot trading systemstemporarily without Commissionapproval. These steps will help toprotect investors by preventingdiscriminatory denials or limitations ofaccess, preventing systems relatedfailures, and permitting access to best-priced orders. In addition, alternativetrading systems should continue tocompete based on innovation, price, andservice rather than access to ‘‘hiddenmarkets.’’

Rules 3a1–1, 3b–16, and RegulationATS adopted today are intended toprovide a choice between registering asa broker-dealer and registering as anexchange for markets operated asalternative trading systems.591 Inaddition, the amendments to Rules 6a–1, 6a–2, and 6a–3 adopted today areintended to update the requirements forregistered or exempt exchanges in orderto accommodate different forms oforganization and methods of operation.The Commission believes that thesechanges will create a more efficientmarket, encourage competition amongalternative trading systems, andstimulate capital formation by makingthe regulatory framework sufficientlyflexible to accommodate new ordifferent approaches to exchangeformation and operation, includingautomated and for-profit exchanges. TheCommission further believes that thecosts identified in the above analysis arenot substantial enough to deter anymarket participants from attempting tobecome an alternative trading system.592

In addition, Rule 19b–5 and FormPilot are intended to provide SROs theopportunity to develop and operatepilot trading systems with less cost andtime delay. As previously stated,currently, SROs are required to submita rule filing to the Commission andundergo a public notice, comment, andapproval process, before they operate anew pilot trading system. Rule 19b–5would permit SROs that develop pilottrading systems to begin operationshortly after submitting Form PILOT tothe Commission. One of theconsequences of SROs filing rulechanges before implementation is thatthe rule filing process informs SROs’competitors about the proposed pilottrading system and provides an avenuefor those competitors to copy, delay, orobstruct implementation of a pilottrading system before it can be tested inthe marketplace. As a result, theCommission believes that proposedRule 19b–5 and Form Pilot should helpcreate a more efficient market,encourage competition between SROsand alternative trading systems, andstimulate capital formation by creating astreamlined procedure for SROs tooperate pilot trading systems andreducing filing costs for SROs generally.

XI. Summary of Final RegulatoryFlexibility Analysis

A Final Regulatory FlexibilityAnalysis (‘‘FRFA’’) has been prepared inaccordance with section 4 of theRegulatory Flexibility Act (‘‘RFA’’).593

The FRFA relates to the adoption of newrules 3a1–1,594 3b–16,595 19b–5,596

Regulation ATS,597 new Forms ATS,598


599 17 CFR 242.638.600 17 CFR 249.821.601 17 CFR 240.6a–1.602 17 CFR 240.6a–2.603 17 CFR 240.6a–3.604 17 CFR 240.11Ac1–1.605 17 CFR 240.17a–3.606 17 CFR 240.17a–4.607 17 CFR 202.3.608 17 CFR 240.17a–23.609 15 U.S.C. 78a et seq.610 See supra note .

ATS–R,599 PILOT,600 amendments torules 6a–1,601 6a–2,602 6a–3,603 11Ac1–1,604 17a–3,605 17a–4,606 theCommission’s rules of practice,607 toForm 1, and the repeal of Rule 17a–23608 under the Exchange Act.609 TheFRFA notes the potential costs ofoperation and procedural changes thatmay be necessary to comply with thenew rules and rule amendments (‘‘newregulatory framework’’). A summary ofthe Initial Regulatory FlexibilityAnalysis (‘‘IRFA’’) appeared in theProposing Release.610

As more fully discussed in the FRFA,market participants have developed avariety of alternative trading systemsthat furnish services traditionallyprovided solely by registered exchanges.Our current regulatory framework,designed more than six decades ago,however, did not foresee many of thesetrading and business functions.Alternative trading systems now handletwenty percent or more of the orders insecurities listed on Nasdaq, and almostfour percent of orders in listedsecurities. Even though these systemsprovide services that are similar to thoseprovided by the registered exchangesand Nasdaq, the current regulatoryframework largely ignores the marketfunctions of alternative trading systems.This creates disparities that affectinvestor protection, marketintermediaries, and other markets. Forexample, activity on alternative tradingsystems is not fully disclosed to, oraccessible by, public investors and maynot be adequately surveilled for marketmanipulation and fraud. Moreover,these trading systems have no obligationto provide investors a fair opportunityto participate in their systems or to treattheir participants fairly. In addition,they do not have an obligation to ensurethat their capacity is sufficient to handletrading demand. Because of theincreasingly important role ofalternative trading systems, thesedifferences call into question not onlythe fairness of current regulatoryrequirements, but also the efficacy of theexisting national market systemstructure.

As described in the FRFA, under thenew regulatory framework, the

Commission will offer trading systems achoice between broker-dealer regulationand exchange regulation. Specifically,the Commission proposed to allowalternative trading systems to choosewhether to register as national securitiesexchanges, or to register as broker-dealers and comply with additionalrequirements under proposedRegulation ATS depending on theiractivities and trading volume. Inconjunction with this proposal, theCommission proposed to repeal Rule17a–23, which currently requiresalternative trading systems—as well asbroker-dealer trading systems that arenot alternative trading systems—tomaintain certain records and file reportswith the Commission. The Commissionalso proposed amendments to Form 1,which securities markets file to registeras national securities exchanges, andrelated rules. Finally, to enableregistered exchanges and nationalsecurities associations to better competein the fast changing marketplace, theCommission proposed to temporarilyexempt certain pilot trading systemsoperated by such exchanges andassociations from the rule filingrequirements of the Exchange Act.

In the Proposing Release, theCommission solicited public commenton the proposed new rules and ruleamendments which were designed toresolve many of the concerns raised byalternative trading systems. Asdiscussed in the FRFA, commentersgenerally supported the Commission’sproposals and welcomed the regulatoryflexibility these proposals offered.While no public comments werereceived in response to the IRFA,several of the comments were related tothe IRFA. Several commentersencouraged the Commission to acceptelectronic filings as a means of reducingthe burden on market participants. TheCommission is, in fact, working towardthe goal of accepting filings in electronicform. One commenter suggested that theCommission impose only minimalregulatory requirements, if any, onalternative trading systems that tradeonly minimal volume in order to avoiderecting significant barriers to entry andinnovation. The Commission believesthat the requirements of Regulation ATSare minimal for new alternative tradingsystems, especially as compared to thecurrent no-action letter process.Regulation ATS sets forth concreterequirements for a system to operate,imposes only notice filings, and reservesmore burdensome requirements for highvolume systems. Another commenterstated that the reporting requirementsunder proposed Regulation ATS are

similar to current Rule 17a–23 and,thus, are not inappropriatelyburdensome. The Commission agreesand notes that most current potentialrespondents under Regulation ATSalready have experience with therequirements and burdens associatedwith Rule 17a–23, so Regulation ATSwill not impose significant new burdenson currently operating alternativetrading systems.

The Commission is adopting newRegulation ATS substantially in theform it was proposed.

The FRFA addresses how theproposal would affect broker-dealersthat operate alternative trading systemsand internal broker-dealer tradingsystems that are small entities. As morefully explained in the FRFA, theCommission believes that the improvedregulatory framework provided byRegulation ATS justifies the costsincurred by industry participants tocomply with Regulation ATS. The FRFAalso describes the Commission’sconsideration of significant alternativesto Regulation ATS. The FRFA concludesthat the alternatives, in the context of anew regulatory framework, would notaccomplish the stated objectives ofRegulation ATS. A copy of the FRFAmay be obtained by contacting DeniseLanders, Attorney, Division of MarketRegulation, Securities and ExchangeCommission, 450 Fifth Street, NW., MailStop 10–1, Washington D.C. 20549.

XII. Paperwork Reduction Act

As explained in the ProposingRelease, certain provisions of the rulesand rule amendments contain‘‘collection of information’’requirements within the meaning of thePaperwork Reduction Act of 1995 (44U.S.C. 3501 et seq.) (‘‘PRA’’).Accordingly, the Commission submittedthe collection of informationrequirements contained in the rules andrule amendments to the Office ofManagement and Budget (‘‘OMB’’) forreview and were approved by OMBwhich assigned the following controlnumbers: Form 1, Rules 6a-1 and 6a-2,control number 3235–0017; Rule 6a-3,control number 3235–0021; Rule 17a–3(a)(16), control number 3235-0508;Rule 17a–4(b)(10), control number3235–0506; Rule 19b–5 and FormPILOT, control number 3235–0507; Rule301, Form ATS and Form ATS-R,control number 3235–0509; Rule 302,control number 3235–0510; and Rule303, control number 3235–0505. Thecollections of information are inaccordance with Section 3507 of the


611 44 U.S.C. 3507.612 For a further discussion of the changes, see the

discussions of Rule 301, Form ATS, Form ATS–R,Rule 302, and Rule 303, infra.

PRA.611 With regard to Rule 301, FormATS, and Form ATS-R, Rule 302, andRule 303, the Commission staff haschanged its estimate of the paperworkburdens slightly due to an increase inthe estimated number of respondentsthat will be affected and a change to thefair access rules. Accordingly, theCommission has submitted a PRAchange worksheet to OMB.612

The collection of informationobligations imposed by the rules andrule amendments are mandatory.However, it is important to note that analternative trading system operating as abroker-dealer is optional, operation of anational securities exchange is optional,and operating a pilot trading system isoptional. The information collected,retained, and/or filed pursuant to therules and rule amendments underRegulation ATS will be keptconfidential to the extent permitted bythe Freedom of Information Act (5U.S.C. § 552 et seq.). The informationcollected, retained, and/or filedpursuant to the rules for registration asa national securities exchange will notbe confidential and will be available tothe public. The information collected,retained, and/or filed pursuant to therules for operation of pilot tradingsystems will not be confidential andwill be made available to the publicwhen the pilot trading system starts tooperate. An agency may not conduct orsponsor, and a person is not required tocomply with, a collection of informationunless it displays a currently valid OMBcontrol number.

The collections of information arenecessary for persons to obtain certainbenefits or to comply with certainrequirements. As described in theProposing Release, the rules and ruleamendments to which the collections ofinformation are related allow theCommission to respond to the impact oftechnological developments in thesecurities markets and permit theCommission to more effectively overseethe growing number of alternativetrading systems. The collections ofinformation are also necessary to permitthe Commission to effectively overseeSRO pilot trading systems. With theexception of two changes to the finalrules, there are no material changes tothe rules and amendments as adoptedthat affect the burden estimates in theProposing Release. The Commission isadopting different fair accessrequirements from those it published inthe Proposing Release. The Commission

has determined to not adopt the fairaccess requirements that would haverequired investors denied or limitedaccess to have a right to appeal to theCommission and alternative tradingsystems making access denial orlimitation decisions to notify suchinvestors of the decision and their rightof appeal to the Commission. Instead,the Commission has decided to adoptrules that require alternative tradingsystems to report quarterly to theCommission a record of all grants,denials, and limitations of access aswell as other descriptive informationsurrounding the decision. Thesechanges eliminate the proposedpaperwork burden of providing noticeto investors and adds a complianceburden on Form ATS–R to report suchinformation to the Commission.Aggregate paperwork burdens have alsobeen revised to reflect updatedinformation regarding the estimatednumber of alternative trading systemsthat will be subject to the rules. In theProposing Release, the Commission staffestimated that there were approximatelyforty-three alternative trading systemsoperating. The Commission staff nowestimates that there are forty-fivealternative trading systems operating, sothe aggregate paperwork burdens havebeen revised to reflect this change.

The Commission solicited publiccomment on the collection ofinformation requirements contained inthe Proposing Release. While theCommission received no comments thatspecifically addressed the PRA portionof the release, it did receive severalcomments that touched on PRA relatedissues.

Several commenters encouraged theCommission to accept electronic filingsas a means of reducing the burden onmarket participants. The Commission is,in fact, working toward the goal ofaccepting filings in electronic form. TheCommission anticipates that the optionof electronic filing will be madeavailable to respondents at some pointin the relatively near future. Severalcommenters also suggested that theCommission reduce the burden onnational securities exchanges byrelieving them of the obligation to fileannual amendments to Form 1 due tothe same information being submitted tothe Commission in other formsperiodically throughout the year. TheCommission believes that it is importantto have one complete annual filing thatcompiles all the changes to theinformation contained on Form 1throughout the year and all otherrequired SRO information. Additionally,the Commission believes that such afiling represents only a compilation of

existing information, so the additionalburden of requiring an annual filing islargely clerical and generally minimal.

One commenter suggested that theCommission impose only minimalregulatory requirements, if any, onalternative trading systems that tradeonly minimal volume in order to avoiderecting significant barriers to entry andinnovation. The Commission believesthat the requirements of Regulation ATSare minimal for new alternative tradingsystems, especially as compared to thecurrent no-action letter process.Regulation ATS sets forth concreterequirements for a system to operate,imposes only notice filings, and reservesmore burdensome requirements for highvolume systems. Another commenterstated that the reporting requirementsunder proposed Regulation ATS aresimilar to current Rule 17a–23 and,thus, are not inappropriatelyburdensome. The Commission agreesand notes that most current potentialrespondents under Regulation ATSalready have experience with therequirements and burdens associatedwith Rule 17a–23, so Regulation ATSwill not impose significant new burdenson currently operating alternativetrading systems.

As noted above in the Cost-Benefitsection, below is a summary of thepaperwork burdens that were identifiedin the Proposing Release. Although notmandated by the PRA, to give regulatedentities and others an understanding ofthe paperwork costs, the discussionbelow provides dollar estimatesassuming certain labor costs.

A. Form 1, Rules 6a–1 and 6a–2These amendments are intended to

simplify the filing requirements andreduce the compliance burdens fornational securities exchanges and willlikely impose few additional costs onnational securities exchanges. Initially,there may be some additional personnelcosts required to review the proposedrules and revised Form 1, but theCommission believes that the simplifiedrequirements will reduce overallcompliance burdens and costs overtime. Reducing the frequency of filingsfor some requirements may result insome information being less current.The Commission, however, believes thatmuch of this type of information doesnot change frequently. Moreover, theoption of posting such information onan Internet web site should encouragemore frequent updating of currentinformation.

The Commission staff has estimatedthat each respondent will incur anaverage burden of forty-seven hours tocomply with Rule 6a–1 and file an


613 The estimated average additional cost perresponse of $30 is derived from two additionalhours of clerical work at $15 per hour.

614 Since 1991, the Commission has receivedthree total applications for registration as a nationalsecurities exchange.

615 The estimated average cost per response of$9.50 is composed of $7.50 for clerical work (0.5hours at $15 per hour) and $2 for printing, supplies,copying, and postage (approximately thirty-fivepercent of the total labor costs). The Commissionstaff has estimated overhead for this collection ofinformation burden, and all other collection ofinformation burdens discussed below, based onthirty-five percent of total labor costs based on theGSA Guide to Estimating Reporting Costs (1973).The estimated average annual cost of $237.50 isderived from twenty-five annual filings at a cost of$9.50 per filing.

616 The Commission staff has estimated that anemployee of a broker-dealer charged to ensurecompliance with Commission regulations receivesannual compensation of $100,000. Thiscompensation is the equivalent of $48.08 per hour($100,000 divided by 2,080 payroll hours per year).The estimated annual cost of $1,298.16 is derivedfrom twenty-seven burden hours per respondent at$48.08 per hour.

617 The estimated aggregate burden of 2,619 hoursis derived from ninety-four broker-dealerrespondents incurring an average burden of twenty-seven hours each. The estimated aggregate cost of$122,027.04 is derived from ninety-four broker-dealer respondents incurring an average burden of$1,298.16 each.

618 The Commission staff has estimated that anemployee of a broker-dealer charged to ensurecompliance with Commission regulations receivesannual compensation of $100,000. Thiscompensation is the equivalent of $48.08 per hour($100,000 divided by 2,080 payroll hours per year).The estimated annual cost of $144.24 is derivedfrom three burden hours per respondent at $48.08per hour.

619 The estimated aggregate burden of twohundred eighty-two hours is derived from ninety-four broker-dealer respondents incurring an averageburden of three hours each. The estimated aggregatecost of $13,558.56 is derived from ninety-fourbroker-dealer respondents incurring an averageburden of $144.24 each.

620 This estimate is based on a review of past SROfilings under section 19(b) of the Exchange Act. TheCommission staff has estimated that approximately6 rule filings per year in the past could have beenfiled under Rule 19b–5.

621 The estimates for burden hours involved withfiling Form PILOT are based on the Commission’sexperience with similar reporting requirementsunder Rule 17a–23.

622 This estimate is based on the Commission’sexperience with collection of similar informationunder Rule 17a–23.

initial application for registration onForm 1. This represents a two hourincrease from the current averageburden due to the estimated additionalburden of the added exhibits. TheCommission staff has estimated that theaverage additional cost per responsewill be approximately $30.613 Becausethe Commission receives applicationsfor registration as an exchange on Form1 from time to time, and not on apredictable basis, it cannot estimate theannual aggregate costs and burden hoursassociated with such filings.614

The Commission notes that it ismaking no material changes to Rule 6a–1, Rule 6a–2, or Form 1 from theProposing Release. Thus, the collectionof information burdens are not changingfrom those proposed.

B. Rule 6a–3

The Commission anticipates that theamendments will not change thepaperwork burden associated withcomplying with Rule 6a–3. TheCommission staff has estimated that theaverage burden for each respondent tocomply with Rule 6a–3 is one-half hourper response because compliance onlyrequires photocopying existingdocuments. The Commission alsoestimates that each respondent will filesupplemental information under Rule6a–3 approximately twenty-five timesper year. The estimated average cost perresponse for each individual respondentis $9.50, resulting in an estimatedannual average cost burden for eachrespondent of $237.50.615

C. Rule 17a–3(a)(16)

No additional recordkeeping burdenswill be imposed on internal broker-dealer systems under the amendmentsto Rule 17a–3. The amendments applyonly to systems that are presentlysubject to the recordkeepingrequirements of Rule 17a–23. Becausethe Commission is repealing Rule 17a–23 and amending Rules 17a–3 and 17a–4 by transferring the recordkeeping

requirements from Rule 17a–23, theCommission does not anticipate anynew recordkeeping costs or burdens forrespondents.

Based on Commission experiencewith the burdens associated with Rule17a–23, the Commission has estimatedthe burdens that will be associated withRule 17a–3(a)(16). The Commission staffhas estimated that there will beapproximately ninety-four broker-dealers operating one hundred twenty-three internal broker-dealer systems thatwill have to make the records describedin Rule 17a–3(a)(16). The Commissionstaff has estimated that each respondentwill spend approximately twenty-sevenhours per year keeping the requiredrecords under Rule 17a–3(a)(16) at anannual cost of $1,298.16.616 Theaggregate burden for approximatelyninety-four broker-dealers operatinginternal broker-dealer trading systems isestimated to be 2,619 hours for a totalaverage cost of $122,027.04.617

D. Rule 17a–4(b)(10)No additional recordkeeping burdens

will be imposed on internal broker-dealer systems under the amendmentsto Rule 17a–4. The amendments applyonly to systems that are presentlysubject to the recordkeepingrequirements of Rule 17a–23. Becausethe Commission is repealing Rule 17a–23 and amending Rules 17a–3 and 17a–4 by transferring the recordkeepingrequirements from Rule 17a–23, theCommission does not anticipate anynew recordkeeping costs or burdens forrespondents.

Based on Commission experiencewith the burdens associated with Rule17a–23, the Commission has estimatedthe burdens that will be associated withRule 17a–4(b)(10). The Commission staffhas estimated that there will beapproximately ninety-four broker-dealers operating one hundred twenty-three internal broker-dealer systems thatwill have to keep the records describedin Rule 17a–4(b)(10). The Commissionstaff has estimated that each respondentwill spend approximately three hours topreserve the required records under

Rule 17a–4(b)(10) at an annual cost of$144.24.618 The aggregate burden forapproximately ninety-four broker-dealers operating internal broker-dealertrading systems is estimated to be twohundred eighty two hours for a totalaverage cost of $13,558.56.619

E. Rule 19b–5 and Form PILOTFor SROs that choose to operate pilot

trading systems and avail themselves ofthe provisions of Rule 19b–5,compliance with Rule 19b–5 and thefilings required on Form PILOT aremandatory. Initial filings on FormPILOT are confidential until the pilotsystem is operational and subsequentfilings are not confidential. Thus, aftera pilot trading system starts to operate,all filings on Form PILOT are availableto the public. Rule 19b–5 reiteratesSROs’ existing recordkeepingobligations under Rule 17a–1, whichrequires that such records be kept fornot less than five years, the first twoyears in an easily accessible place.

The Commission anticipates receivingapproximately 6 notices per yearregarding pilot trading systems on FormPILOT.620 An SRO will be required tosubmit a Form PILOT providingdetailed operational data and updatethis information quarterly. TheCommission staff has estimated that anSRO will expend twenty-four hours tofile an initial operation report and threehours to file a quarterly report and asystems change notice.621 TheCommission also estimates that an SROwill file two amendments per year toreport changes to the system.622 TheCommission staff has estimated that anSRO will expend $1,242 per initialForm PILOT filing and $155 for eachquarterly Form PILOT and system


623 The estimated average cost of $1,242 to file aninitial Form PILOT is composed of $800 for in-house professional work (sixteen hours at $50 perhour), $120 for clerical work (eight hours at $15 perhour) and $322 for printing, supplies, copying, andpostage (approximately thirty-five percent of thetotal labor costs).

The total estimated average cost of $155 to filequarterly reports and system change notices onForm PILOT is composed of $100 for in-houseprofessional work (two hours at $50 per hour), $15for clerical work (one hour at $15 per hour) and $40for printing, supplies, copying and postage(approximately thirty-five percent of the total laborcosts).

624 The estimated average burden of one hundredforty-four hours is derived from six SROrespondents incurring an average burden of twenty-four hours per filing. The estimated average cost of$7,452 is derived from six SRO respondents makingsix initial Form PILOT filings at $1,242 per filing.

625 The estimated average burden of one hundredeight hours is derived from six SRO respondentsfiling four quarterly reports and two systems changenotices at three burden hours per filing. Theestimated average cost of $5,580 is derived from sixSRO respondents filing four quarterly reports andtwo systems change notices at $155 per filing.

626 This estimate is based on filings made withthe Commission under Rule 17a–23. At the time ofthe Proposing Release, the Commission estimatedthat forty-three alternative trading systems wouldbe required to register as exchanges or broker-dealers and comply with Regulation ATS. Sincethat time, two such alternative trading systems havestarted to operate.

627 Based on the Commission’s experience overthe last three years with Rule 17a–23, it appearsthat there are more than three new alternativetrading systems per year. However, we expect thatin the steady state over time, there will beapproximately three new alternative tradingsystems per year. The rapid growth experiencedover the last several years is unlikely to continueat such a high rate in perpetuity.

628 This estimate for burden hours of filing FormATS is based on the burdens associated with filingForm 1, adjusted for differences between Form 1and Form ATS. The division between professionaland clerical time is based on estimates of theproportions used in the estimates of burdens forfiling Form 1.

629 The estimated average cost per response of$1,019 is composed of $650 for in-houseprofessional work (thirteen hours at $50 per hour),$105 for clerical work (seven hours at $15 per hour)and $264 for printing, supplies, copying, andpostage (approximately thirty-five percent of thetotal labor costs).

630 This estimated cost of $45,855 is derived fromforty-five alternative trading systems filing at anaverage cost of $1,019 each.

631 This estimated cost of $3,057 is derived fromthree new alternative trading systems filing at anaverage cost of $1,019 each.

change notice filed.623 Thus, the totalestimated annual burden for SROs tocomply with Rule 19b–5 by filing aninitial notice on Form PILOT isestimated to be one hundred forty-fourhours for a total average cost of$7,452.624 The total estimated annualburden for SROs to file systems changenotices and quarterly reports on FormPILOT is estimated to be one hundredeight hours for a total average cost of$5,580.625

F. Rule 301, Form ATS and FormATS–R

For alternative trading systems thatchoose to register as a broker-dealer, therequirements of Rule 301, Form ATSand Form ATS–R are mandatory. Allfilings required under Rule 301, FormATS and Form ATS–R are consideredconfidential and are not available to thepublic. All records required to be madeunder the Rule are required to bepreserved for three years, the first twoyears in an easily accessible place.

The alternative trading systemamendments and rules have beentailored to minimize their burden onalternative trading systems andespecially small systems. Many of theprovisions in the proposed rules aretriggered by a volume threshold. TheCommission expects that smallalternative trading systems will not havesufficient volume to trigger thosethresholds and will therefore not haveto comply with those provisions. Therecordkeeping and reportingrequirements with which smaller, lowervolume alternative trading systems haveto comply under proposed RegulationATS are substantially similar to thosewith which alternative trading systemscurrently comply. Consequently the

costs for smaller alternative tradingsystems should remain unchanged.

1. Notice, Reporting, and Recordkeeping

All alternative trading systems thatwill be subject to notice, reporting, andrecordkeeping requirements under theCommission’s rules as adopted todayare currently subject to similarrequirements under Rule 17a–23. Therequirements under Regulation ATS,however, require some additionalinformation that is not currentlyrequired under Rule 17a–23.

Under Regulation ATS, alternativetrading systems file an initial operationreport, notices of material systemschanges, and quarterly reports. Therules also include new Forms ATS andATS–R to standardize reporting of suchinformation and make it more useful forthe Commission. The rules requireinformation that is not currentlyrequired under Rule 17a–23, such asgreater detail about the systemoperations, the volume and types ofsecurities traded, criteria for grantingaccess to subscribers, proceduresgoverning order execution, reporting,clearance and settlement, procedures forreviewing systems capacity andcontingency procedures, and theidentity of any other entities involved inoperating the system.

Regulation ATS requires staff time tocomply with the initial notice andamendment requirements. While theCommission has designed therequirements in an effort to balance thecosts of filing with the benefits to begained from the information, some effortwill be necessary to gather and file thisinformation. Most of the information,however, already exists. Alternativetrading systems will only be required togather this information and supply it inthe required format to the Commission.The periodic updating requirementswill also require staff time over the lifeof the alternative trading system tocomply with the rules.

The Commission staff has estimatedthat there are currently about forty-fivealternative trading systems that will berequired to register as exchanges orregister as broker-dealers and complywith Regulation ATS.626 TheCommission also estimates that, overtime, there will be approximately threenew alternative trading systems eachyear that choose to register as broker-

dealers and comply with RegulationATS.627

The Commission also estimates that,over time, there will be approximatelythree alternative trading systems thatfile cessation of operations reports eachyear. Thus, the Commission anticipatesthat, over time, if all forty-five currentalternative trading systems choose toregister as broker-dealers and complywith Regulation ATS, there will beapproximately forty-five alternativetrading systems operating each year.

The Commission staff has estimatedthat the average burden per respondentto file the initial operations report onForm ATS will be twenty hours. Thisburden is computed by estimating thatcompleting the report will require anaverage of thirteen hours of professionalwork and seven hours of clericalwork.628 The Commission staff hasestimated that the average cost perresponse will be $1,019 representing thetwenty hours and cost of supplies.629 Ifall forty-five alternative trading systemsopt to register as broker-dealers andcomply with Regulation ATS, the total,one time cost to comply with theproposed requirements to file initialoperation reports is estimated to be$45,855.630 The Commission alsoestimates that, over time, approximatelythree new alternative trading systemswill register as broker-dealers per year,incurring an annual aggregate burden ofsixty hours for an average total cost of$3,057 after the first year followingadoption of Regulation ATS.631

In addition, the rules requirealternative trading systems to amendtheir initial operations report to notifythe Commission of material systemschanges and other changes to the


632 This estimate is based on the Commission’sexperience with collection of similar informationunder Rule 17a–23.

633 The estimated average cost per response of$111.50 is composed of $75 for in-houseprofessional work (1.5 hours at $50 per hour), $7.50for clerical work (0.5 hours at $15 per hour), and$29 for printing, supplies, copying, and postage(approximately thirty-five percent of the total laborcosts).

634 This estimated cost of $30,105 is composed of$111.50 cost per amendment for forty-fivealternative trading systems filing six times per year.

635 The estimated cost of $223 per response iscomposed of $150 for in-house professional work(three hours at $50 per hour), $15 for clerical work(one hour at $15 per hour) and $58 for printing,supplies, copying, and postage (approximatelythirty-five percent of the total labor costs).

636 The estimated annual cost of $892 to file FormATS–R is derived from four quarterly reports at anestimated annual cost of $223 per filing.

637 This estimated cost of $40,140 is derived fromforty-five alternative trading systems with anestimated annual filing cost for each of $892.

638 The estimated cost of $111.50 per response iscomposed of $75 for in-house professional work(1.5 hours at $50 per hour), $7.50 for clerical work(0.5 hours at $15 per hour), and $29 for printing,supplies, copying and postage (approximatelythirty-five percent of the total labor costs).

639 The estimated cost of $334.50 is derived froman average of three alternative trading systems filingone cessation of operations report per year on FormATS at an estimated cost of $111.50 each.

640 The estimated burden of seventeen hours isderived from five hours for establishing andmaintaining standards for fair access and twelvehours to report fair access information on FormATS–R on a quarterly basis (four responses at threehours per response). The estimated cost of $958.50is derived from $650 for professional work (thirteenhours at $50 per hour), $60 for clerical work (fourhours at $15 per hour), and $248.50 for printing,supplies, copying, and postage (approximatelythirty-five percent of the total labor costs). TheCommission staff has estimated overhead based onthirty-five percent of total labor costs based on theGSA Guide to Estimating Reporting Costs (1973).The estimated burden of thirteen hours ofprofessional work is derived from five hours forestablishing and maintaining standards for fairaccess and eight hours (two hours for four quarterlyreports on Form ATS–R) to compile and report fairaccess information. The estimated burden of fourhours of clerical work is derived from one hour perquarter to compile and send information on FormATS–R.

641 The Commission notes that compliance withthe notice provision can be achieved by a telephonecall, so the burden for each notice is minimal. TheCommission staff has estimated only 0.25 hours pernotice will be required. The estimate of five systemoutage notices per year is based on theCommission’s experience with the AutomatedReview Program.

642 The estimated average cost per response of $17is composed of $12.50 for in-house professionalwork (0.25 hours at $50 per hour) and $4.50 forprinting, supplies, copying, and postage(approximately thirty-five percent of the total laborcosts). The estimated annual cost of $85 is derivedfrom five notices at $17 per notice.

information contained in the initialoperations report. The Commission staffhas estimated that each respondent willfile six such amendments per year.632

The Commission staff has estimated thateach respondent will incur an averageburden of two hours per response andincur an average cost of $111.50 for eachamendment to the initial operationreport that it submits.633 If all forty-fivealternative trading systems opt tocomply with Regulation ATS ratherthan to register as exchanges, the totalaggregate cost per year to comply withthe proposed requirement to fileamendments to the initial operationreports is estimated to be $30,105.634

Alternative trading systemsregistering as broker-dealers will also berequired to file quarterly reports onForm ATS–R, reporting participatingsystem subscribers, the securities tradedon the system, and aggregate volumeinformation. The Commission staff hasestimated that the quarterly reports willcause each respondent to incur anaverage burden of 4 hours per responseand incur an average cost of $223 foreach Form ATS–R that it submits.635

The annual burden per respondent isestimated to be $892.636 If all forty-fivealternative trading systems opt toregister as broker-dealers and complywith Regulation ATS, the total cost peryear to comply with the requirement tofile quarterly reports is estimated to be$40,140.637

Finally, alternative trading systemsregistered as broker-dealers will berequired to submit a notice and a reporton Form ATS when they ceaseoperations. The Commission anticipatesa total of three such filings per year. TheCommission staff has estimated thatindividual respondents will incur aburden of two hours to file the cessationnotice. The Commission staff has

estimated that individual respondentswill incur a cost of $111.50 to file thecessation of operations report on FormATS.638 The annual aggregate burdenfor three alternative trading systems tofile cessation of operations reports isestimated to be $334.50.639

2. Fair AccessUnder Regulation ATS, alternative

trading systems with significant volumeare required to establish and maintainstandards for granting access to theirsystem and keep records of suchstandards. In addition, alternativetrading systems with significant volumeare required to submit certaininformation regarding grants, denials,and limitations of access with theirquarterly reports on Form ATS–R. TheCommission staff has estimated thateach respondent obligated to establishand maintain such records will incur aburden of seventeen hours per year tomake and keep standards for grantingaccess for a total estimated cost of$958.50.640

Although these estimates reflect aprogram change from the ProposingRelease, the total burdens onrespondents are decreasing slightly as aresult of the program changes. TheCommission is eliminating the proposalto require alternative trading systemsthat deny investors access to the systemto provide them with notice of thedenial and their right of appeal to theCommission. Under the rules asadopted, there is no right of appeal tothe Commission. In the ProposingRelease, the Commission estimated that

the burden to comply with the noticerequirement would be approximatelytwenty-seven hours per year for eachrespondent. Under the rules as adopted,such alternative trading systems arerequired to submit fair accessinformation on Form ATS–R on aquarterly basis. The burden for thisrequirement is only twelve hours peryear for each respondent. Thus, thechanges from the Proposing Release areanticipated to reduce the burden oneach respondent by approximatelyfifteen hours per year. The Commissionstaff has estimated that only tworespondents will be affected by thisprogram change, resulting in anaggregate reduction of thirty burdenhours for all respondents. Thisreduction, however, is offset by anincrease in the estimated number ofrespondents. Specifically, the aggregatepaperwork burden for Rule 301, FormATS, and Form ATS–R is increasing byone hundred sixty hours due toupdating the estimate of the number ofpotential respondents from forty-threein the Proposing Release to forty-fivecurrently.

3. Systems Capacity, Integrity, andSecurity

The notification requirement formaterial systems outages should imposerelatively little additional costs onalternative trading systems. Moreover,the Commission believes that this smallburden is justified by the need to keepCommission staff abreast of systems’developments and problems.

The Commission staff has estimatedthat each respondent will incur anaverage annual burden of fifteen hoursto comply with the recordkeepingrequirements associated with thesystems capacity, integrity, and securityprovisions of Regulation ATS. TheCommission staff has estimated thateach respondent will make an average offive system outage notices per year, foran estimated average burden of 1.25hours per year.641 The Commission staffhas estimated that the total estimatedaverage cost of compliance for eachrespondent will be $85 per year.642

Such alternative trading systems will


643 The total estimated cost of $675 is composedof $500 for in-house professional work (ten hoursat $50 per hour) and $175 for printing, supplies,copying, and postage (approximately thirty-fivepercent of the total labor costs).

644 The estimated aggregate cost of $1,520 isderived from two alternative trading systemsincurring an estimated annual cost of $760 each($85 for providing systems outage notices and $675for recordkeeping requirements).

645 The estimated cost of $1,730.88 is derivedfrom an average of thirty-six hours of compliancetime at $48.08 per hour. The value of compliancetime is estimated as follows: an employee of abroker-dealer charged to ensure compliance withCommission regulations receives estimated annualcompensation of $100,000. This compensation isthe equivalent of $48.08 per hour ($100,000 dividedby 2,080 payroll hours per year).

646 This estimated cost of $77,889.60 is derivedfrom forty-five alternative trading systems incurringan annual cost of $1,730.88 each.

647 The estimated cost of $192.32 is derived froman average of four hours of compliance time at$48.08 per hour. The value of compliance time isestimated as follows: An employee of a broker-dealer charged to ensure compliance withCommission regulations receives estimated annualcompensation of $100,000. This compensation isthe equivalent of $48.08 per hour ($100,000 dividedby 2,080 payroll hours per year).

648 This estimated cost of $8,654.40 is derivedfrom forty-five alternative trading systems incurringan annual cost of $192.32 each.

also be required to keep records relatingto the steps taken to comply withsystems capacity, integrity, and securityrequirements under Regulation ATS.The Commission staff has estimated thateach respondent will incur a burden often hours per year to comply with suchrecordkeeping requirements for a totalestimated cost of $675 per year.643 TheCommission staff has estimated that twoalternative trading systems will berequired to comply with the systemscapacity, integrity, and securityprovisions of Regulation ATS due totheir significant volume. The estimatedaggregate cost for these alternativetrading systems chose to comply withthe systems capacity, integrity, andsecurity requirements is $1,520.644

G. Rule 302

Rule 302 requires alternative tradingsystems to make certain records withrespect to trading activity through thealternative trading systems. Thiscollection of information will permit theCommission to detect and investigatepotential market irregularities and toensure investor protection. Suchinformation is not available in any otherform from any other sources.

For alternative trading systems thatchoose to register as a broker-dealer, therequirements of Rule 302 aremandatory. All records required to bemade under Rule 302 are consideredconfidential and are not available to thepublic. All records required to be madeunder the Rule are required to bepreserved for three years, the first twoyears in an easily accessible place.

The Commission staff has estimatedthat each alternative trading system thatchooses to register as a broker-dealerwill be required to expend an average ofthirty-six hours to comply with Rule302 at an average cost of $1,730.88.645

If all forty-five alternative tradingsystems opt to register as broker-dealers,rather than as exchanges, the total cost

for recordkeeping under Rule 302 isestimated to be $77,889.60 per year.646

The Commission notes that it ismaking no material changes to Rule 302from the Proposing Release. Thecollection of information burdens areincreasing slightly due to an updatedestimate of the number of respondentsand not due to any changes to the ruleas proposed.

H. Rule 303Rule 303 requires alternative trading

systems registered as broker-dealers topreserve certain records produced underRule 302, as well as standards forgranting access to the system andrecords generated in complying with thesystems capacity, integrity and securityrequirements for alternative tradingsystems with significant trading volume.Alternative trading systems registered asbroker-dealers are not required to filesuch information, but merely to retain itin an organized manner and make itavailable to the Commission uponrequest.

For alternative trading systems thatchoose to register as a broker-dealer, therequirements of Rule 303 aremandatory. All records required to bemade under Rule 303 are consideredconfidential and are not available to thepublic. All records required to be madeunder the Rule are required to bepreserved for three years, the first twoyears in an easily accessible place.

The Commission staff has estimatedthat each alternative trading system thatchooses to register as a broker-dealerwill be required to expend an average offour hours per year to comply with Rule303 at an average cost of $192.32.647 Ifall forty-five alternative trading systemsopt to register as broker-dealers, ratherthan as exchanges, the total cost forrecord preservation is estimated to be$8,654.40 per year.648

The Commission notes that it ismaking no material changes to Rule 302from the Proposing Release. Thecollection of information burdens areincreasing slightly due to an updatedestimate of the number of respondentsand not due to any changes to the ruleas proposed.

XIII. Statutory AuthorityThe rules and rule amendments in

this release are being adopted pursuantto 15 U.S.C. 78 et seq., particularlysections 3(b), 5, 6, 11A, 15, 17(a), 17(b),19, 23(a), and 36 of the Exchange Act,15 U.S.C. 78c, 78e, 78f, 78k–1, 78o,78q(a), 78q(b), 78s(b), 78w(a), and78mm.

List of Subjects

17 CFR Part 202Administrative practice and

procedure, Securities.

17 CFR Part 240Brokers-dealers, Fraud, Issuers,

Reporting and recordkeepingrequirements, Securities.

17 CFR Part 242Securities.

17 CFR Part 249Reporting and recordkeeping

requirements, Securities.For the reasons set out in the

preamble, Title 17, Chapter II of theCode of Federal Regulations is amendedas follows.

PART 202—INFORMAL AND OTHERPROCEDURES

1. The authority citation for part 202continues to read in part as follows:

Authority: 15 U.S.C. 77s, 77t, 78d–1, 78u,78w, 7811(d), 79r, 79t, 77sss, 77uuu, 80a–37,80a–41, 80b–9, and 80b–11, unless otherwisenoted.

* * * * *2. Paragraph (b) of § 202.3 is revised

to read as follows:

§ 202.3 Processing of filings.(a) * * *(b)(1) Applications for registration as

brokers, dealers, investment advisers,municipal securities dealers andtransfer agents are submitted to theOffice of Filings and InformationServices where they are examined todetermine whether all necessaryinformation has been supplied andwhether all required financialstatements and other documents havebeen furnished in proper form.Defective applications may be returnedwith a request for correction or helduntil corrected before being accepted asa filing. The files of the Commission andother sources of information areconsidered to determine whether anyperson connected with the applicantappears to have engaged in activitieswhich would warrant commencement ofproceedings on the question of denial ofregistration. The staff confers withapplicants and makes suggestions in


appropriate cases for amendments andsupplemental information. Where itappears appropriate in the publicinterest and where a basis thereforeexists, denial proceedings may beinstituted. Within forty-five days of thedate of the filing of a brokerudealer,investment adviser or municipalsecurities dealer application (or withinsuch longer period as to which theapplicant consents), the Commissionshall by order grant registration orinstitute proceedings to determinewhether registration should be denied.An application for registration as atransfer agent shall become effectivewithin 30 days after receipt of theapplication (or within such shorterperiod as the Commission maydetermine). The Office of Filings andInformation Services is also responsiblefor the processing and substantiveexamination of statements of beneficialownership of securities and changes insuch ownership filed under theSecurities Exchange Act of 1934, thePublic Utility Holding Company Act of1935, and the Investment Company Actof 1940, and for the examination ofreports filed pursuant to § 230.144 ofthis chapter.

(2) Applications for registration asnational securities exchanges, orexemption from registration asexchanges by reason of such exchanges’limited volume of transactions filedwith the Commission are routed to theDivision of Market Regulation, whichexamines these applications todetermine whether all necessaryinformation has been supplied andwhether all required financialstatements and other documents havebeen furnished in proper form.Defective applications may be returnedwith a request for correction or helduntil corrected before being accepted asa filing. The files of the Commission andother sources of information areconsidered to determine whether anyperson connected with the applicantappears to have engaged in activitieswhich would warrant commencement ofproceedings on the question of denial ofregistration. The staff confers withapplicants and makes suggestions inappropriate cases for amendments andsupplemental information. Where itappears appropriate in the publicinterest and where a basis thereforeexists, denial proceedings may beinstituted. Within 90 days of the date ofthe filing of an application forregistration as a national securitiesexchange, or exemption fromregistration by reason of suchexchanges’ limited volume oftransactions (or within such longer

period as to which the applicantconsents), the Commission shall byorder grant registration, or instituteproceedings to determine whetherregistration should be denied asprovided in § 240.19(a)(1) of thischapter.

PART 240—GENERAL RULES ANDREGULATIONS, SECURITIESEXCHANGE ACT OF 1934


Authority: 15 U.S.C. 77c, 77d, 77g, 77j,77s, 77z–2, 77eee, 77ggg, 77nnn, 77sss, 77ttt,78c, 78d, 78f, 78i, 78j, 78j–1, 78k, 78k–1, 78l,78m, 78n, 78o, 78p, 78q, 78s, 78u–5, 78w,78x, 78ll(d), 78mm, 79q, 79t, 80a–20, 80a–23,80a–29, 80a–37, 80b–3, 80b–4 and 80b–11,unless otherwise noted.

* * * * *4. Section 240.3a1–1 is added before

the undesignated center heading‘‘Definition of ‘Equity Security’ as Usedin Sections 12(g) and 16’’ to read asfollows:

§ 240.3a1–1 Exemption from the definitionof ‘‘Exchange’’ under Section 3(a)(1) of theAct.

(a) An organization, association, orgroup of persons shall be exempt fromthe definition of the term ‘‘exchange’’under section 3(a)(1) of the Act, (15U.S.C. 78c(a)(1)), if such organization,association, or group of persons:

(1) Is operated by a national securitiesassociation;

(2) Is in compliance with RegulationATS, 17 CFR 242.300 through 242.303;or

(3) Pursuant to paragraph (a) of§ 242.301 of Regulation ATS, 17 CFR242.301(a), is not required to complywith Regulation ATS, 17 CFR 242.300through 242.303.

(b) Notwithstanding paragraph (a) ofthis section, an organization,association, or group of persons shallnot be exempt under this section fromthe definition of ‘‘exchange,’’ if:

(1) During three of the preceding fourcalendar quarters such organization,association, or group of persons had:

(i) Fifty percent or more of the averagedaily dollar trading volume in anysecurity and five percent or more of theaverage daily dollar trading volume inany class of securities; or

(ii) Forty percent or more of theaverage daily dollar trading volume inany class of securities; and

(2) The Commission determines, afternotice to the organization, association,or group of persons, and an opportunityfor such organization, association, orgroup of persons to respond, that suchan exemption would not be necessary orappropriate in the public interest or

consistent with the protection ofinvestors taking into account therequirements for exchange registrationunder section 6 of the Act, (15 U.S.C.78f), and the objectives of the nationalmarket system under section 11A of theAct, (15 U.S.C 78k–1).

(3) For purposes of paragraph (b) ofthis section, each of the following shallbe considered a ‘‘class of securities’’:

(i) Equity securities, which shall havethe same meaning as in § 240.3a11–1;

(ii) Listed options, which shall meanany options traded on a nationalsecurities exchange or automatedfacility of a national securitiesexchange;

(iii) Unlisted options, which shallmean any options other than thosetraded on a national securities exchangeor automated facility of a nationalsecurities association;

(iv) Municipal securities, which shallhave the same meaning as in section3(a)(29) of the Act, (15 U.S.C.78c(a)(29));

(v) Investment grade corporate debtsecurities, which shall mean anysecurity that:

(A) Evidences a liability of the issuerof such security;

(B) Has a fixed maturity date that isat least one year following the date ofissuance;

(C) Is rated in one of the four highestratings categories by at least oneNationally Recognized StatisticalRatings Organization; and

(D) Is not an exempted security, asdefined in section 3(a)(12) of the Act,(15 U.S.C. 78c(a)(12));

(vi) Non-investment grade corporatedebt securities, which shall mean anysecurity that:

(A) Evidences a liability of the issuerof such security;

(B) Has a fixed maturity date that isat least one year following the date ofissuance;

(C) Is not rated in one of the fourhighest ratings categories by at least oneNationally Recognized StatisticalRatings Organization; and

(D) Is not an exempted security, asdefined in section 3(a)(12) of the Act,(15 U.S.C. 78o);

(vii) Foreign corporate debt securities,which shall mean any security that:

(A) Evidences a liability of the issuerof such debt security;

(B) Is issued by a corporation or otherorganization incorporated or organizedunder the laws of any foreign country;and

(C) Has a fixed maturity date that isat least one year following the date ofissuance; and

(viii) Foreign sovereign debtsecurities, which shall mean anysecurity that:


(A) Evidences a liability of the issuerof such debt security;

(B) Is issued or guaranteed by thegovernment of a foreign country, anypolitical subdivision of a foreigncountry, or any supranational entity;and

(C) Does not have a maturity date ofa year or less following the date ofissuance.

5. Section 240.3b–16 is added beforethe undesignated center heading‘‘Registration and Exemption ofExchanges’’ to read as follows:

§ 240.3b–16 Definitions of terms used inSection 3(a)(1) of the Act.

(a) An organization, association, orgroup of persons shall be considered toconstitute, maintain, or provide ‘‘amarket place or facilities for bringingtogether purchasers and sellers ofsecurities or for otherwise performingwith respect to securities the functionscommonly performed by a stockexchange,’’ as those terms are used insection 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 forsecurities of multiple buyers and sellers;and

(2) Uses established, non-discretionary methods (whether byproviding a trading facility or by settingrules) under which such orders interactwith each other, and the buyers andsellers entering such orders agree to theterms of a trade.

(b) An organization, association, orgroup of persons shall not be consideredto constitute, maintain, or provide ‘‘amarket place or facilities for bringingtogether purchasers and sellers ofsecurities or for otherwise performingwith respect to securities the functionscommonly performed by a stockexchange,’’ solely because suchorganization, association, or group ofpersons engages in one or more of thefollowing activities:

(1) Routes orders to a nationalsecurities exchange, a market operatedby a national securities association, or abroker-dealer for execution; or

(2) Allows persons to enter orders forexecution against the bids and offers ofa single dealer; and

(i) As an incidental part of theseactivities, matches orders that are notdisplayed to any person other than thedealer and its employees; or

(ii) In the course of acting as a marketmaker registered with a self-regulatoryorganization, displays the limit orders ofsuch market maker’s, or other broker-dealer’s, customers; and

(A) Matches customer orders withsuch displayed limit orders; and

(B) As an incidental part of its marketmaking activities, crosses or matchesorders that are not displayed to anyperson other than the market maker andits employees.

(c) For purposes of this section theterm order means any firm indication ofa willingness to buy or sell a security,as either principal or agent, includingany bid or offer quotation, market order,limit order, or other priced order.

(d) For the purposes of this section,the terms bid and offer shall have thesame meaning as under § 240.11Ac1–1.

(e) The Commission mayconditionally or unconditionallyexempt any organization, association, orgroup of persons from the definition inparagraph (a) of this section.

6. Section 240.6a–1 is amended byrevising the section heading andparagraphs (a) and (b) to read as follows:

§ 240.6a–1 Application for registration as anational securities exchange or exemptionfrom registration based on limited volume.

(a) An application for registration asa national securities exchange, or forexemption from such registration basedon limited volume, shall be filed onForm 1 (§ 249.1 of this chapter), inaccordance with the instructionscontained therein.

(b) Promptly after the discovery thatany information filed on Form 1 wasinaccurate when filed, the exchangeshall file with the Commission anamendment correcting such inaccuracy.* * * * *

7. Section 240.6a–2 is revised to readas follows:

§ 240.6a–2 Amendments to application.

(a) A national securities exchange, oran exchange exempted from suchregistration based on limited volume,shall file an amendment to Form 1,(§ 249.1 of this chapter), which shall setforth the nature and effective date of theaction taken and shall provide any newinformation and correct any informationrendered inaccurate, on Form 1, (§ 249.1of this chapter), within 10 days after anyaction is taken that renders inaccurate,or that causes to be incomplete, any ofthe following:

(1) Information filed on the ExecutionPage of Form 1, or amendment thereto;or

(2) Information filed as part ofExhibits C, F, G, H, J, K or M, or anyamendments thereto.

(b) On or before June 30 of each year,a national securities exchange, or anexchange exempted from suchregistration based on limited volume,shall file, as an amendment to Form 1,the following:

(1) Exhibits D and I as of the end ofthe latest fiscal year of the exchange;and

(2) Exhibits K, M, and N, which shallbe up to date as of the latest datepracticable within 3 months of the datethe amendment is filed.

(c) On or before June 30, 2001 andevery 3 years thereafter, a nationalsecurities exchange, or an exchangeexempted from such registration basedon limited volume, shall file, as anamendment to Form 1, completeExhibits A, B, C and J. The informationfiled under this paragraph (c) shall becurrent as of the latest practicable date,but shall, at a minimum, be up to datewithin 3 months as of the date theamendment is filed.

(d)(1) If an exchange, on an annual ormore frequent basis, publishes, orcooperates in the publication of, any ofthe information required to be filed byparagraphs (b)(2) and (c) of this section,in lieu of filing such information, anexchange may:

(i) Identify the publication in whichsuch information is available, the name,address, and telephone number of theperson from whom such publicationmay be obtained, and the price of suchpublication; and

(ii) Certify to the accuracy of suchinformation as of its publication date.

(2) If an exchange keeps theinformation required under paragraphs(b)(2) and (c) of this section up to dateand makes it available to theCommission and the public uponrequest, in lieu of filing suchinformation, an exchange may certifythat the information is kept up to dateand is available to the Commission andthe public upon request.

(3) If the information required to befiled under paragraphs (b)(2) and (c) ofthis section is available continuously onan Internet web site controlled by anexchange, in lieu of filing suchinformation with the Commission, suchexchange may:

(i) Indicate the location of the Internetweb site where such information may befound; and

(ii) Certify that the informationavailable at such location is accurate asof its date.

(e) The Commission may exempt anational securities exchange, or anexchange exempted from suchregistration based on limited volume,from filing the amendment required bythis section for any affiliate orsubsidiary listed in Exhibit C of theexchange’s application for registration,as amended, that either:

(1) Is listed in Exhibit C of theapplication for registration, as amended,


of one or more other national securitiesexchanges; or

(2) Was an inactive subsidiarythroughout the subsidiary’s latest fiscalyear.

Any such exemption may be grantedupon terms and conditions theCommission deems necessary orappropriate in the public interest or forthe protection of investors, providedhowever, that at least one nationalsecurities exchange shall be required tofile the amendments required by thissection for an affiliate or subsidiarydescribed in paragraph (e)(1) of thissection.

8. Section 240.6a–3 is revised to readas follows:

§ 240.6a–3 Supplemental material to befiled by exchanges.

(a)(1) A national securities exchange,or an exchange exempted from suchregistration based on limited volume,shall file with the Commission anymaterial (including notices, circulars,bulletins, lists, and periodicals) issuedor made generally available to membersof, or participants or subscribers to, theexchange. Such material shall be filedwith the Commission within 10 daysafter issuing or making such materialavailable to members, participants orsubscribers.

(2) If the information required to befiled under paragraph (a)(1) of thissection is available continuously on anInternet web site controlled by anexchange, in lieu of filing suchinformation with the Commission, suchexchange may:

(i) Indicate the location of the Internetweb site where such information may befound; and

(ii) Certify that the informationavailable at such location is accurate asof its date.

(b) Within 15 days after the end ofeach calendar month, a nationalsecurities exchange or an exchangeexempted from such registration basedon limited volume, shall file a reportconcerning the securities sold on suchexchange during the calendar month.Such report shall set forth:

(1) The number of shares of stock soldand the aggregate dollar amount of suchstock sold;

(2) The principal amount of bondssold and the aggregate dollar amount ofsuch bonds sold; and

(3) The number of rights and warrantssold and the aggregate dollar amount ofsuch rights and warrants sold.

9. Section 240.11Ac1–1 is amendedby redesignating paragraph (c)(5)(ii)(A)as paragraph (c)(5)(ii)(A)(l), paragraph(c)(5)(ii)(B), introductory text, asparagraph (c)(5)(ii)(A)(2), paragraph

(c)(5)(ii)(B)(1) as paragraph(c)(5)(ii)(A)(2)(i), paragraph(c)(5)(ii)(B)(2) as paragraph(c)(5)(ii)(A)(2)(ii), in newly designatedparagraph (c)(5)(ii)(A)(2)(ii) by removingthe period and adding in its place ‘‘; or’’,and adding new paragraph (c)(5)(ii)(B)to read as follows:

§ 240.11Ac1–1 Dissemination ofquotations.

* * * * *(c) * * *(5) * * *(ii) * * *(A)(1) * * *(B) Is an alternative trading system

that:(1) Displays orders and provides the

ability to effect transactions with suchorders under § 242.301(b)(3) of thischapter; and

(2) Otherwise is in compliance withRegulation ATS, § 242.300 through§ 242.303 of this chapter.* * * * *

10. Section 240.17a–3 is amended byadding paragraph (a)(16) to read asfollows:

§ 240.17a–3 Records to be made by certainexchange members, brokers and dealers.

(a) * * *(16)(i) The following records

regarding any internal broker-dealersystem of which such a broker or dealeris the sponsor:

(A) A record of the broker’s or dealer’scustomers that have access to aninternal broker-dealer system sponsoredby such broker or dealer (identifyingany affiliations between such customersand the broker or dealer);

(B) Daily summaries of trading in theinternal broker-dealer system,including:

(1) Securities for which transactionshave been executed through use of suchsystem; and

(2) Transaction volume (separatelystated for trading occurring duringhours when consolidated tradereporting facilities are and are not inoperation):

(i) With respect to equity securities,stated in number of trades, number ofshares, and total U.S. dollar value;

(ii) With respect to debt securities,stated in total settlement value in U.S.dollars; and

(iii) With respect to other securities,stated in number of trades, number ofunits of securities, and in dollar value,or other appropriate commonly usedmeasure of value of such securities; and

(C) Time-sequenced records of eachtransaction effected through the internalbroker-dealer system, including dateand time executed, price, size, security

traded, counterparty identificationinformation, and method of execution(if internal broker-dealer system allowsalternative means or locations forexecution, such as routing to anothermarket, matching with limit orders, orexecuting against the quotations of thebroker or dealer sponsoring the system).

(ii) For purposes of paragraph (a) ofthis section, the term:

(A) Internal broker-dealer systemshall mean any facility, other than anational securities exchange, anexchange exempt from registrationbased on limited volume, or analternative trading system as defined inRegulation ATS, §§ 242.300 through242.303 of this chapter, that provides amechanism, automated in full or in part,for collecting, receiving, disseminating,or displaying system orders andfacilitating agreement to the basic termsof a purchase or sale of a securitybetween a customer and the sponsor, orbetween two customers of the sponsor,through use of the internal broker-dealersystem or through the broker or dealersponsor of such system;

(B) Sponsor shall mean any broker ordealer that organizes, operates,administers, or otherwise directlycontrols an internal broker-dealertrading system or, if the operator of theinternal broker-dealer system is not aregistered broker or dealer, any brokeror dealer that, pursuant to contract,affiliation, or other agreement with thesystem operator, is involved on a regularbasis with executing transactions inconnection with use of the internalbroker-dealer system, other than solelyfor its own account or as a customerwith access to the internal broker-dealersystem; and

(C) System order means any order orother communication or indicationsubmitted by any customer with accessto the internal broker-dealer system forentry into a trading system announcingan interest in purchasing or selling asecurity. The term ‘‘system order’’ doesnot include inquiries or indications ofinterest that are not entered into theinternal broker-dealer system.* * * * *

11. Section 240.17a–4 is amended byrevising paragraph (b)(1) and addingparagraph (b)(10) to read as follows:

§ 240.17a–4. Records to be preserved bycertain exchange members, brokers anddealers.* * * * *

(b) * * *(1) All records required to be made

pursuant to paragraphs (a)(4), (a)(6),(a)(7), (a)(8), (a)(9), and (a)(10) of§ 240.17a–3.* * * * *


(10) All notices relating to an internalbroker-dealer system provided to thecustomers of the broker or dealer thatsponsors such internal broker-dealersystem, as defined in paragraph(a)(16)(ii)(A) of § 240.17a–3. Notices,whether written or communicatedthrough the internal broker-dealertrading system or other automatedmeans, shall be preserved under thisparagraph (b)(10) if they are provided toall customers with access to an internalbroker-dealer system, or to one or moreclasses of customers. Examples ofnotices to be preserved under thisparagraph (b)(10) include, but are notlimited to, notices addressing hours ofsystem operations, system malfunctions,changes to system procedures,maintenance of hardware and software,and instructions pertaining to access tothe internal broker-dealer system.* * * * *

§ 240.17a–23 [Removed]12. Section 240.17a–23 is removed

and reserved.13. Section 240.19b–5 is added to

read as follows:

§ 240.19b–5 Temporary exemption fromthe filing requirements of Section 19(b) ofthe Act.

Preliminary Notes1. The following section provides for

a temporary exemption from the rulefiling requirement for self-regulatoryorganizations that file proposed rulechanges concerning the operation of apilot trading system pursuant to section19(b) of the Act (15 U.S.C. 78s(b), asamended). All other requirements underthe Act that are applicable to self-regulatory organizations continue toapply.

2. The disclosures made pursuant tothe provisions of this section are inaddition to any other applicabledisclosure requirements under thefederal securities laws.

(a) For purposes of this section, theterm specialist means any membersubject to a requirement of a self-regulatory organization that suchmember regularly maintain a market ina particular security.

(b) For purposes of this section, theterm trading system means the rules ofa self-regulatory organization that:

(1) Determine how the orders ofmultiple buyers and sellers are broughttogether; and

(2) Establish non-discretionarymethods under which such ordersinteract with each other and underwhich the buyers and sellers enteringsuch orders agree to the terms of trade.

(c) For purposes of this section, theterm pilot trading system shall mean a

trading system operated by a self-regulatory organization that is notsubstantially similar to any tradingsystem or pilot trading system operatedby such self-regulatory organization atany time during the preceding year, andthat:

(1)(i) Has been in operation for lessthan two years;

(ii) Is independent of any othertrading system operated by such self-regulatory organization that has beenapproved by the Commission pursuantto section 19(b) of the Act, (15 U.S.C.78s(b));

(iii) With respect to each securitytraded on such pilot trading system,during at least two of the last fourconsecutive calendar months, hastraded no more than 5 percent of theaverage daily trading volume of suchsecurity in the United States; and

(iv) With respect to all securitiestraded on such pilot trading system,during at least two of the last fourconsecutive calendar months, hastraded no more than 20 percent of theaverage daily trading volume of alltrading systems operated by such self-regulatory organization; or

(2)(i) Has been in operation for lessthan two years;

(ii) With respect to each securitytraded on such pilot trading system,during at least two of the last fourconsecutive calendar months, hastraded no more than 1 percent of theaverage daily trading volume of suchsecurity in the United States; and

(iii) With respect to all securitiestraded on such pilot trading system,during at least two of the last fourconsecutive calendar months, hastraded no more than 20 percent of theaverage daily trading volume of alltrading systems operated by such self-regulatory organization; or

(3)(i) Has been in operation for lessthan two years; and

(ii)(A) Satisfied the definition of pilottrading system under paragraph (c)(1) ofthis section no more than 60 days ago,and continues to be independent of anyother trading system operated by suchself-regulatory organization that hasbeen approved by the Commissionpursuant to section 19(b) of the Act, (15U.S.C. 78s(b)); or

(B) Satisfied the definition of pilottrading system under paragraph (c)(2) ofthis section no more than 60 days ago.

(d) A pilot trading system shall bedeemed independent of any othertrading system operated by a self-regulatory organization if:

(1) Such pilot trading system tradessecurities other than the issues ofsecurities that trade on any other tradingsystem operated by such self-regulatory

organization that has been approved bythe Commission pursuant to section19(b) of the Act, (15 U.S.C. 78s(b));

(2) Such pilot trading system does notoperate during the same trading hoursas any other trading system operated bysuch self-regulatory organization thathas been approved by the Commissionpursuant to section 19(b) of the Act, (15U.S.C. 78s(b)); or

(3) No specialist or market maker onany other trading system operated bysuch self-regulatory organization thathas been approved by the Commissionpursuant to section 19(b) of the Act, (15U.S.C. 78s(b)), is permitted to effecttransactions on the pilot trading systemin securities in which they are aspecialist or market maker.

(e) A self-regulatory organization shallbe exempt temporarily from therequirement under section 19(b) of theAct, (15 U.S.C. 78s(b)), to submit onForm 19b–4, 17 CFR 249.819, proposedrule changes for establishing a pilottrading system, if the self-regulatoryorganization complies with thefollowing requirements:

(1) Form PILOT. The self-regulatoryorganization:

(i) Files Part I of Form PILOT, 17 CFR249.821, in accordance with theinstructions therein, at least 20 daysprior to commencing operation of thepilot trading system;

(ii) Files an amendment on Part I ofForm PILOT at least 20 days prior toimplementing a material change to theoperation of the pilot trading system;and

(iii) Files a quarterly report on Part IIof Form PILOT within 30 calendar daysafter the end of each calendar quarter inwhich the market has operated after theeffective date of this section.

(2) Fair access.(i) The self-regulatory organization

has in place written rules to ensure thatall members of the self-regulatoryorganization have fair access to the pilottrading system, and that informationregarding orders on the pilot tradingsystem is equally available to allmembers of the self-regulatoryorganization with access to such pilottrading system.

(ii) Notwithstanding the requirementin paragraph (e)(2)(i) of this section, aspecialist on the pilot trading systemmay have preferred access toinformation regarding orders that itrepresents in its capacity as specialist.

(iii) The rules established by a self-regulatory organization pursuant toparagraph (e)(2)(i) of this section will beconsidered rules governing the pilottrading system for purposes of thetemporary exemption under thissection.


(3) Trading rules and procedures andlisting standards.

(i) The self-regulatory organizationhas in place written trading rules andprocedures and listing standardsnecessary to operate the pilot tradingsystem.

(ii) The rules established by a self-regulatory organization pursuant toparagraph (e)(3)(i) of this section will beconsidered rules governing the pilottrading system for purposes of thetemporary exemption under thissection.

(4) Surveillance. The self-regulatoryorganization establishes internalprocedures for the effective surveillanceof trading activity on the self-regulatoryorganization’s pilot trading system.

(5) Clearance and settlement. Theself-regulatory organization establishesreasonable clearance and settlementprocedures for transactions effected onthe self-regulatory organizations pilottrading system.

(6) Types of securities. The self-regulatory organization permits to tradeon the pilot trading system onlysecurities registered under section 12 ofthe Act, (15 U.S.C. 78l).

(7) Activities of specialists.(i) The self-regulatory organization

does not permit any member to be aspecialist in a security on the pilottrading system and a specialist in asecurity on a trading system operated bysuch self-regulatory organization thathas been approved by the Commissionpursuant to section 19(b) of the Act, (15U.S.C. 78s(b)), or on another pilottrading system operated by such self-regulatory organization, if suchsecurities are related securities, exceptthat a member may be a specialist inrelated securities that the Commission,upon application by the self-regulatoryorganization, later determines isnecessary or appropriate in the publicinterest and consistent with theprotection of investors;

(ii) Notwithstanding paragraph(e)(7)(i) of this section, a self-regulatoryorganization may permit a member to bea specialist in any security on a pilottrading system, if the pilot tradingsystem is operated during trading hoursdifferent from the trading hours of thetrading system in which such member isa specialist.

(iii) For purposes of paragraph (e)(7)of this section, the term relatedsecurities means any two securities inwhich:

(A) The value of one security isdetermined, in whole or significant part,by the performance of the other security;or

(B) The value of both securities isdetermined, in whole or significant part,

by the performance of a third security,combination of securities, index,indicator, interest rate or other commonfactor.

(8) Examinations, inspections, andinvestigations. The self-regulatoryorganization cooperates with theexamination, inspection, orinvestigation by the Commission oftransactions effected on the pilot tradingsystem.

(9) Recordkeeping. The self-regulatoryorganization shall retain at its principalplace of business and make available toCommission staff for inspection, all therules and procedures relating to eachpilot trading system operating pursuantto this section for a period of not lessthan five years, the first two years in aneasily accessible place, as prescribed in§ 240.17a–1.

(10) Public availability of pilot tradingsystem rules. The self-regulatoryorganization makes publicly availableall trading rules and procedures,including those established underparagraphs (e)(2) and (e)(3) of thissection.

(11) Every notice or amendment filedpursuant to this paragraph (e) shallconstitute a ‘‘report’’ within themeaning of sections 11A, 17(a), 18(a),and 32(a), (15 U.S.C. 78k–1, 78q(a),78r(a), and 78ff(a)), and any otherapplicable provisions of the Act. Allnotices or reports filed pursuant to thisparagraph (e) shall be deemed to beconfidential until the pilot tradingsystem commences operation.

(f)(1)A self-regulatory organizationshall request Commission approval,pursuant to section 19(b)(2) of the Act,(15 U.S.C. 78s(b)(2)), for any rule changerelating to the operation of a pilottrading system by submitting Form 19b–4, 17 CFR 249.819, no later than twoyears after the commencement ofoperation of such pilot trading system,or shall cease operation of the pilottrading system.

(2) Simultaneous with a request forCommission approval pursuant tosection 19(b)(2) of the Act, (15 U.S.C.78s(b)(2)), a self-regulatory organizationmay request Commission approvalpursuant to section 19(b)(3)(A) of theAct, (15 U.S.C. 78s(b)(3)(A)), for anyrule change relating to the operation ofa pilot trading system by submittingForm 19b–4, 17 CFR 249.819, effectiveimmediate upon filing, to continueoperations of such trading system for aperiod not to exceed six months.

(g) Notwithstanding paragraph (e) ofthis section, rule changes with respectto pilot trading systems operated by aself-regulatory organization shall not beexempt from the rule filingrequirements of section 19(b)(2) of the

Act, (15 U.S.C. 78s(b)(2)), if theCommission determines, after notice tothe SRO and opportunity for the SRO torespond, that exemption of such rulechanges is not necessary or appropriatein the public interest or consistent withthe protection of investors.

PART 242—REGULATIONS M ANDATS

14. The authority citation for part 242is revised to read as follows:

Authority: 15 U.S.C. 77g, 77q(a), 77s(a),78b, 78c, 78i(a), 78j, 78k–1(c), 78l, 78m,78mm, 78n, 78o(b), 78o(c), 78o(g), 78q(a),78q(b), 78q(h), 78w(a), 78dd–1, 80a–23, 80a–29, and 80a–37.

15. The part heading for part 242 isrevised as set forth above.

16. Part 242 is amended by addingRegulation ATS, §§ 242.300 through242.303 to read as follows:

Regulation ATS—Alternative TradingSystems

Sec.242.300 Definitions.242.301 Requirements for alternative

trading systems.242.302 Recordkeeping requirements for

alternative trading systems.242.303 Record preservation requirements

for alternative trading systems.

Regulation ATS—Alternative TradingSystems

Preliminary Notes

1. An alternative trading system is requiredto comply with the requirements in thisRegulation ATS, unless such alternativetrading system:

(a) Is registered as a national securitiesexchange;

(b) Is exempt from registration as a nationalsecurities exchange based on the limitedvolume of transactions effected on thealternative trading system; or

(c) Trades only government securities andcertain other related instruments.

All alternative trading systems mustcomply with the antifraud, antimanipulation,and other applicable provisions of the federalsecurities laws.

2. The requirements imposed upon analternative trading system by Regulation ATSare in addition to any requirementsapplicable to broker-dealers registered undersection 15 of the Act, (15 U.S.C. 78o).

3. An alternative trading system mustcomply with any applicable state law relatingto the offer or sale of securities or theregistration or regulation of persons orentities effecting transactions in securities.

4. The disclosures made pursuant to theprovisions of this section are in addition toany other disclosure requirements under thefederal securities laws.

§ 242.300 Definitions.

For purposes of this section, thefollowing definitions shall apply:


(a) Alternative trading system meansany organization, association, person,group of persons, or system:

(1) That constitutes, maintains, orprovides a market place or facilities forbringing together purchasers and sellersof securities or for otherwise performingwith respect to securities the functionscommonly performed by a stockexchange within the meaning of§ 240.3b–16 of this chapter; and

(2) That does not:(i) Set rules governing the conduct of

subscribers other than the conduct ofsuch subscribers’ trading on suchorganization, association, person, groupof persons, or system; or

(ii) Discipline subscribers other thanby exclusion from trading.

(b) Subscriber means any person thathas entered into a contractual agreementwith an alternative trading system toaccess such alternative trading systemfor the purpose of effecting transactionsin securities or submitting,disseminating, or displaying orders onsuch alternative trading system,including a customer, member, user, orparticipant in an alternative tradingsystem. A subscriber, however, shall notinclude a national securities exchangeor national securities association.

(c) Affiliate of a subscriber means anyperson that, directly or indirectly,controls, is under common control with,or is controlled by, the subscriber,including any employee.

(d) Debt security shall mean anysecurity other than an equity security, asdefined in § 240.3a11–1 of this chapter,as well as non-participatory preferredstock.

(e) Order means any firm indication ofa willingness to buy or sell a security,as either principal or agent, includingany bid or offer quotation, market order,limit order, or other priced order.

(f) Control means the power, directlyor indirectly, to direct the managementor policies of an alternative tradingsystem, whether through ownership ofsecurities, by contract, or otherwise. Aperson is presumed to control analternative trading system, if thatperson:

(1) Is a director, general partner, orofficer exercising executiveresponsibility (or having similar statusor performing similar functions);

(2) Directly or indirectly has the rightto vote 25 percent or more of a class ofvoting security or has the power to sellor direct the sale of 25 percent or moreof a class of voting securities of thealternative trading system; or

(3) In the case of a partnership, hascontributed, or has the right to receiveupon dissolution, 25 percent or more of

the capital of the alternative tradingsystem.

(g) Covered security shall have themeaning provided in § 240.11Ac1–1(a)(6) of this chapter, provided,however, that a debt or convertible debtsecurity shall not be deemed a coveredsecurity for purposes of Regulation ATS.

(h) Effective transaction reportingplan shall have the meaning provided in§ 240.11Aa3–1(a)(3) of this chapter.

(i) Exchange market maker shall havethe meaning provided in § 240.11Ac1–1(a)(9) of this chapter.

(j) OTC market maker shall have themeaning provided in § 240.11Ac1–1(a)(13) of this chapter.

(k) Investment grade corporate debtsecurity shall mean any security that:

(1) Evidences a liability of the issuerof such security;

(2) Has a fixed maturity date that is atleast one year following the date ofissuance;

(3) Is rated in one of the four highestratings categories by at least oneNationally Recognized StatisticalRatings Organization; and

(4) Is not an exempted security, asdefined in section 3(a)(12) of the Act (15U.S.C. 78c(a)(12)).

(l) Non-investment grade corporatedebt security shall mean any securitythat:

(1) Evidences a liability of the issuerof such security;

(2) Has a fixed maturity date that is atleast one year following the date ofissuance;

(3) Is not rated in one of the fourhighest ratings categories by at least oneNationally Recognized StatisticalRatings Organization; and

(4) Is not an exempted security, asdefined in section 3(a)(12) of the Act (15U.S.C. 78c(a)(12)).

(m) Commercial paper shall mean anynote, draft, or bill of exchange whicharises out of a current transaction or theproceeds of which have been or are tobe used for current transactions, andwhich has a maturity at the time ofissuance of not exceeding nine months,exclusive of days of grace, or anyrenewal thereof the maturity of which islikewise limited.

§ 242.301 Requirements for alternativetrading systems.

(a) Scope of section. An alternativetrading system shall comply with therequirements in paragraph (b) of thissection, unless such alternative tradingsystem:

(1) Is registered as an exchange undersection 6 of the Act, (15 U.S.C. 78f);

(2) Is exempted by the Commissionfrom registration as an exchange basedon the limited volume of transactionseffected;

(3) Is operated by a national securitiesassociation;

(4)(i) Is registered as a broker-dealerunder sections 15(b) or 15C of the Act(15 U.S.C. 78o(b), and 78o–5), or is abank, and

(ii) Limits its securities activities tothe following instruments:

(A) Government securities, as definedin section 3(a)(42) of the Act, (15 U.S.C.78c(a)(42));

(B) Repurchase and reverserepurchase agreements solely involvingsecurities included within paragraph(a)(4)(ii)(A) of this section;

(C) Any put, call, straddle, option, orprivilege on a government security,other than a put, call, straddle, option,or privilege that:

(1) Is traded on one or more nationalsecurities exchanges; or

(2) For which quotations aredisseminated through an automatedquotation system operated by aregistered securities association; and

(D) Commercial paper.(5) Is exempted, conditionally or

unconditionally, by Commission order,after application by such alternativetrading system, from one or more of therequirements of paragraph (b) of thissection. The Commission will grantsuch exemption only after determiningthat such an order is consistent with thepublic interest, the protection ofinvestors, and the removal ofimpediments to, and perfection of themechanisms of, a national marketsystem.

(b) Requirements. Every alternativetrading system subject to this RegulationATS, pursuant to paragraph (a) of thissection, shall comply with therequirements in this paragraph (b).

(1) Broker-dealer registration. Thealternative trading system shall registeras a broker-dealer under section 15 ofthe Act, (15 U.S.C. 78o).

(2) Notice. (i) The alternative tradingsystem shall file an initial operationreport on Form ATS, § 249.637 of thischapter, in accordance with theinstructions therein, at least 20 daysprior to commencing operation as analternative trading system, or if thealternative trading system is operatingas of April 21, 1999, no later than May11, 1999.

(ii) The alternative trading systemshall file an amendment on Form ATSat least 20 calendar days prior toimplementing a material change to theoperation of the alternative tradingsystem.

(iii) If any information contained inthe initial operation report filed underparagraph (b)(2)(i) of this sectionbecomes inaccurate for any reason andhas not been previously reported to the


Commission as an amendment on FormATS, the alternative trading systemshall file an amendment on Form ATScorrecting such information within 30calendar days after the end of eachcalendar quarter in which thealternative trading system has operated.

(iv) The alternative trading systemshall promptly file an amendment onForm ATS correcting informationpreviously reported on Form ATS afterdiscovery that any information filedunder paragraphs (b)(2)(i), (ii) or (iii) ofthis section was inaccurate when filed.

(v) The alternative trading systemshall promptly file a cessation ofoperations report on Form ATS inaccordance with the instructions thereinupon ceasing to operate as an alternativetrading system.

(vi) Every notice or amendment filedpursuant to this paragraph (b)(2) shallconstitute a ‘‘report’’ within themeaning of sections 11A, 17(a), 18(a),and 32(a), (15 U.S.C. 78k–1, 78q(a),78r(a), and 78ff(a)), and any otherapplicable provisions of the Act.

(vii) The reports provided for inparagraph (b)(2) of this section shall beconsidered filed upon receipt by theDivision of Market Regulation, Stop 10–2, at the Commission’s principal officein Washington, DC. Duplicate originalsof the reports provided for in paragraphs(b)(2)(i) through (v) of this section mustbe filed with surveillance personneldesignated as such by any self-regulatory organization that is thedesignated examining authority for thealternative trading system pursuant to§ 240.17d–1 of this chaptersimultaneously with filing with theCommission. Duplicates of the reportsrequired by paragraph (b)(9) of thissection shall be provided to surveillancepersonnel of such self-regulatoryauthority upon request. All reports filedpursuant to this paragraph (b)(2) andparagraph (b)(9) of this section shall bedeemed confidential when filed.

(3) Order display and executionaccess. (i) An alternative trading systemshall comply with the requirements setforth in paragraph (b)(3)(ii) of thissection, with respect to any coveredsecurity in which the alternative tradingsystem:

(A) Displays subscriber orders to anyperson (other than alternative tradingsystem employees); and

(B) During at least 4 of the preceding6 calendar months, had an average dailytrading volume of 5 percent or more ofthe aggregate average daily sharevolume for such covered security asreported by an effective transactionreporting plan or disseminated throughan automated quotation system as

described in section 3(a)(51)(A)(ii) of theAct, (15 U.S.C. 78c(a)(51)(A)(ii)).

(ii) Such alternative trading systemshall provide to a national securitiesexchange or national securitiesassociation the prices and sizes of theorders at the highest buy price and thelowest sell price for such coveredsecurity, displayed to more than oneperson in the alternative trading system,for inclusion in the quotation data madeavailable by the exchange or associationto quotation vendors pursuant to§ 240.11Ac1–1 of this chapter.

(iii) With respect to any orderdisplayed pursuant to paragraph(b)(3)(ii) of this section, an alternativetrading system shall provide to anybroker-dealer that has access to thenational securities exchange or nationalsecurities association to which thealternative trading system provides theprices and sizes of displayed orderspursuant to paragraph (b)(3)(ii)(A) ofthis section, the ability to effect atransaction with such orders that is:

(A) Equivalent to the ability of suchbroker-dealer to effect a transaction withother orders displayed on the exchangeor by the association; and

(B) At the price of the highest pricedbuy order or lowest priced sell orderdisplayed for the lesser of thecumulative size of such priced ordersentered therein at such price, or the sizeof the execution sought by such broker-dealer.

(4) Fees. The alternative tradingsystem shall not charge any fee tobroker-dealers that access the alternativetrading system through a nationalsecurities exchange or nationalsecurities association, that isinconsistent with equivalent access tothe alternative trading system requiredby paragraph (b)(3)(iv) of this section. Inaddition, if the national securitiesexchange or national securitiesassociation to which an alternativetrading system provides the prices andsizes of orders under paragraphs(b)(3)(ii) and (b)(3)(iii) of this sectionestablishes rules designed to assureconsistency with standards for access toquotations displayed on such nationalsecurities exchange, or the marketoperated by such national securitiesassociation, the alternative tradingsystem shall not charge any fee tomembers that is contrary to, that is notdisclosed in the manner required by, orthat is inconsistent with any standard ofequivalent access established by suchrules.

(5) Fair access. (i) An alternativetrading system shall comply with therequirements in paragraph (b)(5)(ii) ofthis section, if during at least 4 of the

preceding 6 calendar months, suchalternative trading system had:

(A) With respect to any coveredsecurity, 20 percent or more of theaverage daily volume in that securityreported by an effective transactionreporting plan or disseminated throughan automated quotation system asdescribed in section 3(a)(51)(A)(ii) of theAct (15 U.S.C. 78c(a)(51)(A)(ii));

(B) With respect to an equity securitythat is not a covered security and forwhich transactions are reported to aself-regulatory organization, 20 percentor more of the average daily volume inthat security as calculated by the self-regulatory organization to which suchtransactions are reported;

(C) With respect to municipalsecurities, 20 percent or more of theaverage daily volume traded in theUnited States;

(D) With respect to investment gradecorporate debt, 20 percent or more ofthe average daily volume traded in theUnited States;

(E) With respect to non-investmentgrade corporate debt, 20 percent or moreof the average daily volume traded inthe United States.

(ii) An alternative trading systemshall:

(A) Establish written standards forgranting access to trading on its system;

(B) Not unreasonably prohibit or limitany person in respect to access toservices offered by such alternativetrading system by applying thestandards established under paragraph(b)(5)(ii)(A) of this section in an unfairor discriminatory manner; and

(C) Make and keep records of:(1) All grants of access including, for

all subscribers, the reasons for grantingsuch access;

(2) All denials or limitations of accessand reasons, for each applicant, fordenying or limiting access.

(D) Report the information requiredon Form ATS–R, § 249.638 of thischapter, regarding grants, denials, andlimitations of access.

(iii) Notwithstanding paragraph(b)(5)(i) of this section, an alternativetrading system shall not be required tocomply with the requirements inparagraph (b)(5)(ii) of this section, ifsuch alternative trading system:

(A) Matches customer orders for asecurity with other customer orders;

(B) Such customers’ orders are notdisplayed to any person, other thanemployees of the alternative tradingsystem; and

(C) Such orders are executed at a pricefor such security disseminated by aneffective transaction reporting plan orthrough an automated quotation systemas described in section 3(a)(51)(A)(ii) of


the Act, (15 U.S.C. 78c(a)(51)(A)(ii)), orderived from such prices.

(6) Capacity, integrity, and security ofautomated systems. (i) The alternativetrading system shall comply with therequirements in paragraph (b)(6)(ii) ofthis section, if during at least 4 of thepreceding 6 calendar months, suchalternative trading system had:

(A) With respect to any coveredsecurity, 20 percent or more of theaverage daily volume reported by theeffective transaction reporting plan ordisseminated through an automatedquotation system as described inSection 3(a)(51)(A)(ii) of the Act, (15U.S.C. 78c(a)(51)(A)(ii));

(B) With respect to equity securitiesthat are not covered securities and forwhich transactions are reported to aself-regulatory organization, 20 percentor more of the average daily volume ascalculated by the self-regulatoryorganization to which such transactionsare reported;

(C) With respect to municipalsecurities, 20 percent or more of theaverage daily volume traded in theUnited States;

(D) With respect to investment gradecorporate debt, 20 percent or more ofthe average daily volume traded in theUnited States;

(E) With respect to non-investmentgrade corporate debt, 20 percent or moreof the average daily volume traded inthe United States.

(ii) With respect to those systems thatsupport order entry, order routing, orderexecution, transaction reporting, andtrade comparison, the alternativetrading system shall:

(A) Establish reasonable current andfuture capacity estimates;

(B) Conduct periodic capacity stresstests of critical systems to determinesuch system’s ability to processtransactions in an accurate, timely, andefficient manner;

(C) Develop and implementreasonable procedures to review andkeep current its system developmentand testing methodology;

(D) Review the vulnerability of itssystems and data center computeroperations to internal and externalthreats, physical hazards, and naturaldisasters;

(E) Establish adequate contingencyand disaster recovery plans;

(F) On an annual basis, perform anindependent review, in accordance withestablished audit procedures andstandards, of such alternative tradingsystem’s controls for ensuring thatparagraphs (b)(6)(ii)(A) through (E) ofthis section are met, and conduct areview by senior management of areport containing the recommendations

and conclusions of the independentreview; and

(G) Promptly notify the Commissionstaff of material systems outages andsignificant systems changes.

(iii) Notwithstanding paragraph(b)(6)(i) of this section, an alternativetrading system shall not be required tocomply with the requirements inparagraph (b)(6)(ii) of this section, ifsuch alternative trading system:

(A) Matches customer orders for asecurity with other customer orders;

(B) Such customers’ orders are notdisplayed to any person, other thanemployees of the alternative tradingsystem; and

(C) Such orders are executed at a pricefor such security disseminated by aneffective transaction reporting plan orthrough an automated quotation systemas described in section 3(a)(51)(A)(ii) ofthe Act, (15 U.S.C. 78c(a)(51)(A)(ii)), orderived from such prices.

(7) Examinations, inspections, andinvestigations. The alternative tradingsystem shall permit the examinationand inspection of its premises, systems,and records, and cooperate with theexamination, inspection, orinvestigation of subscribers, whethersuch examination is being conducted bythe Commission or by a self-regulatoryorganization of which such subscriber isa member.

(8) Recordkeeping. The alternativetrading system shall:

(i) Make and keep current the recordsspecified in § 242.302; and

(ii) Preserve the records specified in§ 242.303.

(9) Reporting. The alternative tradingsystem shall:

(i) File the information required byForm ATS–R (§ 249.638 of this chapter)within 30 calendar days after the end ofeach calendar quarter in which themarket has operated after the effectivedate of this section; and

(ii) File the information required byForm ATS–R within 10 calendar daysafter an alternative trading systemceases to operate.

(10) Procedures to ensure theconfidential treatment of tradinginformation.

(i) The alternative trading systemshall establish adequate safeguards andprocedures to protect subscribers’confidential trading information. Suchsafeguards and procedures shallinclude:

(A) Limiting access to the confidentialtrading information of subscribers tothose employees of the alternativetrading system who are operating thesystem or responsible for its compliancewith these or any other applicable rules;

(B) Implementing standardscontrolling employees of the alternative

trading system trading for their ownaccounts; and

(ii) The alternative trading systemshall adopt and implement adequateoversight procedures to ensure that thesafeguards and procedures establishedpursuant to paragraph (b)(10)(i) of thissection are followed.

(11) Name. The alternative tradingsystem shall not use in its name theword ‘‘exchange,’’ or derivations of theword ‘‘exchange,’’ such as the term‘‘stock market.’’

§ 242.302 Recordkeeping requirements foralternative trading systems.

To comply with the condition setforth in paragraph (b)(8) of § 242.301, analternative trading system shall makeand keep current the following records:

(a) A record of subscribers to suchalternative trading system (identifyingany affiliations between the alternativetrading system and subscribers to thealternative trading system, includingcommon directors, officers, or owners);

(b) Daily summaries of trading in thealternative trading system including:

(1) Securities for which transactionshave been executed;

(2) Transaction volume, expressedwith respect to equity securities in:

(i) Number of trades;(ii) Number of shares traded; and(iii) Total settlement value in terms of

U.S. dollars; and(3) Transaction volume, expressed

with respect to debt securities in:(i) Number of trades; and(ii) Total U.S. dollar value; and(c) Time-sequenced records of order

information in the alternative tradingsystem, including:

(1) Date and time (expressed in termsof hours, minutes, and seconds) that theorder was received;

(2) Identity of the security;(3) The number of shares, or principal

amount of bonds, to which the orderapplies;

(4) An identification of the order asrelated to a program trade or an indexarbitrage trade as defined in New YorkStock Exchange Rule 80A;

(5) The designation of the order as abuy or sell order;

(6) The designation of the order as ashort sale order;

(7) The designation of the order as amarket order, limit order, stop order,stop limit order, or other type or order;

(8) Any limit or stop price prescribedby the order;

(9) The date on which the orderexpires and, if the time in force is lessthan one day, the time when the orderexpires;

(10) The time limit during which theorder is in force;


(11) Any instructions to modify orcancel the order;

(12) The type of account, i.e., retail,wholesale, employee, proprietary, orany other type of account designated bythe alternative trading system, for whichthe order is submitted;

(13) Date and time (expressed in termsof hours, minutes, and seconds) that theorder was executed;

(14) Price at which the order wasexecuted;

(15) Size of the order executed(expressed in number of shares or unitsor principal amount); and

(16) Identity of the parties to thetransaction.

§ 242.303 Record preservationrequirements for alternative tradingsystems.

(a) To comply with the condition setforth in paragraph (b)(9) of § 242.301, analternative trading system shall preservethe following records:

(1) For a period of not less than threeyears, the first two years in an easilyaccessible place, an alternative tradingsystem shall preserve:

(i) All records required to be madepursuant to § 242.302;

(ii) All notices provided by suchalternative trading system to subscribersgenerally, whether written orcommunicated through automatedmeans, including, but not limited to,notices addressing hours of systemoperations, system malfunctions,changes to system procedures,maintenance of hardware and software,instructions pertaining to access to themarket and denials of, or limitations on,access to the alternative trading system;

(iii) If subject to paragraph (b)(5)(ii) of§ 242.301, at least one copy of suchalternative trading system’s standardsfor access to trading, all documentsrelevant to the alternative tradingsystems decision to grant, deny, or limitaccess to any person, and all otherdocuments made or received by thealternative trading system in the courseof complying with paragraph (b)(5) of§ 242.301; and

(iv) At least one copy of alldocuments made or received by thealternative trading system in the courseof complying with paragraph (b)(6) of§ 242.301, including all correspondence,memoranda, papers, books, notices,accounts, reports, test scripts, testresults, and other similar records.

(2) During the life of the enterpriseand of any successor enterprise, analternative trading system shallpreserve:

(i) All partnership articles or, in thecase of a corporation, all articles ofincorporation or charter, minute booksand stock certificate books; and

(ii) Copies of reports filed pursuant toparagraph (b)(2) of § 242.301 of thischapter and records made pursuant toparagraph (b)(5) of § 242.301 of thischapter.

(b) The records required to bemaintained and preserved pursuant toparagraph (a) of this section must beproduced, reproduced, and maintainedin paper form or in any of the formspermitted under § 240.17a–4(f) of thischapter.

(c) Alternative trading systems mustcomply with any other applicablerecordkeeping or reporting requirementin the Act, and the rules and regulationsthereunder. If the information in arecord required to be made pursuant tothis section is preserved in a recordmade pursuant to § 240.17a–3 or§ 240.17a–4 of this chapter, or otherwisepreserved by the alternative tradingsystem (whether in summary or someother form), this section shall notrequire the sponsor to maintain suchinformation in a separate file, providedthat the sponsor can promptly sort andretrieve the information as if it had beenkept in a separate file as a record madepursuant to this section, and preservesthe information in accordance with thetime periods specified in paragraph (a)of this section.

(d) The records required to bemaintained and preserved pursuant tothis section may be prepared ormaintained by a service bureau,depository, or other recordkeepingservice on behalf of the alternativetrading system. An agreement with aservice bureau, depository, or otherrecordkeeping service shall not relievethe alternative trading system from theresponsibility to prepare and maintainrecords as specified in this section. Theservice bureau, depository, or otherrecordkeeping service shall file with theCommission a written undertaking in aform acceptable to the Commission,signed by a duly authorized person, tothe effect that such records are theproperty of the alternative tradingsystem required to be maintained andpreserved and will be surrenderedpromptly on request of the alternative

trading system, and shall include thefollowing provision: With respect to anybooks and records maintained orpreserved on behalf of (name ofalternative trading system), theundersigned hereby undertakes topermit examination of such books andrecords at any time, or from time totime, during business hours byrepresentatives or designees of theSecurities and Exchange Commission,and to promptly furnish to theCommission or its designee a true,correct, complete and current hard copyof any, all, or any part of, such booksand records.

(e) Every alternative trading systemshall furnish to any representative of theCommission promptly upon request,legible, true, and complete copies ofthose records that are required to bepreserved under this section.

PART 249—FORMS, SECURITIESEXCHANGE ACT OF 1934


Authority: 15 U.S.C. 78a, et seq., unlessotherwise noted;

* * * * * *18. Section 249.1 and Form 1 are

revised to read as follows:

§ 249.1 Form 1, for application for, andamendments to applications for,registration as a national securitiesexchange or exemption from registrationpursuant to Section 5 of the Exchange Act.

The form shall be used for applicationfor, and amendments to applications for,registration as a national securitiesexchange or exemption from registrationpursuant to Section 5 of the Act, (15U.S.C. 78e).

Note: Form 1 does not and theamendments will not appear in the Code ofFederal Regulations.

OMB APPROVALOMB Number: 3235–0017Expires: 8/31/2001Estimated Average burden hours per

form: 30

Form 1—Application for, andAmendments to Application for,Registration as a National SecuritiesExchange or Exemption FromRegistration Pursuant to Section 5 ofthe Exchange Act

BILLING CODE 8010–01–M


BILLING CODE 8010–01–C


§ 249.1a and Form 1–A [Removed]

19. Section 249.1a and Form 1–A areremoved.

§ 249.636 and Form 17A–23 [Removed andreserved]

20. Section 249.636 and Form 17A–23are removed and reserved.

21. Section 249.637 and Form ATSare added to read as follows:

§ 249.637 Form ATS, information requiredof alternative trading systems pursuant to§ 242.301(b)(2) of this chapter.

This form shall be used by everyalternative trading system to filerequired notices, reports andamendments under § 242.301(b)(2) ofthis chapter.

Note: Form ATS does not and theamendments will not appear in the Code ofFederal Regulations.

OMB APPROVALOMB Number: 3235–0509Expires: 8/31/2001Estimated Average burden hours per

form: 8

Form ATS—Intial Operation Report,Amendment to Initial Operation Reportand Cessation of Operations Report ofAlternative Trading System Activities



22. Section 249.638 and Form ATS–R are added to read as follows:

§ 249.638 Form ATS–R, informationrequired of alternative trading systemspursuant to § 242.301(b)(8) of this chapter.

This form shall be used by everyalternative trading system to file

required reports under § 242.301(b)(8) ofthis chapter.

Note: Form ATS–R does not and theamendments will not appear in the Code ofFederal Regulations.

OMB APPROVALOMB Number: 3235–0509

Expires: 8/31/2001

Estimated Average burden hours perform: 3.5

Form ATS–R—Quarterly Report ofAlternative Trading System Activities



23. Section 249.821 and Form PILOTare added to read as follows:

§ 249.821 Form PILOT, informationrequired of self-regulatory organizationsoperating pilot trading systems pursuant to§ 240.19b–5 of this chapter.

This form shall be used by all self-regulatory organizations, as defined insection 3(a)(26) of the Act, (15 U.S.C

78c(a)(26)), to file required informationand reports with regard to pilot tradingsystems pursuant to § 240.I20240.19b–5of this chapter.

Note: Form PILOT does not and theamendments will not appear in the Code ofFederal Regulations.OMB APPROVALOMB Number: 3235–0507Expires: 8/31/2001

Estimated Average burden hours perform: 6

Form PILOT—Initial Operation Report,Amendment to Initial Operation Reportand Quarterly Report for Pilot TradingSystems Operated by Self-RegulatoryOrganizations



By the Commission. Dated: December 8, 1998.Margaret H. McFarland,Deputy Secretary.[FR Doc. 98–33299 Filed 21–21–98; 8:45 am]BILLING CODE 8010–01–C

Form ATS OMB APPROVAL OMB Number: 3235-0509 Expires: September 30, 2021 Estimated average burden hours per response. . . . . . 2.6

INITIAL OPERATION REPORT, AMENDMENT TO INITIAL OPERATION REPORT AND CESSATION OF OPERATIONS REPORT FOR ALTERNATIVE TRADING SYSTEMS

SEC 2550 (5-05)

FORM ATS INSTRUCTIONS

A. GENERAL INSTRUCTIONS

1. Form ATS is the form an alternative trading system must file to notify the Securities and Exchange Commission (“SEC” or “Commission”) of its activities pursuant to Regulation ATS, § 242.300 et seq.

2. WHEN TO FILE FORM ATS z An alternative trading system must file an initial operation report on F orm ATS at least 20 days prior to commencing

operation. z The alternative trading system must update Form ATS information by submitting amendments to the initial operation

report at least 20 calendar days prior to implementing a material change to the operation of the alternative trading system as described on F orm ATS or any amendment thereto. Additionally , the alternative trading system must update Form ATS information by submitting amendments to the initial operation report on F orm ATS within 30 calendar days after the end of each calendar quarter in which the alternative trading system has operated, correcting any information contained in any initial operation report or any amendment thereto that has been rendered inaccurate and that has not previously been reported to the SEC.

z An alternative trading must also file a cessation of operations report on Form ATS promptly upon ceasing to operate. z Form ATS shall not be considered filed, unless it complies with applicable requirements.

3. CONTACT EMPLOYEE - The individual listed on page 1 as the contact employee must be authorized to receive all contact information, communications and mailings and be responsible for disseminating that information within the alternative trading system’s organization.

4. FORMAT z

z

z

z

Attach an Execution Page (Page 1) with original manual signatures. Please type all information. Provide the name of the alternative trading system, the CRD number, the SEC File number, and the filing date on each page. Use only the current version of Form ATS or a reproduction.

5. WHERE TO FILE AND NUMBER OF COPIES - Submit one original and two copies of F orm ATS to: SEC, Division of Market Regulation, 450 Fifth Street, N.W., Washington D.C. 20549-1002. Simultaneously with the filing of the original with the SEC, file one duplicate copy of Form ATS with surveillance personnel designated by the self-regulatory organization that is the designated examining authority for the alternative trading system pursuant to Rule 17d-1 under the Securities Exchange Act of 1934.

6. RECORDKEEPING - A copy of this Form ATS, as well as the forms filed with the SEC, must be retained by the alternative trading system and made available for inspection upon request of the SEC.

7. PAPERWORK REDUCTION ACT DISCLOSURE z

z

z

z

z

z

Form ATS requires an alternative trading system subject to Regulation A TS to provide the Commission with certain information regarding the operation of the alternative trading system, material and other changes to the operation of the alternative trading system, and notice upon ceasing operation of the alternative trading system.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. Sections 3(b), 11A(a), 11A(c), 15(c), 17(a), 23(a) and 36(a) authorize the Commission to collect information on this F orm ATS from alternative trading systems that are subject to Regulation ATS. See 15 U.S.C. §§78c(b), 78k-1(a), 78k-1(c), 78o(c), 78q(a), 78w(a) and 78mm(a).

Any member of the public may direct to the Commission any comments concerning the accuracy of the burden estimate on the facing page of Form ATS and any suggestions for reducing this burden.

Form ATS is designed to enable the Commission to determine whether an alternative trading system subject to Regulation ATS is in compliance with Regulation ATS and other federal securities laws.

It is estimated that an alternative trading system will spend approximately 20 hours completing the initial operation report on F orm ATS, approximately 4 hours preparing each amendment to F orm ATS, and approximately 2 hours preparing a cessation of operations report on Form ATS.

It is mandatory that an alternative trading system subject to Regulation ATS file an initial operation report on Form ATS, file an amendment to Form ATS prior to making a material change, file quarterly amendments to Form ATS to reflect changes not previously reported, and file notice on Form ATS upon ceasing operation of the ATS.

2

FORM ATS INSTRUCTIONS

z All reports provided to the Commission on F orm ATS are deemed confidential and will be available only to the examination of Commission staff , state securities authorities, and the self -regulatory organizations. Subject to the provisions of the Freedom of Information Act, 5 U.S.C. 522 (“FOIA”) and the Commission’s rules thereunder (17 CFR 200.80(b)(4)(iii)), the Commission does not generally publish or make available information contained in any reports, summaries, analyses, letters, or memoranda arising out of, in anticipation of, or in connection with, an examination or inspection of the books and records of any person or any other investigation.

z This collection of information has been reviewed by the Office of Management and Budget (“OMB”) in accordance with the clearance requirements of 44 U.S.C. §3507. The applicable Privacy Act system of records is SEC-2 and the routine uses of the records are set forth at 40 FR 39255 (August 27, 1975) and 41 FR 5318 (February 5, 1976).

B. EXPLANATION OF TERMS

ALTERNATIVE TRADING SYSTEM - Shall mean any organization, association, person, group of persons, or system: (1) that 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 within the meaning of Rule 3b-16 under the Exchange Act; and (2) that does not (i) set rules governing the conduct of subscribers other than the conduct of such subscribers’ trading on such organization, association, person, group of persons, or system, or (ii) discipline subscribers other than by exclusion from trading.

SUBSCRIBER - Shall mean any person that has entered into a contractual agreement with an alternative trading system to access such alternative trading system for the purpose of effecting transactions in securities or for submitting, disseminating, or displaying orders on such alternative trading system, including a customer , member, user, or participant in an alternative trading system. A subscriber, however, shall not include a national securities exchange or national securities association.

ORDER - Shall mean any firm indication of a willingness to buy or sell a security, as either principal or agent, including any bid or offer quotation, market order, limit order or other priced order.

3

Form ATS Page 1

Execution Page

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549


Date filed (MM/DD/YY):

OFFICIAL USE ONLY

WARNING: Failure to keep this form current and to file accurate supplementary information on a timely basis, or the failure to keep accurate books and records or otherwise to comply with the provisions of law applying to the conduct of alternative trading systems would violate the federal securities laws and may result in disciplinary, administrative or criminal action.

INTENTIONAL MISSTATEMENTS OR OMISSIONS OF FACTS MAY CONSTITUTE CRIMINAL VIOLATIONS

INITIAL OPERATION REPORT AMENDMENT TO INITIAL OPERATION REPORT CESSATION OF OPERATIONS REPORT

1. Exact name, principal business address, mailing address, if different, and telephone number of alternative trading system:

A. Full name of alternative trading system (if sole proprietor, last, first and middle name):

B. Name(s) under which business is conducted, if different from Item 1A:

C. CRD Number: D. SEC File No.: 8 -

E. If this filing makes a name change on behalf of the alternative trading system, enter the previous name and specify whether the name change is of the ________ alternative trading system name (1A), or ________ business name (1B):

Previous name:

F. Alternative trading system’s main street address (Do not use a P.O. Box):

G. Mailing address (if different):

H. Business telephone and facsimile number:

(Telephone) (Facsimile) I. Contact employee:

(Name and Title) (Telephone Number) (Facsimile)

EXECUTION: The alternative trading system consents that service of any civil action brought by , or notice of any proceeding before, the SEC or a self-regulatory organization in connection with the alternative trading system’s activities may be given by registered or certified mail or confirmed telegram, to the alternative trading system’s contact employee at the main address, or mailing address if different, given in Items 1F and 1G. The undersigned, being first duly sworn, deposes and says that he/she has executed this form on behalf of, and with the authority of, said alternative trading system. The undersigned and alternative trading system represent that the information and statements contained herein, including exhibits, schedules, or other documents attached hereto, and other information filed herewith, all of which are made a part hereof, are current, true, and complete.

Date: (MM/DD/YY) (Name of applicant)

By: (Signature) (Printed Name and Title)

Subscribed and sworn before me this _______ day of _________________, __________ by ______________________________ (Month) (Year) (Notary Public)

My Commission expires __________________ County of _____________________ S tate of ______________________________

This page must always be completed in full with original, manual signature and notarization. Affix notary stamp or seal where applicable.


4

Form ATS Page 2



OFFICIAL USE

OFFICIAL USE ONLY

Alternative trading system name: CRD Number:

Filing date: SEC File Number: 8

2. If this is an initial operation report, the date the alternative trading system expects to commence operation:

3. Attach as Exhibit A , a description of classes of subscribers (for example, broker -dealer, institution, or retail). Also describe any differences in access to the services offered by the alternative trading system to different groups or classes of subscribers.

4. Attach as Exhibit B:

a. A list of the types of securities the alternative trading system trades (for example, debt, equity , listed, Nasdaq NM), or if this is an initial operation report, the types of securities it expects to trade. Note whether any types of securities are not registered under Section 12(a) of the Exchange Act of 1934 (“Exchange Act”).

b. A list of the securities the alternative trading system trades, or if this is an initial operation report, the securities it expects to trade. Note whether any securities are not registered under Section 12(a) of the Exchange Act.

5. Attach as Exhibit C, the name, address, and telephone number of counsel for the alternative trading system.

6. Attach as Exhibit D, a copy of the constitution, articles of incorporation or association, with all amendments, and of the existing by-laws or corresponding rules or instruments, whatever the name, of the alternative trading system. If this information is publicly available on a continuous basis on an Internet site controlled by the alternative trading system, the alternative trading system may indicate the location of the Internet web site where such information may be found in lieu of filing such information with the Commission.

7. Attach as Exhibit E , the name of any entity , other than the alternative trading system, that will be involved in operation of the alternative trading system, including the execution, trading, clearing, and settling of transactions on behalf of the alternative trading system. Provide a description of the role and responsibilities of each entity.

8. Attach as Exhibit F, the following information:

a. The manner of operation of the alternative trading system;

b. Procedures governing entry of orders into the alternative trading system;

c. The means of access to the alternative trading system;

d. The procedures governing execution, reporting, clearance, and settlement of transactions effected through the alternative trading system;

e. Procedures for ensuring subscriber compliance with system guidelines; and

f. A copy of the alternative trading system’s subscriber manual and any other materials provided to subscribers.

9. Attach as Exhibit G, a brief description of the alternative trading system’s procedures for reviewing system capacity, security, and contingency planning procedures.

10. If any other entity, other than the alternative trading system, will hold or safeguard subscriber funds or securities on a regular basis, attach as Exhibit H the name of such entity and a brief description of the controls that will be implemented to ensure the safety of such funds and securities.

11. Attach as Exhibit I, a list providing the full legal name of those direct owners reported on Schedule A of F orm BD.

5

Form 1 OMB APPROVAL OMB Number: 3235-0017Expires: June 30, 2022 Estimated average burden hours per response. . . . . .30.00

APPLICATION FOR, AND AMENDMENTS TO APPLICATION FOR, REGISTRATION AS A NATIONAL SECURITIES EXCHANGE OR EXEMPTION FROM REGISTRATIONPURSUANT TO SECTION 5 OF THE EXCHANGE ACT

SEC 1935 (2-99)

FORM 1 INSTRUCTIONS

A. GENERAL INSTRUCTIONS

1. Form 1 is the application for registration as a national securities exchange or an exchange exempt from registration pursuant to Section 5 of the Securities Exchange Act of 1934 (“Exchange Act”).

2. UPDATING - A registered exchange or exchange exempt from registration pursuant to Section 5 of the Exchange Act must file amendments to Form 1 in accordance with Exchange Act Rule 6a-2.

3. CONTACT EMPLOYEE - The individual listed on the Execution Page (Page 1) of Form 1 as the contact employee must be authorized to receive all contact information, communications, and mailings, and is responsible for disseminating such information within the applicant’s organization.

4. FORMAT z Attach an Execution Page (Page 1) with original manual signatures. z Please type all information. z Use only the current version of Form 1 or a reproduction.

5. If the information called for by any Exhibit is available in printed form, the printed material may be filed, provided it does not exceed 8 1/2 X 11 inches in size.

6. If any Exhibit required is inapplicable, a statement to that effect shall be furnished in lieu of such Exhibit.

7. An exchange that is filing Form 1 as an application may not satisfy the requirements to provide certain information by means of an Internet web page. All materials must be filed with the Commission in paper.

8. WHERE TO FILE AND NUMBER OF COPIES - Submit one original and two copies of Form 1 to: SEC, Division of Market Regulation, Office of Market Supervision, 450 Fifth Street, N.W., Washington, DC 20549.

9. PAPERWORK REDUCTION ACT DISCLOSURE z Form 1 requires an exchange seeking to register as a national securities exchange or seeking an exemption from

registration as a national securities exchange pursuant to Section 5 of the Exchange Act to provide the Securities and Exchange Commission (“SEC” or “Commission”) with certain information regarding the operation of the exchange. Form 1 also requires national securities exchanges or exchanges exempt from registration based on limited volume to update certain information on a periodic basis.

z An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number . Sections 3(a)(1), 5, 6(a) and 23(a) authorize the Commission to collect information on this Form 1 from exchanges. See 15 U.S.C. §§78c(a)(1), 78e, 78f(a) and 78w(a).

z Any member of the public may direct to the Commission any comments concerning the accuracy of the burden estimate on the facing page of Form 1 and any suggestions for reducing this burden.

z Form 1 is designed to enable the Commission to determine whether an exchange applying for registration is in compliance with the provisions of Sections 6 and 19 of the Exchange Act. Form 1 is also designed to enable the Commission to determine whether a national securities exchange or exchange exempt from registration based on limited volume is operating in compliance with the Exchange Act.

z It is estimated that an exchange will spend approximately 47 hours completing the initial application on Form 1 pursuant to Rule 6a-1. It is also estimated that each exchange will spend approximately 25 hours to prepare each amendment to Form 1 pursuant to Rule 6a-2.

z It is mandatory that an exchange seeking to operate as a national securities exchange or as an exchange exempt from registration based on limited volume file Form 1 with the Commission. It is also mandatory that national securities exchanges or exchanges exempt from registration based on limited volume file amendments to Form 1 under Rule 6a-2.

z No assurance of confidentiality is given by the Commission with respect to the responses made in Form 1. The public has access to the information contained in Form 1.

z This collection of information has been reviewed by the Office of Management and Budget (“OMB”) in accordance with the clearance requirements of 44 U.S.C. §3507. The applicable Privacy Act system of records is SEC-2 and the routine uses of the records are set forth at 40 FR 39255 (August 27, 1975) and 41 FR 5318 (February 5, 1976).

2

FORM 1 INSTRUCTIONS

B. EXPLANATION OF TERMS

APPLICANT - The entity or organization filing an application for registration or an exemption for registration, or amending any such application on this Form 1.

AFFILIATE - Any person that, directly or indirectly, controls, is under common control with, or is controlled by, the national securities exchange or exchange exempt from registration based on the limited volume of transactions effected on such exchange, including any employees.

CONTROL - The power, directly or indirectly, to direct the management or policies of a company, whether through ownership of securities, by contract, or otherwise. Any person that (i) is a director, general partner or officer exercising executive responsibility (or having similar status or functions); (ii) directly or indirectly has the right to vote 25% or more of a class of voting securities or has the power to sell or direct the sale of 25% or more of a class of voting securities; or (iii) in the case of a partnership, has the right to receive, upon dissolution, or has contributed, 25% or more of the capital, is presumed to control that entity.

DIRECT OWNERS - Any person that owns, beneficially owns, has the right to vote, or has the power to sell or direct the sale of, 5% or more of a class of a voting security of the applicant. For purposes of this Form 1, a person beneficially owns any securities (i) owned by his/her child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, sharing the same residence; or (ii) that he/she has the right to acquire, within 60 days, through the exercise of any option, warrant or right to purchase the security.

MEMBER - Shall have the same meaning as under Exchange Act Section 3(a)(3).

NATIONAL SECURITIES EXCHANGE - Shall mean any exchange registered pursuant to Section 6 of the Exchange Act.

PERSON ASSOCIATED WITH A MEMBER - Shall have the same meaning as under Section 3(a)(21) of the Exchange Act.

3

Form 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Date filed OFFICIAL Page 1 WASHINGTON, D.C. 20549 (MM/DD/YY): USE

Execution APPLICATION FOR, AND AMENDMENTS TO APPLICATION FOR, ONLY REGISTRATION AS A NATIONAL SECURITIES EXCHANGE OR EXEMPTION Page FROM REGISTRATION PURSUANT TO SECTION 5 OF THE EXCHANGE ACT

WARNING: Failure to keep this form current and to file accurate supplementary information on a timely basis, or the failure to keep accurate books and records or otherwise to comply with the provisions of law applying to the conduct of the applicant would violate the federal securities laws and may result in disciplinary, administrative, or criminal action.

INTENTIONAL MISSTATEMENTS OR OMISSIONS OF FACTS MAY CONSTITUTE CRIMINAL VIOLATIONS

� APPLICATION � AMENDMENT

1. State the name of the applicant:

2. Provide the applicant’s primary street address (Do not use a P.O. Box):

3. Provide the applicant’s mailing address (if different):

4. Provide the applicant’s business telephone and facsimile number:

(Telephone) (Facsimile)

5. Provide the name, title, and telephone number of a contact employee:

(Name) (Title) (Telephone Number)

6. Provide the name and address of counsel for the applicant:

7. Provide the date applicant’s fiscal year ends:

8. Indicate legal status of applicant: � Corporation � Sole Proprietorship � Partnership � Limited Liability Company � Other (specify):

If other than a sole proprietor, indicate the date and place where applicant obtained its legal status (e.g. state where incorporated, place where partnership agreement was filed or where applicant entity was formed):

(a) Date (MM/DD/YY): (b) State/Country of formation:

(c) Statute under which applicant was organized:

EXECUTION: The applicant consents that service of any civil action brought by , or notice of any proceeding before, the Securities and Exchange Commission in connection with the applicant’s activities may be given by registered or certified mail or confirmed telegram to the applicant’s contact employee at the main address, or mailing address if different, given in Items 2 and 3. The undersigned, being first duly sworn, deposes and says that he/she has executed this form on behalf of , and with the authority of , said applicant. The unders igned and applicant represent that the information and statements contained herein, including exhibits, schedules, or other documents att ached hereto, and other information filed herewith, all of which are made a part hereof, are current, true, and complete.

Date: (MM/DD/YY) (Name of applicant)

By: (Signature) (Printed Name and Title) ______________________________ Subscribed and sworn before me this _______ day of _________________, __________ by

(Month) (Year) (Notary Public)

My Commission expires __________________ County of _____________________ S tate of ______________________________

This page must always be completed in full with original, manual signature and notarization. Affix notary stamp or seal where applicable.

4

Form 1 Page 2


APPLICATION FOR, AND AMENDMENTS TO APPLICATION FOR, REGISTRATION AS A NATIONAL SECURITIES EXCHANGE OR EXEMPTION FROM REGISTRATION PURSUANT TO SECTION 5 OF THE EXCHANGE ACT

OFFICIAL USE

OFFICIAL USE ONLY


EXHIBITS File all Exhibits with an application for registration as a national securities exchange or exemption from registration pursuant to Section 5 of the Exchange Act and Rule 6a-1, or with amendments to such applications pursuant to Rule 6a-2. For each exhibit, include the name of the applicant, the date upon which the exhibit was filed and the date as of which the information is accurate (if different from the date of the filing). If any Exhibit required is inapplicable a statement to that effect shall be furnished in lieu of such Exhibit.

Exhibit A A copy of the constitution, articles of incorporation or association with all subsequent amendments, and of existing by-laws or corresponding rules or instruments, whatever the name, of the applicant.

Exhibit B A copy of all written rulings, settled practices having the effect of rules, and interpretations of the Governing Board or other committee of the applicant in respect of any provisions of the constitution, by-laws, rules, or trading practices of the applicant which are not included in Exhibit A.

Exhibit C For each subsidiary or affiliate of the applicant, and for any entity with whom the applicant has a contractual or other agreement relating to the operation of an electronic trading system to be used to effect transactions on the exchange (“System”), provide the following information:

1. Name and address of organization.

2. Form of organization (e.g., association, corporation, partnership, etc.).

3. Name of state and statute citation under which organized. Date of incorporation in present form.

4. Brief description of nature and extent of affiliation.

5. Brief description of business or functions.Description should include responsibilities with respect to operation of the System and/or execution, reporting, clearance, or settlement of transactions in connection with operation of the System.

6. A copy of the constitution.

7. A copy of the articles of incorporation or association including all amendments.

8. A copy of existing by-laws or corresponding rules or instruments.

9. The name and title of the present officers, governors, members of all standing committees, or persons performing similar functions.

10. An indication of whether such business or organization ceased to be associated with the applicant during the previous year, and a brief statement of the reasons for termination of the association.

Exhibit D For each subsidiary or affiliate of the exchange, provide unconsolidated financial statements for the latest fiscal year. Such financial statements shall consist, at a minimum, of a balance sheet and an income statement with such footnotes and other disclosures as are necessary to avoid rendering the financial statements misleading. If any affiliate or subsidiary is required by another Commission rule to

submit annual financial statements, a statement to that effect, with a citation to the other Commission rule, may be provided in lieu of the financial statements required here.

5

Form 1 Page 3


APPLICATION FOR, AND AMENDMENTS TO APPLICATION FOR, REGISTRATION AS A NATIONAL SECURITIES EXCHANGE OR EXEMPTION FROM REGISTRATION PURSUANT TO SECTION 5 OF THE EXCHANGE ACT

OFFICIAL USE

OFFICIAL USE ONLY

EXHIBITS

Exhibit E

Exhibit F

Exhibit G

Exhibit H

Exhibit I

Exhibit J

Describe the manner of operation of the System. This description should include the following:

1. The means of access to the System.

2. Procedures governing entry and display of quotations and orders in the System.

3. Procedures governing the execution, reporting, clearance and settlement of transactions in connection with the System.

4. Proposed fees.

5. Procedures for ensuring compliance with System usage guidelines.

6. The hours of operation of the System, and the date on which applicant intends to commence operation of the System.

7. Attach a copy of the users’ manual.

8. If applicant proposes to hold funds or securities on a regular basis, describe the controls that will be implemented to ensure safety of those funds or securities.

A complete set of all forms pertaining to:

1. Application for membership, participation, or subscription to the entity.

2. Application for approval as a person associated with a member , participant, or subscriber of the entity.

3. Any other similar materials.

A complete set of all forms of financial statements, reports, or questionnaires required of members, participants, subscribers, or any other users relating to financial responsibility or minimum capital requirements for such members, participants, or any other users. Provide a table of contents listing the forms included in this Exhibit G.

A complete set of documents comprising the applicant’s listing applications, including any agreements required to be executed in connection with listing and a schedule of listing fees. If the applicant does not list securities, provide a brief description of the criteria used to determine what securities may be traded on the exchange. Provide a table of contents listing the forms included in this Exhibit H.

For the latest fiscal year of the applicant, audited financial statements which are prepared in accordance with, or in the case of a foreign applicant, reconciled with, United States generally accepted accounting principles, and are covered by a report prepared by an independent public accountant. If an applicant has no consolidated subsidiaries, it shall file audited financial statements under Exhibit I alone and need not file a separate unaudited financial statement for the applicant under Exhibit D.

A list of the officers, governors, members of all standing committees, or persons performing similar functions, who presently hold or have held their offices or positions during the previous year, indicating the following for each:

1. Name.

2. Title.

3. Dates of commencement and termination of term of office or position.

4. Type of business in which each is primarily engaged (e.g., floor broker, specialist, odd lot dealer,

etc.).

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Form 1 Page 4


APPLICATION FOR, AND AMENDMENTS TO APPLICATION FOR, ISTRATION AS A NATIONAL SECURITIES EXCHANGE OR EXEMPTION M REGISTRATION PURSUANT TO SECTION 5 OF THE EXCHANGE ACT

REGFRO

OFFICIAL USE

OFFICIAL USE ONLY

Exhibit K This Exhibit is applicable only to exchanges that have one or more owners, shareholders, or partners that are not also members of the exchange. If the exchange is a corporation, please provide a list of

each shareholder that directly owns 5% or more of a class of a voting security of the applicant. If the exchange is a partnership, please provide a list of all general partners and those limited and special partners that have the right to receive upon dissolution, or have contributed, 5% or more of the partnership’s capital. For each of the persons listed in the Exhibit K, please provide the following:

1. Full legal name;

2. Title or Status;

3. Date title or status was acquired;

4. Approximate ownership interest; and

5. Whether the person has control, a term that is defined in the instructions to this Form.

Exhibit L Describe the exchange’s criteria for membership in the exchange. Describe conditions under which members may be subject to suspension or termination with regard to access to the exchange. Describe any procedures that will be involved in the suspension or termination of a member.

Exhibit M Provide an alphabetical list of all members, participants, subscribers or other users, including the following information:

1. Name;

2. Date of election to membership or acceptance as a participant, subscriber or other user;

3. Principal business address and telephone number;

4. If member, participant, subscriber or other user is an individual, the name of the entity with which such individual is associated and the relationship of such individual to the entity (e.g. partnerofficer, director, employee, etc.);

5. Describe the type of activities primarily engaged in by the membe, rparticipant, subscriber, or other user (e.g. floor broker, specialist, odd lot dealer, other market maker, proprietary trader, non-broker dealer, inactive or other functions). A person shall be “primarily engaged” in an activity or function for purposes of this item when that activity or function is the one in which that person is engaged for the majority of their time. When more than one type of person at an entity engages in any of the six types of activities or functions enumerated in this item, identify each type (e.g. proprietary

, trader Registered Competitive Trader and Registered Competitive Market Maker) and state the number of members, participants, subscribers, or other users in each; and

6. The class of membership, participation or subscription or other access.

Exhibit N Provide a schedule for each of the following:

1. The securities listed in the exchange, indicating for each the name of the issuer and a description of the security;

2. The securities admitted to unlisted trading privileges, indicating for each the name of the issuer and a description of the security;

3. The unregistered securities admitted to trading on the exchange which are exempt from registration under Section 12(a) of the Act. For each security listed, provide the name of the issuerand a description of the security, and the statutory exemption claimed (e.g. Rule 12a-6); and

4. Other securities traded on the exchange, including for each the name of the issuer and a description of the security.

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