October 6, 2004
Ellen J. Neely, Esq.
Dear Ms. Neely:
This is in response to your letter dated October 1, 2004, in which you requested advice that the Division of Market Regulation ("Division") would not recommend that the Securities and Exchange Commission ("Commission") take enforcement action against the Chicago Stock Exchange ("CHX") regarding CHX's compliance with Rules 31 and 31T and Form R31 under the Securities Exchange Act of 1934 ("Exchange Act"),1 if, as described in your letter, CHX makes adjustments to the data provided by the National Securities Clearing Corporation ("NSCC") to ensure that the data provided by CHX in its Forms R31 accurately reflect the aggregate dollar amount of covered sales occurring on CHX for the applicable reporting period.
As you note, Section 31 of the Exchange Act,2 among other things, requires each national securities exchange to pay the Commission a fee based on the aggregate dollar amount of certain sales of securities. Rules 31 and 31T, adopted by the Commission in June 2004,3 established a procedure for the calculation and collection of Section 31 fees on these "covered sales."4 Rule 31 requires each national securities exchange that owes Section 31 fees (i.e., a "covered exchange" ),5 including CHX, to submit a completed Form R31 to the Commission each month, beginning with July 2004. Rule 31T requires each covered exchange to submit a completed Form R31 for each of the months September 2003 to June 2004, inclusive. The covered exchange must report its covered sale volume based on the data of a "designated clearing agency,"6 when available. These covered sales are reported in Part I of Form R31.7 Rule 31 provides that a covered exchange "shall provide in Part I of Form R31 only the data supplied to it by a designated clearing agency."8
In your letter, you stated that "[t]he data supplied by NSCC to the CHX for the periods from September 1, 2003 through August 2004 . . . does not accurately reflect the aggregate dollar value of the covered sales that occurred on the CHX." Furthermore, you stated that, while the NSCC-provided data includes all covered sales (except for the ex-clearing transactions separately reported by CHX), the data also contain information about various non-covered sales. You concluded, therefore, that "the CHX cannot report accurate information on Form R31 unless it makes adjustments to the NSCC data that are based on data other than that provided by NSCC." You reasoned that these adjustments "were necessary to ensure that the CHX reported the accurate dollar volume of covered sales of equity securities occurring on the CHX during the applicable reporting period." In addition, you indicated that NSCC is attempting to implement systems changes in early 2005 that should ensure the capture and sorting of the data needed to more accurately complete Form R31. In view of this fact, you stated that CHX will need to continue making adjustments to the NSCC-supplied data until the new NSCC system is operative.
As you noted in your letter, the Commission acknowledged in the Adopting Release that "trade data going back to September 1, 2003, may not have been reported to NSCC in a form that can immediately be tabulated under the procedure created by new Rule 31. Nevertheless, the Commission believes that NSCC, with the assistance of the exchanges, can sift the data to produce an accurate record of each exchange's covered sales in equities since September 1, 2003."9 The Commission identified certain areas in which the covered exchanges should work with NSCC to confirm the accuracy of the data.10 You stated that, after the Adopting Release was issued, additional limitations to the NSCC data surfaced, "including, but not limited to, a better understanding of the limited utility of the ITS data that NSCC could provide."
In light of this situation, you requested the Division staff to confirm that it would not recommend that the Commission take enforcement action against CHX "for making these types of adjustments on the Forms R31 that it submits to the Commission to accurately reflect the dollar value of covered sales on the CHX." You stated that you understood that the Division staff "cannot specifically confirm that the CHX's calculations with respect to each adjustment are accurate." However, you requested that the Division staff confirm "that it is appropriate, in principle, for the Exchange to reduce the NSCC-provided aggregate dollar amount of covered sales by the amounts associated with these types of transactions."
Based on all the facts and representations presented in your letter and in view of the statements made by the Commission in the Adopting Release, the Division staff would not recommend that the Commission take enforcement action against CHX if CHX adjusts the data provided by NSCC to ensure that it accurately reflects the aggregate dollar amount of covered sales occurring on CHX and reports such adjusted data in Part I of the applicable Form R31. Any different facts or conditions might lead to a different conclusion. In particular, the Division would expect CHX to use NSCC data exclusively in Part I of its Forms R31 when NSCC's new system for tracking covered sale volume is operative, because adjustments to the NSCC data should no longer be necessary.
Other covered exchanges for which NSCC acts as a designated clearing agency under Rule 31 may rely on this letter to the extent that, prior to NSCC's implementation of this new system, they make adjustments to NSCC's data to ensure its accuracy before reporting covered sale volume in Part I of Form R31. However, the Division is not expressing any view with respect to the type or amount of any particular adjustment made by CHX or any other covered exchange. Therefore, the statements in this letter would not preclude the Division staff from recommending enforcement action if a particular adjustment made by a covered exchange had an inadequate legal basis or if the amount of the adjustment could not clearly be substantiated by the exchange. This no-action position concerns enforcement action only and does not represent any legal conclusion regarding the applicability of the statutory or regulatory provisions of the federal securities laws.
Robert L.D. Colby
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