Rules of Practice, 4066-4072 [2011-1199]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 76, Number 15 (Monday, January 24, 2011)]
[Rules and Regulations]
[Pages 4066-4072]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-1199]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 201, 202 and 240

[Release No. 34-63723]


Rules of Practice

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: Section 916 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (``Dodd-Frank Act'') \1\ amended Section 19(b) of the 
Securities Exchange Act of 1934 (``Exchange Act''),\2\ which governs 
the handling of proposed rule changes submitted by self-regulatory 
organizations (``SROs''). Among other things, the Dodd-Frank Act's 
amendments to Section 19 of the Exchange Act require the Securities and 
Exchange Commission (``Commission'') to promulgate rules setting forth 
the procedural requirements of proceedings to determine whether a 
proposed rule change should be disapproved. In satisfaction of this 
requirement, the Commission is adopting new Rules of Practice to 
formalize the process it will use when conducting proceedings to 
determine whether an SRO's proposed rule change should be disapproved 
under Section 19(b)(2) of the Exchange Act. The new rules are intended 
to add transparency to the Commission's conduct of those proceedings 
and address the process the Commission will follow to institute 
proceedings and provide notice of the grounds for disapproval under 
consideration as well as provide interested parties with an opportunity 
to submit written materials to the Commission. In addition, the 
Commission is making conforming changes to Rule 19b-4 under the 
Exchange Act in recognition of the new Rules of Practice. Further, 
pursuant to Section 107 of the Sarbanes-Oxley Act of 2002 (``Sarbanes-
Oxley Act''), the provisions of paragraphs (1) through (3) of Section 
19(b) of the Exchange Act govern the proposed rules of the Public 
Company Accounting Oversight Board (``PCAOB'').\3\ The Commission is 
amending Regulation P to add a rule providing that these new Rules of 
Practice also formalize the process the Commission will use when 
conducting proceedings to determine whether a PCAOB proposed rule 
should be disapproved.
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    \1\ Public Law 111-203 (July 21, 2010).
    \2\ 15 U.S.C. 78s(b)(2).
    \3\ See 15 U.S.C. 7217.

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DATES: Effective Date: January 24, 2011.

FOR FURTHER INFORMATION CONTACT: Richard Holley III, Assistant 
Director, at (202) 551-5614, Kristie Diemer, Special Counsel, at (202) 
551-5613, and Arisa Tinaves, Special Counsel, at (202) 551-5676, 
Division of Trading and Markets, or Jeffrey S. Cohan, Senior Special 
Counsel, at (202) 551-5300, Office of the Chief Accountant, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission is adding to its Rules of 
Practice \4\ to establish procedures for instituting proceedings to 
determine whether an SRO's proposed rule change should be disapproved 
under Section 19(b) of the Exchange Act (Sec.  201.700 et seq.) and is 
making corresponding changes to Rule 19b-4 under the Exchange Act (15 
U.S.C. 78f(b)(4)). The Commission is also adding Rule 170 to Regulation 
P \5\ to provide that Sec.  201.700 et seq. establishes procedures for 
instituting proceedings to determine whether a PCAOB proposed rule 
should be disapproved.
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    \4\ 17 CFR 201 et seq.
    \5\ 17 CFR 202.100 et seq.
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I. Discussion of Rule Amendments

A. Background

    Section 916 of the Dodd-Frank Act amended Section 19(b) of the 
Exchange Act, which governs the Commission's handling of proposed rule 
changes submitted by SROs, including national securities exchanges, the 
Financial Industry Regulatory Authority (``FINRA''), and registered 
clearing agencies.\6\ Notably, the amendments to Section 19(b) in 
Section 916 of the Dodd-Frank Act established new statutory deadlines 
applicable to the Commission's publication and review of proposed SRO 
rule changes.\7\
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    \6\ Pursuant to Section 107 of the Sarbanes-Oxley Act, the 
provisions of paragraphs (1) through (3) of Section 19(b) of the 
Exchange Act also govern proposed rules of the PCAOB.
    \7\ Pursuant to Rule 30-3(a) (17 CFR 200.30-3(a)), the 
Commission has delegated authority to the Division of Trading and 
Markets for certain functions related to the handling of proposed 
rule changes filed by SROs under Section 19 of the Exchange Act.

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[[Page 4067]]

    Among other things, amended Section 19(b) imposes a requirement 
that an SRO's proposed rule change be sent by the Commission to the 
Federal Register for publication within 15 days of the date on which 
the SRO posted its proposed rule change on its Web site.\8\ Further, 
Section 916(a) of the Dodd-Frank Act amended Section 19(b)(2) of the 
Exchange Act to require the Commission, within 45 days of the 
``publication date'' of notice of a proposed rule change, to either 
approve a proposed rule change, disapprove a proposed rule change, or 
institute proceedings to determine whether the proposed rule change 
should be disapproved.\9\ With the exception of the ability to 
disapprove a proposed rule change without first instituting 
proceedings, the authority to either approve a proposed rule change or 
institute proceedings to determine whether a proposed rule change 
should be disapproved is not new.
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    \8\ See Section 19(b)(2)(E) of the Exchange Act (15 U.S.C. 
78s(b)(2)(E)), as added by Section 916(a) of the Dodd-Frank Act. The 
15-day period commences when the SRO, ``after filing a proposed rule 
change with the Commission,'' posts its proposal on a publicly 
available Web site. See id. Separately, Rule 19b-4(l) under the 
Exchange Act requires the SRO to post a proposal on its Web site 
within two business days after filing the proposal with the 
Commission. See 17 CFR 240.19b-4(l). If the Commission fails to send 
the notice to the Federal Register by the applicable deadline, then 
the ``publication date'' would be deemed to be the date on which the 
SRO Web site publication was made. See 15 U.S.C. 78s(b)(2)(E).
    \9\ See Exchange Act Section 19(b)(2)(A)(i). The initial 45-day 
period may be extended by either the Commission or the SRO for up to 
an additional 45 days to a maximum of 90 days total. See 15 U.S.C. 
78s(b)(2)(A)(ii). If the Commission subsequently fails to act within 
the applicable time frame, then the proposed rule change will be 
``deemed to have been approved.'' See 15 U.S.C. 78s(b)(2)(D).
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    In addition, the Dodd-Frank Act removed the concept of 
``abrogation'' of a filing that an SRO designated to be effective 
immediately upon filing with the Commission. Prior to the Dodd-Frank 
Act, the Commission had the authority, within 60 days of the date of 
filing, to summarily abrogate a proposed rule change filed for 
immediate effectiveness under former Section 19(b)(3)(A) of the 
Exchange Act \10\ if the Commission determined that such action was 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Exchange 
Act.\11\ Abrogation suspended the effectiveness of an immediately 
effective proposal and obligated the SRO, if it desired to proceed with 
its proposed rule change, to refile the proposal for notice, comment, 
and Commission consideration under Section 19(b)(2) of the Exchange 
Act. Section 916(c) of the Dodd-Frank Act amended Section 19(b)(3)(C) 
of the Exchange Act and replaced abrogation with a process in which the 
Commission may ``temporarily suspend'' a proposed rule change (if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Exchange Act) and then must 
institute proceedings under Section 19(b)(2)(B) to determine whether to 
approve or disapprove the SRO rule change.\12\
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    \10\ See 15 U.S.C. 78s(b)(3)(A).
    \11\ See former Section 19(b)(3)(C); former 15 U.S.C. 
78s(b)(3)(C).
    \12\ See 15 U.S.C. 78s(b)(3)(C). Section 19(b)(3)(C) further 
provides that a temporary suspension is not reviewable under 
Exchange Act Section 25 nor is it deemed to be ``final agency 
action.''
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    Prior to the Dodd-Frank Act's amendments to Section 19, proceedings 
to determine whether to disapprove a proposed rule change were rarely 
begun and even more rarely concluded.\13\ Rather, an SRO typically 
modified or withdrew a proposal when it understood the Commission or 
its staff had concerns that could lead it to institute such 
proceedings. The Dodd-Frank Act's amendments to Section 19 may increase 
the number of proceedings that the Commission determines to institute 
because, among other things, the new authority to ``temporarily 
suspend'' an immediately effective filing obligates the Commission to 
institute proceedings to determine whether to disapprove the SRO rule 
change with the imposition of the suspension. That provision, together 
with the new statutory deadlines applicable to Commission review and 
publication of an SRO's proposed rule change, will further increase the 
Commission's workload. Consequent constraints on Commission resources 
would be compounded to the extent that the Commission continues to 
receive an increasing number of proposed rule changes from an 
increasing number of SROs.
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    \13\ See, e.g., infra note 16 (citing to a 1984 disapproval 
proceeding order).
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B. Rule Amendments

    As required by Section 19(b)(2)(F) of the Exchange Act (added by 
Section 916(a) of the Dodd-Frank Act), the Commission is promulgating 
new Rules of Practice setting forth the procedural requirements for 
proceedings to determine whether to disapprove an SRO's proposed rule 
change.\14\ Specifically, the Commission is adopting rules to outline 
the procedures that it will follow when exercising its authority under 
Section 19(b)(2)(A)(i)(II) of the Exchange Act, pursuant to which the 
Commission either (1) may institute proceedings to determine whether a 
proposed rule change filed under Section 19(b)(2) should be disapproved 
or (2) shall institute such proceedings to determine whether to 
disapprove an immediately effective proposed rule change filed under 
Section 19(b)(3)(A) that the Commission determined to temporarily 
suspend.
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    \14\ See 15 U.S.C. 78s(b)(2)(F). Section 19(b)(2)(F) also 
requires the Commission, as part of its effort to promulgate rules 
setting forth the procedural requirements for proceedings to 
determine whether to disapprove an SRO's proposed rule change, to 
have ``consult[ed] with other regulatory agencies.'' Id. In 
satisfaction of this requirement, Commission staff has consulted 
with staff from the Commodity Futures Trading Commission, the 
Federal Reserve Board, and the Office of the Comptroller of the 
Currency.
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    The procedural rules that the Commission now is adopting are 
intended to implement the mandate imposed by the Dodd-Frank Act.\15\ 
The rules also are intended to bring transparency to the conduct of 
proceedings to disapprove a proposed rule change under Section 19(b) of 
the Exchange Act and reflect the process that the Commission generally 
has followed when it has had occasion to conduct such proceedings.\16\ 
Among other things, the new rules outline the process that the 
Commission will follow to provide to the SRO notice of the grounds for 
disapproval under consideration.\17\
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    \15\ Rules 700 and 701 are not affected by the other Rules of 
Practice contained in part 201, except as specifically provided for 
in Rule 700. See amendment to Rule of Practice 100 (``Scope of the 
Rules of Practice'') adding new subparagraph (b)(3).
    \16\ See, e.g., Securities Exchange Act Release No. 21439 
(October 31, 1984), 49 FR 44577 (November 7, 1984) (File Nos. SR-
CBOE-84-15 and SR-CBOE-84-16) (Order Instituting Proceedings to 
Determine Whether to Disapprove Rule Changes).
    \17\ Though in a proceeding to determine whether to disapprove a 
proposed rule change the Commission is required to publish notice of 
its grounds for disapproval under consideration, the Commission 
could ultimately either disapprove or approve the proposal following 
conclusion of the proceedings. See Exchange Act Section 19(b)(2)(C); 
15 U.S.C. 78s(b)(2)(C) (setting forth the standards applicable to 
Commission approval or disapproval of a proposed rule change). See 
also infra note 27.
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    While the new rules are not within the scope of the existing Rules 
of Practice, they do incorporate three existing Rules of Practice by 
reference: Rule 103 (Construction of Rules), 104 (Business Hours), and 
160 (Time Computation). Rule 103, among other things, specifies that 
the Rules of Practice ``shall be construed and administered to secure 
the just, speedy, and inexpensive determination of every proceeding.'' 
\18\ It also states that counsel

[[Page 4068]]

for a party may take any action required or permitted to be taken by 
such party.\19\ Rule 104 sets forth the business hours of the 
Commission, which will be applicable to the filing of papers with the 
Commission.\20\ Rule 160 governs the computation of time periods, which 
will be applicable when the Commission establishes, for example, 
deadlines by which comments must be received.\21\
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    \18\ See 17 CFR 201.103(a).
    \19\ See 17 CFR 201.103(c)(3).
    \20\ See 17 CFR 201.104.
    \21\ See 17 CFR 201.160. Among other things, Rule 160 addresses 
compliance with deadlines that fall on a Saturday, Sunday, or 
Federal holiday.
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    Consistent with Exchange Act Section 19(b)(2)(B), when instituting 
proceedings to determine whether to disapprove an SRO's proposed rule 
change, the new rules state that the Commission shall provide notice to 
the SRO and to the public of the grounds for disapproval under 
consideration. This notice shall include a brief statement of the 
matters of fact and law that the Commission is considering in 
determining whether to disapprove the rule filing.\22\ In addition to 
publication of such notice in the Federal Register, the rules provide 
that the Commission also will serve a copy of the notice to the SRO 
that filed the proposed rule change.\23\
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    \22\ As stated in Rule 700(e), the Commission is not required to 
amend its notice of the grounds for disapproval under consideration 
to consider additional matters of fact and law beyond what was set 
forth in its notice of the grounds for disapproval under 
consideration.
    \23\ Specifically, in addition to Federal Register publication, 
notice will be served to the contact person listed on the cover page 
of the Form 19b-4 filing filed with the Commission. See Rule 
700(b)(1)(iii).
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    As reflected in new Rule 700(b)(1), such notice of the grounds for 
disapproval under consideration may be provided either simultaneously 
with the initial publication by the Commission of the notice of the 
SRO's proposed rule change in the Federal Register, or it may be 
published separately in the Federal Register subsequent to the initial 
publication by the Commission of the notice of the SRO's proposed rule 
change in the Federal Register. Providing for publication of the 
grounds for disapproval under consideration simultaneous with the 
initial publication of the proposed rule change in the Federal Register 
recognizes that a proposed rule change may initially raise questions as 
to whether the Commission would be able to approve the proposal as 
consistent with the Exchange Act and the rules and regulations 
thereunder applicable to the SRO. Simultaneous publication will allow 
the Commission to highlight prominently for public comment issues on 
which it seeks comment in an efficient manner when the proposal is 
first noticed for public comment. In addition, it will allow the 
Commission to proceed without additional delay to act on a proposed 
rule change in a more efficient manner. Alternatively, providing for 
publication of the grounds for disapproval under consideration 
subsequent to the initial publication of the proposed rule change in 
the Federal Register recognizes that commenters or the Commission may 
identify an issue with a proposal after a proposal was published for 
comment that warrants the institution of proceedings to determine 
whether to disapprove the proposal. Further, as a consequence of the 
short timeframe for noticing a proposal that is established in revised 
Section 19(b) of the Exchange Act, the Commission may be compelled to 
publish filings that are later found to raise concerns under the 
Exchange Act, in which case the Commission may decide to institute 
proceedings subsequent to the initial publication of the proposed rule 
change in the Federal Register.\24\
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    \24\ As required by Section 19(b)(2)(E) of the Exchange Act 
(added by Section 916(a) of the Dodd-Frank Act), the Commission must 
send notice of an SRO's proposed rule change to the Federal Register 
for publication within 15 calendar days of the date on which the SRO 
posts its proposed rule change on its Web site. Failure to meet the 
15 calendar day statutory timeframe results in the ``publication 
date'' being deemed to be the day on which the SRO posted its 
proposal on its Web site. Because the 45-day statutory deadline for 
Commission action is keyed off of the ``publication date,'' and 
because failure to act by that deadline results in a proposal being 
``deemed approved,'' failure to notice a proposal within 15 calendar 
days can effectively reduce the time that the Commission and 
commenters have to fully consider a proposal.
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    When instituting proceedings, Section 19(b)(2)(B)(i)(II) of the 
Exchange Act requires the Commission to provide the SRO with an 
opportunity for a hearing. Accordingly, new Rule 700(c) outlines the 
conduct of the proceedings and establishes the opportunity for the SRO 
that filed the proposed rule change, as well as any other interested 
parties, to be heard on the matter. Specifically, Rule 700(c) states 
that all parties, including the SRO, will be given a specified amount 
of time (as indicated in the notice of the grounds for disapproval) to 
submit supporting or opposing materials, in writing, for the 
Commission's consideration in determining whether to approve or 
disapprove a proposed rule change.\25\ In particular, the SRO that 
submitted the proposed rule change could file a written statement in 
support of its proposed rule change demonstrating, in specific detail, 
how such proposed rule change is consistent with the requirements of 
the Exchange Act and the rules and regulations thereunder applicable to 
the SRO.\26\ The statement could include a response to each of the 
grounds for disapproval under consideration as well as any specific 
representations or undertakings (e.g., representations or undertakings 
concerning the SRO's plans for surveillance or enforcement of a 
proposed new trading rule).
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    \25\ A request for an opportunity for an oral presentation of 
views should be submitted as a written request to the Secretary of 
the Commission and should include a reference to the proposed rule 
change's file number. See Exchange Act Rule 19b-4(g). The 
Commission, in its sole discretion, may determine whether any issues 
relevant to approval or disapproval would be facilitated by the 
opportunity for an oral presentation of views. See Rule 700(c)(2).
    \26\ Notably, the instructions to Form 19b-4 require an SRO to 
present, in a clear and comprehensible manner, how every proposed 
rule change it files with the Commission is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to the SRO. These standards are reflected in 
Rule 700(b)(3).
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    At the conclusion of the initial opportunity to submit written 
materials, the rules provide an opportunity for the SRO whose proposed 
rule change is under consideration to respond to any comments received 
on its proposal (i.e., a ``rebuttal period'').\27\ The rules state that 
any failure by the SRO to respond to comments received on the proposal 
may result in the Commission not having a sufficient basis to make an 
affirmative finding as to whether the SRO's proposed rule change is 
consistent with the Exchange Act and the rules and regulations 
thereunder applicable to the SRO.\28\
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    \27\ The Commission will indicate in the notice of the grounds 
for disapproval the specified amount of time for the rebuttal 
period. See Rule 700(c)(3).
    \28\ The standard for approval of a proposed rule change is that 
the Commission ``shall approve a proposed rule change * * * if it 
finds that such proposed rule change is consistent with the 
requirements of [the Exchange Act] and the rules and regulations 
issued under [the Exchange Act] that are applicable to [the SRO].'' 
15 U.S.C. 78s(b)(2)(C)(i). The standard for disapproval is that the 
Commission ``shall disapprove a proposed rule change of [an SRO] if 
it does not make [such finding].'' 15 U.S.C. 78s(b)(2)(C)(ii).
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    Further, the new rules state that the Commission may consider any 
failure by the SRO to provide all of the information required by Form 
19b-4 in the manner required by the Form, as well as any failure to 
explain how the proposed rule change is consistent with the 
requirements of the Exchange Act and the applicable rules and 
regulation thereunder or any failure by the SRO to provide a complete 
response to the Commission's grounds for disapproval under 
consideration, in determining whether to approve or disapprove the

[[Page 4069]]

proposed rule change.\29\ In particular, such failure may result in the 
Commission not having a sufficient basis to make an affirmative finding 
that the proposed rule change is consistent with the Exchange Act and 
the rules and regulations thereunder applicable to the SRO.
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    \29\ In addition, a filing that does not comply with all 
applicable requirements, including the requirements of Form 19b-4, 
may be rejected as not properly filed under the circumstances 
outlined in Section 19(b)(10) of the Exchange Act. See Section 
19(b)(10) of the Exchange Act, 15 U.S.C. 78s(b)(10) (setting forth 
the rule of construction relating to the filing date of proposed 
rule changes and the ability of the Commission to reject incomplete 
filings). Specifically, as stated in the general instructions to 
Form 19b-4, any filing that does not comply with the requirements of 
Form 19b-4 may be returned to the SRO and any filing so returned 
shall for all purposes be deemed not to have been filed with the 
Commission. See also Rule 0-3 under the Exchange Act, 17 CFR 254.0-3 
(``[t]he date on which papers are actually received by the 
Commission shall be the date of filing thereof if all of the 
requirements with respect to the filing have been complied with * * 
*'').
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    After conclusion of the initial comment period and the rebuttal 
period, the opportunity for interested parties to comment on the 
proposed rule change would close. Thereafter, the Commission would 
issue a written order either approving or disapproving the SRO's 
proposed rule change that sets out the reasons for the Commission's 
determination.\30\
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    \30\ See Rule 701; see also Exchange Act Section 19(b)(2)(C); 15 
U.S.C. 78s(b)(2)(C).
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    The new rules also specify the record that the Commission will 
consider in the context of a proceeding to determine whether to 
disapprove an SRO's proposed rule change. Specifically, Rule 700(d)(3) 
states that the Commission will determine the matter on the basis of 
the record, which shall include the SRO's proposed rule change filed on 
Form 19b-4, any written materials received from any party on the 
proposed rule change, and any written materials that reflect 
communications between the Commission and any interested parties.\31\ 
Further, the rules reflect that written materials shall be filed with 
the Secretary of the Commission and that all materials received will 
generally be made publicly available.
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    \31\ In the event that an oral presentation of supporting or 
opposing views is ordered by the Commission, the written transcript 
of the remarks would become part of the record.
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    Further, the Commission is making conforming edits to Rule 19b-4 in 
light of new Rules of Practice 700 and 701. In particular, the 
Commission is removing existing paragraph (g) of that rule, which 
references the opportunity for interested persons to be heard in the 
context of a proceeding to determine whether to disapprove a proposed 
rule change, and is replacing it with a cross reference to new Rules of 
Practice 700-701.\32\ In addition, the Commission is amending paragraph 
(l) of Rule 19b-4 concerning the obligation of an SRO to post and 
maintain a copy of each proposed rule change on its Web site to provide 
specific guidance to the SRO as to when to remove a proposed rule 
change that is disapproved by the Commission. Currently, Rule 19b-4(l) 
does not specifically reference a Commission disapproval order as one 
of the potential final actions on a proposal.
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    \32\ Rule 19b-4(g) is consistent with the process outlined in 
new Rules of Practice 700 and 701. However, to avoid any confusion 
or overlap, the Commission is amending the Rule 19b-4(g) to cross 
reference the new Rules of Practice.
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    Finally, the Commission is adding Rule 170 to Regulation P \33\ to 
provide that Sec.  201.700 et seq. establishes the procedures for 
instituting proceedings to determine whether a PCAOB proposed rule 
should be disapproved. Specifically, and consistent with Section 107 of 
the Sarbanes-Oxley Act, new Rule 170 clarifies that Sec.  201.700 et 
seq applies to proposed rules of the PCAOB as fully as if it were a 
proposed rule change of a ``registered securities association''. Rule 
170, like Section 107(b)(4)(A) of the Sarbanes-Oxley Act, substitutes 
the approval criteria to be ``consistent with the requirements of title 
I of the Sarbanes-Oxley Act of 2002, and the rules and regulations 
issued thereunder applicable to such organization, or as necessary or 
appropriate in the public interest or for the protection of investors * 
* *.'' Further, given that the PCAOB is not explicitly subject to Rule 
19b-4, Rule 170 also clarifies the requirement for the PCAOB to 
demonstrate that a proposed rule is ``consistent with the requirements 
of title I of the Sarbanes-Oxley Act of 2002, and the rules and 
regulations issued thereunder applicable to such organization, or as 
necessary or appropriate in the public interest or for the protection 
of investors.'' \34\
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    \33\ 17 CFR 202.100 et seq.
    \34\ 15 U.S.C. 7217(b)(4)(A).
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II. Administrative Procedure Act, Regulatory Flexibility Act, and 
Paperwork Reduction Act

    The Commission finds, in accordance with the Administrative 
Procedure Act (``APA''),\35\ that the new rules and rule amendments 
relate solely to agency organization, procedures or practices. 
Accordingly, these new rules and rule amendments are not subject to the 
provisions of the APA requiring notice, opportunity for public comment, 
and publication. The Regulatory Flexibility Act,\36\ therefore, does 
not apply. Similarly, because these rules relate to ``agency 
organization, procedure or practice that does not substantially affect 
the rights or obligations of non-agency parties,'' analysis of major 
status under the Small Business Regulatory Enforcement Fairness Act is 
not required.\37\ The new rules and rule amendments do not contain any 
new collection of information requirements as defined by the Paperwork 
Reduction Act of 1995, as amended.\38\ Rather, the new rules and rule 
amendments govern a process that the Commission will be able to 
institute when an SRO's proposed rule change submitted on Form 19b-4 
failed to provide the Commission with a sufficient basis to make a 
finding whether the proposed rule change was or was not consistent with 
the Exchange Act and the rules and regulations thereunder applicable to 
the SRO. The required scope of information that an SRO must submit to 
the Commission to explain each proposed rule change and demonstrate 
that each proposed rule change is consistent with the Exchange Act and 
the rules and regulations thereunder is established in existing Form 
19b-4, and the rules and rule amendments do not contain any additional 
collection of information requirements beyond what SROs are already 
required to provide to the Commission.
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    \35\ 5 U.S.C. 553(b)(3)(A).
    \36\ 5 U.S.C. 601 et seq.
    \37\ 5 U.S.C. 804(3)(C).
    \38\ 44 U.S.C. 3501 et seq.
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III. Consideration of the Costs and Benefits of the Rule Amendments and 
Burden on Competition

    The Commission is sensitive to the costs and benefits imposed by 
its rules and has identified certain costs and benefits of these rules. 
The rules and rule amendments that the Commission is adopting are 
intended to implement the mandate imposed by the Dodd-Frank Act. The 
benefits of the new rules and rule amendments also include increased 
transparency of the Commission's conduct of proceedings to determine 
whether to disapprove an SRO's proposed rule change. New Rules 201.700 
and 701 and new Rule 170 under Regulation P establish procedures for 
the Commission to follow when instituting and conducting proceedings to 
determine whether to disapprove a proposed rule filing. The new rules 
and rule amendments provide procedures for the Commission, SROs, the 
PCAOB, and the public concerning the administration of certain of the 
Commission's responsibilities under Section 19 of the Exchange Act and

[[Page 4070]]

Section 107 of the Sarbanes-Oxley Act, and reflect a process that is 
intended to help ensure that only those proposed rule changes that are 
consistent with the Exchange Act and title I of the Sarbanes-Oxley Act, 
respectively, are permitted.
    There also are potential costs of the new rules. An SRO or the 
PCAOB may incur costs as a result of the new rules, for example, when 
submitting written material in support of its proposed rule change or 
providing a response to any adverse comments received. However, the 
Commission believes that such costs typically are already incurred by 
the SROs when filing proposed rule changes on Form 19b-4, particularly 
since Form 19b-4 contains comprehensive and rigorous requirements that 
an SRO must follow when presenting, explaining, and offering a thorough 
legal analysis of each proposed rule change. Further, SROs already 
typically submit responses to adverse substantive comments received 
during the rule filing process. Similarly, the PCAOB has incurred costs 
by presenting, explaining, and offering similarly rigorous legal 
analysis of each of its proposed rules.
    Further, because the new rules and rule amendments relate to agency 
organization, procedures or practice, the Commission believes that they 
will have no adverse impact on capital formation, nor are they expected 
to have any potential adverse impact on efficiency. In particular, the 
new rules and rule amendments are intended to add transparency to the 
Commission's institution and conduct of proceedings to determine 
whether to disapprove a proposed rule change. To the extent that 
interested parties identify issues and present information that informs 
the Commission's decision-making with respect to a particular proposed 
rule change that itself may affect capital formation or price 
efficiency, then the Commission's new rules and rule amendments could, 
in turn, promote capital formation and efficiency.
    Section 23(a) of the Exchange Act \39\ requires the Commission, 
when making rules and regulations under the Exchange Act, to consider 
the impact a new rule would have on competition. Exchange Act Section 
23(a)(2) prohibits the Commission from adopting any rule that would 
impose a burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.
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    \39\ 15 U.S.C. 78w(a).
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    The new rules and rule amendments implement the Dodd-Frank Act 
statutory changes to the rule change process and are intended to 
enhance transparency with respect to the Commission's conduct of 
proceedings under the Exchange Act to determine whether to disapprove 
an SRO's proposed rule change or a proposed rule of the PCAOB. The new 
rules, which set forth the administrative procedures concerning the 
Commission's conduct of such proceedings, apply equally to all SROs, 
including all national securities exchanges, FINRA, and clearing 
agencies that are required to submit proposed rule filing changes with 
the Commission. We note that many of the substantive requirements of 
the new rules come directly from the amendments to Exchange Act Section 
19(b) by the Dodd-Frank Act. In addition, these rules are intended to 
codify and reflect the typical process that the Commission has followed 
when conducting proceedings to determine whether to disapprove an SRO's 
proposed rule change. Therefore, the Commission does not expect the 
rules to have an anti-competitive effect. To the contrary, the new 
rules provide all interested parties with an opportunity to express 
their views to the Commission concerning an SRO's proposed rule change 
or a proposed rule of the PCAOB that the Commission is considering 
potentially disapproving. To that extent, the new rules are expected to 
promote competition and help ensure that SRO rules are consistent with 
the Exchange Act and the rules and regulations thereunder and PCAOB 
rules and standards are consistent with the Sarbanes-Oxley Act and the 
rules and regulations thereunder.

IV. Statutory Basis and Text of Rules

    The Commission is amending its Rules of Practice and Rule 19b-4 
pursuant to authority set forth in the Exchange Act, including Sections 
19(b) and 23(a). The Commission is amending Regulation P pursuant to 
authority set forth in the Sarbanes-Oxley Act, including Sections 3(b) 
and 107 and the Exchange Act, including Sections 19(b) and 23(a).

List of Subjects in 17 CFR Parts 201, 202 and 240

    Administrative practice and procedures.

Text of Amendments

    For the reasons set out in the preamble, Title 17, Chapter II of 
the Code of Federal Regulations is amended as follows:

PART 201--RULES OF PRACTICE

0
1. The authority citation for part 201 is amended by adding authority 
citations for Sec. Sec.  201.700 to 201.702 to read as follows:

    Authority: 15 U.S.C. 77s, 77sss, 78w, 78x, 80a-37, and 80b-11; 5 
U.S.C. 504(c)(1).
    Sections 201.700 to 201.702 are also issued under sec. 916, Pub. 
L. 111-203, 124 Stat. 1376.


0
2. Section 201.100 is amended by adding new paragraph (b)(3) to read as 
follows:


Sec.  201.100  Scope of the rules of practice.

* * * * *
    (b) * * *
    (3) Initiation of proceedings for SRO proposed rule changes under 
17 CFR 201.700-701, except where made specifically applicable therein.
* * * * *

0
3. Add Sec. Sec.  201.700 and 201.701 to read as follows:


Sec.  201.700  Initiation of proceedings for SRO proposed rule changes.

    (a) Rules of Practice. For purposes of these Rules of Practice 
contained at 17 CFR 201.700 through 201.701, the following Rules of 
Practice apply:
    (1) Rule 103, 17 CFR 201.103 (Construction of Rules);
    (2) Rule 104, 17 CFR 201.104 (Business Hours); and
    (3) Rule 160, 17 CFR 201.160 (Time Computation).
    (b) Institution of proceedings; notice and opportunity to submit 
written views.
    (1) Generally. If the Commission determines to initiate proceedings 
to determine whether a self-regulatory organization's proposed rule 
change should be disapproved, it shall provide notice thereof to the 
self-regulatory organization that filed the proposed rule change, as 
well as all interested parties and the public, by publication in the 
Federal Register of the grounds for disapproval under consideration.
    (i) Prior to notice. If the Commission determines to institute 
proceedings prior to initial publication by the Commission of the 
notice of the self-regulatory organization's proposed rule change in 
the Federal Register, then the Commission shall publish notice of the 
proposed rule change simultaneously with a brief summary of the grounds 
for disapproval under consideration.
    (ii) Subsequent to notice. If the Commission determines to 
institute proceedings subsequent to initial publication by the 
Commission of the notice of the self-regulatory organization's proposed 
rule change in the Federal Register, then the Commission shall publish 
separately in the Federal Register a brief summary of the grounds for 
disapproval under consideration.

[[Page 4071]]

    (iii) Service of an order instituting proceedings. In addition to 
publication in the Federal Register of the grounds for disapproval 
under consideration, the Secretary, or another duly authorized officer 
of the Commission, shall serve a copy of the grounds for disapproval 
under consideration to the self-regulatory organization that filed the 
proposed rule change by serving notice to the person listed as the 
contact person on the cover page of the Form 19b-4 filing. Notice shall 
be made by delivering a copy of the order to such contact person either 
by any method specified in 17 CFR 201.141(a) or by electronic means 
including e-mail.
    (2) Notice of the grounds for disapproval under consideration. The 
grounds for disapproval under consideration shall include a brief 
statement of the matters of fact and law on which the Commission 
instituted the proceedings, including the areas in which the Commission 
may have questions or may need to solicit additional information on the 
proposed rule change. The Commission may consider during the course of 
the proceedings additional matters of fact and law beyond what was set 
forth in its notice of the grounds for disapproval under consideration.
    (3) Demonstration of consistency with the Exchange Act. The burden 
to demonstrate that a proposed rule change is consistent with the 
Exchange Act and the rules and regulations issued thereunder that are 
applicable to the self-regulatory organization is on the self-
regulatory organization that proposed the rule change. As reflected in 
the General Instructions to Form 19b-4, the Form is designed to elicit 
information necessary for the public to provide meaningful comment on 
the proposed rule change and for the Commission to determine whether 
the proposed rule change is consistent with the requirements of the 
Exchange Act and the rules and regulations thereunder applicable to the 
self-regulatory organization. The self-regulatory organization must 
provide all information elicited by the Form, including the exhibits, 
and must present the information in a clear and comprehensible manner. 
In particular, the self-regulatory organization must explain why the 
proposed rule change is consistent with the requirements of the 
Exchange Act and the rules and regulations thereunder applicable to the 
self-regulatory organization. A mere assertion that the proposed rule 
change is consistent with those requirements, or that another self-
regulatory organization has a similar rule in place, is not sufficient. 
Instead, the description of the proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding. Any failure of the self-
regulatory organization to provide the information elicited by Form 
19b-4 may result in the Commission not having a sufficient basis to 
make an affirmative finding that a proposed rule change is consistent 
with the Exchange Act and the rules and regulations issued thereunder 
that are applicable to the self-regulatory organization.
    (c) Conduct of hearings.
    (1) Initial comment period in writing. Unless otherwise specified 
by the Commission in its notice of grounds for disapproval under 
consideration, all interested persons will be given an opportunity to 
submit written data, views, and arguments concerning the proposed rule 
change under consideration and whether the Commission should approve or 
disapprove the proposed rule change. The self-regulatory organization 
that submitted the proposed rule change may file a written statement in 
support of its proposed rule change demonstrating, in specific detail, 
how such proposed rule change is consistent with the requirements of 
the Exchange Act and the rules and regulations thereunder applicable to 
the self-regulatory organization, including a response to each of the 
grounds for disapproval under consideration. Such statement may include 
specific representations or undertakings by the self-regulatory 
organization. The Commission will specify in the summary of the grounds 
for disapproval under consideration the length of the initial comment 
period.
    (2) Oral. The Commission, in its sole discretion, may determine 
whether any issues relevant to approval or disapproval would be 
facilitated by the opportunity for an oral presentation of views.
    (3) Rebuttal. At the end of the initial comment period, the self-
regulatory organization that filed the proposed rule change will be 
given an opportunity to respond to any comments received. The self-
regulatory organization may voluntarily file, or the Commission may 
request a self-regulatory organization to file, a response to a comment 
received regarding any aspect of the proposed rule change under 
consideration to assist the Commission in determining whether the 
proposed rule change should be disapproved. The Commission will specify 
in the summary of the grounds for disapproval under consideration the 
length of the rebuttal period.
    (4) Non-response. Any failure by the self-regulatory organization 
to provide a complete response, within the applicable time period 
specified, to a comment letter received or to the Commission's grounds 
for disapproval under consideration may result in the Commission not 
having a sufficient basis to make an affirmative finding that a 
proposed rule change is consistent with the Exchange Act and the rules 
and regulations issued thereunder that are applicable to the self-
regulatory organization.
    (d) Record before the Commission.
    (1) Filing of papers with the Commission. Filing of papers with the 
Commission shall be made by filing them with the Secretary, including 
through electronic means. In its notice setting forth the grounds for 
disapproval under consideration for a proposed rule change, the 
Commission shall inform interested parties of the methods by which they 
may submit written comments and arguments for or against Commission 
approval.
    (2) Public availability of materials received. During the conduct 
of the proceedings, the Commission generally will make available 
publicly all written comments it receives without change. In its notice 
setting forth the grounds for disapproval under consideration for a 
proposed rule change, the Commission shall inform interested parties of 
the methods by which they may view all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552.
    (3) Record before the Commission. The Commission shall determine 
each matter on the basis of the record. The record shall consist of the 
proposed rule change filed on Form 19b-4 by the self-regulatory 
organization, including all attachments and exhibits thereto, and all 
written materials received from any interested parties on the proposed 
rule change, including the self-regulatory organization that filed the 
proposed rule change, through the means identified by the Commission as 
provided in paragraph (1), as well as any written materials that 
reflect communications between the Commission and any interested 
parties.
    (e) Amended notice not required. The Commission is not required to 
amend its notice of grounds for disapproval under consideration in 
order to consider, during the course of the proceedings, additional 
matters of fact and law beyond what was set forth in the notice

[[Page 4072]]

of the grounds for disapproval under consideration.


Sec.  201.701  Issuance of order.

    At any time following conclusion of the rebuttal period specified 
in 17 CFR 201.700(b)(4), the Commission may issue an order approving or 
disapproving the self-regulatory organization's proposed rule change 
together with a written statement of the reasons therefor.

PART 202--INFORMAL AND OTHER PROCEDURES

0
4. The authority citation for part 202 continues to read as follows:

    Authority: 15 U.S.C. 77s, 77t, 78d-1, 78u, 78w, 78ll(d), 79r, 
79t, 77sss, 77uuu, 80a-37, 80a-41, 80b-9, 80b-11, and 7201 et seq., 
unless otherwise noted.


0
5. Add Sec.  202.170 to read as follows:


Sec.  202.170  Initiation of disapproval proceedings for PCAOB proposed 
rules.

    Initiation of disapproval proceedings for proposed rules of the 
Public Company Accounting Oversight Board as defined by section 107 of 
the Sarbanes-Oxley Act of 2002 are subject to the provisions of 
Sec. Sec.  201.700 and 201.701 of this chapter as fully as if it were a 
registered securities association, except that:
    (a) Demonstration of Consistency with the Sarbanes-Oxley Act of 
2002. For purposes of proposed rules of the Public Company Accounting 
Oversight Board, apply this paragraph in lieu of paragraph (b)(3) of 
Sec.  201.700 of this chapter. The burden to demonstrate that a 
proposed rule is consistent with the requirements of title I of the 
Sarbanes-Oxley Act of 2002, and the rules and regulations issued 
thereunder, or as necessary or appropriate in the public interest or 
for the protection of investors, is on the Public Company Accounting 
Oversight Board. In its filing the Public Company Accounting Oversight 
Board must explain in a clear and comprehensible manner why the 
proposed rule change is consistent with the requirements of title I of 
the Sarbanes-Oxley Act of 2002 and the rules and regulations 
thereunder, or as necessary or appropriate in the public interest or 
for the protection of investors. A mere assertion that the proposed 
rule change is consistent with those requirements is not sufficient. 
Instead, the description of the proposed rule, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding. Any failure by the Public 
Company Accounting Oversight Board in its proposed rule filing with the 
Commission may result in the Commission not having a sufficient basis 
to make an affirmative finding that a proposed rule change is 
consistent with the title I of the Sarbanes-Oxley Act of 2002, and the 
rules and regulations issued thereunder, or as necessary or appropriate 
in the public interest or for the protection of investors.
    (b) For each reference to ``the Exchange Act and the rules and 
regulations thereunder applicable to the self-regulatory organization'' 
apply ``title I of the Sarbanes-Oxley Act of 2002, and the rules and 
regulations issued thereunder applicable to such organization, or as 
necessary or appropriate in the public interest or for the protection 
of investors.''

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
6. The authority citation for part 240 continues to read as follows:

    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.


0
7. Section 240.19b-4 is amended by revising paragraphs (g), (l)(1) and 
(l)(4) to read as follows:


Sec.  240.19b-4  Filings with respect to proposed rule changes by self-
regulatory organizations.

* * * * *
    (g) Proceedings to determine whether a proposed rule change should 
be disapproved will be conducted pursuant to 17 CFR 201.700-701 
(Initiation of Proceedings for SRO Proposed Rule Changes).
* * * * *
    (l) * * *
    (1) In the case of a proposed rule change filed under section 
19(b)(2) of the Act (15 U.S.C. 78s(b)(2)), the Commission approves or 
disapproves the proposed rule change or the self-regulatory 
organization withdraws the proposed rule change, or any amendments, or 
is notified that the proposed rule change is not properly filed; or
* * * * *
    (4) In the case of a proposed rule change, or any amendment 
thereto, that has been disapproved, withdrawn or not properly filed, 
the self-regulatory organization shall remove the proposed rule change, 
or any amendment, from its Web site within two business days of 
notification of disapproval, improper filing, or withdrawal by the SRO 
of the proposed rule change.
* * * * *

    By the Commission.

    Dated: January 14, 2011.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-1199 Filed 1-21-11; 8:45 am]
BILLING CODE 8011-01-P