SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 42312 / January 4, 2000
Admin. Proc. File No. 3-9756
In the Matter of the Application of :
THE AMERICAN STOCK EXCHANGE, INC. :
OPINION OF THE COMMISSION
CONSOLIDATED TAPE ASSOCIATION -- REVIEW OF NATIONAL MARKET SYSTEM PLAN ACTION PURSUANT TO RULE 11Aa3-2(e) UNDER THE SECURITIES EXCHANGE ACT
Jurisdiction to Review Action of Plan
Consolidated Tape Association voted to exclude from the calculation of petitioner's annual share, under the revenue-sharing provisions of the Association's national market system plan, revenue generated from the sale of transaction information in a derivative product known as Diamonds. Held, the Commission declines to exercise its discretion to review this action under Rule 11Aa3-2(e) of the Securities Exchange Act of 1934, and application for review is dismissed.
Stuart I. Friedman, Friedman, Wittenstein & Hochman, for the American Stock Exchange, Inc.
Thomas E. Haley, for the Consolidated Tape Association.
George W. Mann, Jr., for the Boston Stock Exchange, Inc.
Michael P. Roundtree, for the Pacific Exchange, Inc.
Appeal filed: September 11, 1998
Last brief received: June 7, 1999
The American Stock Exchange, Inc. ("Amex") seeks review pursuant to Rule 11Aa3-2(e) 1under the Securities Exchange Act of 1934 2of action taken at an August 12, 1998 meeting of the Consolidated Tape Association ("CTA"). 3 A majority of the CTA, including the Boston Stock Exchange, Inc. ("BSE"), Chicago Board Options Exchange, Inc. ("CBOE"), Chicago Stock Exchange, Inc. ("CHX"), Cincinnati Stock Exchange, Inc. ("CSE"), and Pacific Exchange, Inc. ("PCX") (collectively the "Majority") voted to exclude, from the calculation of Amex's annual share of revenue, transactions in a derivative product known as Diamonds. Diamonds consist of securities representing interests in unit investment trusts. These trusts hold stock in the companies that comprise the Dow Jones Industrial Average. 4 The Majority concluded that the Amex had entered into a contractual relationship granting it an exclusive right to trade Diamonds, and therefore was not entitled to have Diamonds counted in the calculation of its annual share of revenue. For the reasons set forth below, we decline to exercise our discretion to review this matter pursuant to Exchange Act Rule 11Aa3-2(e).
In 1975, Congress enacted amendments 5to the Exchange Act that, among other things, authorized the Commission "to facilitate the establishment of a national market system forsecurities." 6 Congress found that a national market system would link "all markets for qualified securities through communication and data processing facilities." 7 Congress contemplated that a national market system would encourage both centralized trading and fair competition among markets. 8
The plan for a national market system had been under way several years before Congress mandated its creation. In 1971, the Commission proposed the establishment of a national market system and began taking steps towards this end. The Commission, among other things, adopted a rule that required every national securities exchange and the NASD to file a plan for collecting, processing, and disseminating on a consolidated basis reports of completed transactions ("last sale reports") in securities registered or admitted to trading on an exchange or over-the-counter. 9 To meet the requirements of the rule, various self-regulatory organizations filed with the Commission a joint industry plan ("CTA Plan") governing the implementation and the operation of the consolidated reporting system. 10 The CTA Plan sets forth the terms, conditions, and procedures under which last sale reports are made available. The CTA Plan also engages the Securities Industry Automation Corporation ("SIAC") as the central processor of last sale information for inclusion in the consolidated tape. 11
The CTA Plan provides for the collection and dissemination of "last sale" price information in "eligible securities," which is defined to include any common stock, long-term warrant, or preferred stock registered or admitted to unlisted trading privileges on any exchange. 12 "Common stock" is further defined as "any equity security, however designated, registered or admitted to unlisted trading privileges on an exchange as a common stock, including . . . shares or certificates of beneficial interest in trusts . . . ." 13 Each participating exchange and Nasdaq reports to SIAC last sale prices relating to transactions in eligible securities. 14 SIAC, in turn, disseminates this information to vendors for a fee. The vendors then distribute the data to broker-dealers, investors, and other members of the public via computer terminals or the ticker tape.
The CTA Plan also provides for the sharing of net income from the fees charged to vendors and others for the receipt or use of the CTA networks' last sale price information. Each CTA participant is entitled to receive its "annual share" of revenue, which is calculated according to the relative percentage of last sale transactions reported by that participant. 15 The number of transactions used to calculate a participant's annual share of revenue, however, does not include those transactions in a security for which the participant has entered into a contractual relationship granting that participant the exclusive right to trade (or the discretion to determine whether another participant may trade that security). 16
In June 1997, the Amex entered into a licensing agreement with Dow Jones & Company ("Dow Jones"). The agreement granted Amex a license to use the Dow Jones trademarks in connection with the trading of Diamonds. Amex began trading Diamonds in January 1998. 17 At around this time, the CSE expressed to Dow Jones its interest in trading Diamonds and questioned whether any licensing requirements were imposed in connection with trading Diamonds. According to the CSE, Dow Jones responded that it had an exclusive license with Amex and would not license any other exchange to trade Diamonds. In March 1998, the CSE again contacted Dow Jones. In a joint letter with the CHX, the CSE asked Dow Jones to clarify the licensing issue with respect to the Diamonds product. This time, Dow Jones responded by stating that its lawyers were "currently studying the pros and cons of extending the licensing of Diamonds to additional exchanges. We hope to have an answer to you by the end of April."
By May 1998, no answer was forthcoming. The Chairman of the CTA, acting at the behest of the CTA participants, contacted Dow Jones and inquired whether exchanges other than Amex could trade Diamonds without a license or Dow Jones' approval. Dow Jones advised the CTA Chairman that the matter was still under review. Dow Jones gave no indication as to when it would resolve the licensing question. To date, Dow Jones has not responded to the CTA Chairman's inquiry.
At the August 12, 1998, meeting of the CTA, the CSE observed that the issue of whether Diamonds were exclusively traded had been open for many months without any resolution. As a result, the CSE believed that Diamonds were subject to exclusive trading rights and thus not eligible for revenue-sharing under the CTA Plan. The Amex, by contrast, asserted that its license with DowJones gave it the right to issue, market, and promote Diamonds, but not the exclusive right to trade Diamonds. The Amex also noted that the NASD had been trading Diamonds based on unlisted trading privileges, 18without a license from Dow Jones. The Majority voted in favor of a motion that stated "that transactions in the Diamonds products should not be included in calculations to determine each Participant's market data revenue distribution until this committee determines that all Participants of CTA can freely trade the product." 19 The Amex, NASD, and PHLX opposed the motion; the NYSE abstained. The Amex now appeals and requests the Commission to set aside the CTA's action and determine that Diamonds be counted toward each participant's share of revenue.
Rule 11Aa3-2 governs the Commission's authority to hear appeals from action taken pursuant to a national market system plan such as the CTA Plan. Subsection (e) of the Rule provides that "[t]he Commission may, in its discretion, entertain appeals in connection with the implementation or operation of any effective national market system plan." 20 Subsection (e)(1) further provides, however, that "[a]ny action taken or failure to act by any person in connection with an effective national market system plan . . . shall be subject to review by the Commission, on its own motion or upon application by any person aggrievedthereby . . . ." 21 The apparent conflict between these two parts of the Rule raises the question whether we must consider Amex's appeal or whether we have the discretion to decline to do so.
By order dated March 30, 1999, we directed the parties to file briefs addressing the issues whether Commission review under Rule 11Aa3-2(e)(1) is mandatory or discretionary and, if discretionary, whether Commission review of this matter is appropriate in light of the public interest in the effective operation of a national market system plan. 22 As discussed below, we conclude that our authority to hear appeals under the Rule is discretionary. We exercise our discretion not to review the Amex's appeal.
A. Commission Review of Appeals Under Exchange Act Rule 11Aa3-2(e)(1) is Discretionary
Rule 11Aa3-2(e)(1) grants the Commission the "discretion," but not the obligation, to entertain an appeal from action taken in connection with the CTA Plan. 23 The language "shall be subject to review" does not make Commission review of national market system plan action mandatory. Rather, when read in light of Rule 11Aa3-2(e)'s leading sentence, this language indicates that national market system plan action will be subject to the Commission's review only if the Commission decides to exercise its discretion to consider an appeal. As a result, Commissionreview of appeals under Rule 11Aa3-2(e) is discretionary. 24None of the parties to this proceeding argues to the contrary.
Statements made by the Commission in the releases leading to the Rule's adoption support this conclusion. For example, in the release proposing Rule 11Aa3-2, the Commission stated:
The Commission believes that it is appropriate to provide a procedure for Commission review, in its discretion, of any action taken or failure to act by any person in connection with an effective [National Market System] Plan. Paragraph (e) of the Rule therefore provides that any action taken or failure to act by any person in connection with an effective [National Market System] Plan shall be subject to review by the Commission, on its own motion or upon application of any person aggrieved thereby. 25
The use of the word "therefore" suggests that the Commission believed that its obligation to review an appeal from national market system plan action would be triggered only in the event that the Commission exercised its discretion in the first instance to undertake such a review.
In the release adopting Rule 11Aa3-2, the Commission remarked that a number of commentators had argued that the procedures relating to Commission review under Rule 11Aa3-2 should be "analogous in all relevant respects" to those contained in Exchange Act Section 19. In particular, the commentators had asserted that Rule 11Aa3-2 should be modified "to provide more precise parallels between the appeals procedure contained in the Rule and that contained in Section 19 of the [Exchange]
Act." 26 Under Exchange Act Section 19(d), the Commission has a mandatory duty to review certain determinations by self-regulatory organizations ("SROs"). 27
The Commission responded that it did not believe Congress intended to treat national market system plans as analogous toSRO rules. 28 According to the Commission, the legislative history of the 1975 Amendments indicates that Congress viewed the Commission's authority under Section 11A(a)(3)(B) as "distinct" from its authority under Section 19. 29 The Commission noted that, if Congress had wanted Section 11A(a)(3)(B) to be subject to the procedures contained in Section 19, it would have incorporated by reference Section 19's provisions or repeated those provisions in Section 11A(a)(3)(B). 30 That Congress chose not to do either of these things provides additional support for the conclusion that the Commission's review authority under Rule 11Aa3-2(e) is discretionary. 31
B. The Commission Declines to Exercise its Discretion to Consider Amex's Appeal.
We decline to exercise our discretion to consider Amex's appeal. The issues raised by this appeal fail to implicate any of the broad objectives of the national market system -- the public interest, the protection of investors, or the maintenance of fair and orderly markets. 32 Nor does Amex's appeal concern action related to our role in facilitating the establishment of a national market system. 33 This appeal involves an ordinary commercial dispute. As we stated in the release adopting Rule 11Aa3-2, "[t]he Commission's responsibility under the [Exchange] Act is not to act as the arbiter of individual competitive interests but instead to further the objectives set forth in Section 11A under the Act, including those relating to the enhancement of competition in the securities industry." 34Because this appeal concerns individual financial interests, and not the broad objectives of the national market system, it does not warrant the invocation of our discretionary power of review under Rule 11Aa3-2(e).
Amex argues that this appeal "implicates important issues of securities law and public policy calling for the Commission's specialized expertise." Amex, however, fails to identify any such issue. 35
Amex also fails to explain how the Commission's expertise in securities law will be useful in resolving what it concedes "is
fundamentally a contract dispute." The primary issue raised by Amex's appeal is whether the license agreement between Amex and Dow Jones grants Amex the exclusive right to trade Diamonds. The resolution of this question should be left to the courts, which have experience in adjudicating such questions. 36 Amex acknowledges that judicial relief is available in the event that the Commission declines to exercise its discretion and consider Amex's appeal.
For the foregoing reasons, we decline to entertain Amex's appeal pursuant to Exchange Act Rule 11Aa3-2. 37
An appropriate order will issue. 38
By the Commission (Chairman LEVITT and Commissioners JOHNSON, HUNT, CAREY, and UNGER)
Jonathan G. Katz
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 42312 / January 4, 2000
Admin. Proc. File No. 3-9756
In the Matter of the Application of :
THE AMERICAN STOCK EXCHANGE, INC. :
ORDER DISMISSING APPLICATION FOR REVIEW OF ACTION BY CONSOLIDATED TAPE ASSOCIATION
On the basis of the Commission's opinion issued this day, it is
ORDERED that the American Stock Exchange, Inc.'s application for review of the exclusion by the Consolidated Tape Association of transactions in DIAMONDS from the calculation of the American Stock Exchange, Inc.'s annual share of tape revenues be, and it hereby is, dismissed.
By the Commission.
Jonathan G. Katz
117 C.F.R. § 240.11Aa3-2(e).
215 U.S.C. §§ 78a et seq.
3The CTA consists of eight exchanges and the National Association of Securities Dealers, Inc. ("NASD").
4For a more complete description of Diamonds, see Order Granting Approval and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 1 to the Proposed Rule Change Relating to Listing and Trading of Diamonds Trust Units, Exchange Act Rel. No. 39525 (Jan. 8, 1998), 66 SEC Docket 810; Notice of Filing of Proposed Rule Change by the American Stock Exchange, Inc. Relating to Listing and Trading of Diamonds Trust Units, Exchange Act Rel. No. 39143 (Sept. 29, 1997), 65 SEC Docket 1536.
5Securities Acts Amendments of 1975 ("1975 Amendments"), Pub. L. No. 94-29, 89 Stat. 97.
6Exchange Act Section 11A(a)(2), 15 U.S.C. § 78k-1(a)(2).
7Exchange Act Section 11A(a)(1)(D), 15 U.S.C. § 78k-1(a)(1)(D).
8Exchange Act Section 11A(a)(1)(C), 15 U.S.C. § 78k-1(a)(1)(C).
9 See Exchange Act Rel. No. 9850 (Nov. 8, 1972) (adopting Rule 17a-15, which was subsequently redesignated as Rule 11Aa3-1 in Exchange Act Rel. No. 16589 (Feb. 19 1980), 19 SEC Docket 659).
10 See Exchange Act Rel. No. 15250 (Oct. 20, 1978), 15 SEC Docket 1355, 1356.
1115 SEC Docket at 1356. SIAC is a jointly-owned subsidiary of the Amex and New York Stock Exchange ("NYSE").
The Commission initially approved a version of the CTA Plan in May 1974. Exchange Act Rel. No. 10787 (May 10, 1974), 7 SEC Docket 271. The Commission has since approved several amendments and restatements of the CTA Plan. Order Granting Approval of Proposed Restatements and Amendments to the Restated Consolidated Tape Association Plan and theConsolidated Quotation Plan, Exchange Act Rel. No. 37191 (May 9, 1996), 61 SEC Docket 2367.
12CTA Plan Section VII(a).
13CTA Plan Section VII(b).
14The CTA Plan provides that the consolidated system consists, in part, of two networks of information: Network A and Network B. Network A contains transaction information in securities listed or admitted to unlisted trading privileges on the New York Stock Exchange, Inc. ("NYSE"). Network B contains transaction information in securities listed or admitted to unlisted trading privileges on the Amex, BSE, CBOE, CHX, CSE, PCX, Philadelphia Stock Exchange, Inc. ("PHLX"), and Nasdaq, but not the NYSE.
15CTA Plan Section XII(a)(i).
16 Id. The Commission approved this revenue-sharing provision in January 1991. See Joint Industry Plan; Order Approvingthe Fifteenth Amendment to the Consolidated Tape Association Plan and the Nineteenth Amendment to the Consolidated Quotation Plan, Exchange Act Rel. No. 28808 (Jan. 22, 1991), 48 SEC Docket 11. The Commission concluded that, because an exclusivity agreement prevents markets from competing with one another in trading a security, it was equitable for participants to determine that revenue from the sale of transaction information in an exclusively traded security should be excluded from revenue sharing under the CTA Plan. Id. at 14.
17The Amex represents that, on average, approximately 800,000 Diamonds trade daily.
18Exchange Act Section 12(f), 15 U.S.C. § 78l(f). While an exchange usually trades only those securities that it lists, unlisted trading privileges allow an exchange to trade some securities without listing them.
19Under the CTA Plan, the affirmative vote of a majority of all voting members is generally deemed to be the action of the CTA when such action is taken at a CTA meeting.
2017 C.F.R. § 240.11Aa3-2(e) (emphasis added). The Rule was promulgated pursuant to Exchange Act Section 11A(a)(3)(B), which authorizes the Commission, in furtherance of its statutory directive to facilitate the development of a national market system, "by rule or order, to authorize or require self-regulatory organizations to act jointly with respect to matters as to which they share authority under this title in planning, developing, operating, or regulating a national market system . . . ." 15 U.S.C. § 78k-1(a)(3)(B).
2117 C.F.R. § 240.11Aa3-2(e)(1) (emphasis added). The parties do not dispute that Amex's appeal is "in connection with the implementation or operation of" the CTA Plan.
22 Order Directing Filing of Briefs, Admin. Proc. File No.
3-9756 (Mar. 30, 1999). The CTA filed a letter brief setting forth the consensus view of CTA participants. The BSE submitted a supplemental letter in support of the CTA's position. The Amex and PCX submitted individual briefs, since their views were not represented in the CTA's brief.
23 See also In the Matter of ORS Automation, Inc., Exchange Act Rel. No. 23256 (May 20, 1986), 35 SEC Docket 1246, 1251 (dismissal of appeal from NASD's denial of stay under Exchange Act Rule 11Aa2-1(e) which contained similar language to Rule 11Aa3-2(e); the Commission found that "the language of Rule 11Aa2-1(e)(1) provides the Commission with authority to review, in its discretion, [ORS Automation, Inc.'s] appeal.").
24 Compare Exchange Act Section 11A(b)(5), 15 U.S.C. § 78k-1(b)(5) (providing that any "prohibition or denial of access to services" offered by a registered securities information processor requires Commission review).
25 Procedures and Requirements for National Market System Plans, Exchange Act Rel. No. 16410 (Dec. 7, 1979), 18 SEC Docket 1306, 1313 (footnote omitted) (emphasis supplied).
2715 U.S.C. § 78s(d)(2).
28 Procedures and Requirements for National Market System Plans, Exchange Act Rel. No. 17580 (Feb. 26, 1981), 22 SEC Docket 195, 199.
31 See supra n.24.
32Exchange Act Section 11A(a)(2), 15 U.S.C. § 78k-1(a)(2).
34 Procedures and Requirements for National Market System Plans, Exchange Act Rel. No. 17580 (Feb. 26, 1981), 22 SEC Docket 195, 198 (footnote omitted).
35Similarly, we reject PCX's argument that the Commission has a "clear interest" in Amex's appeal because it approved the revenue-sharing provisions at issue. We found under Rule 11Aa3-2(c) that the revenue-sharing provisions of the CTA Plan were consistent with the purposes of the 1975 Amendments. See Joint Industry Plan; Order Approving the Fifteenth Amendment to the Consolidated Tape Association Plan and the Nineteenth Amendment to the Consolidated Quotation Plan, Exchange Act Rel. No. 28808 (Jan. 22, 1991), 48 SEC Docket 11. While that conclusion bespeaks Commission interest in the overall scheme, it does not establish a Commission interest in reviewing each application of the governing Plan.
36The CTA Plan provides that "[n]o action or inaction by CTA shall prejudice any Participant's right to present its views to the SEC or any other person with respect to any matter relating to this CTA Plan or to seek to enforce its views in any other forum it deems appropriate." The CTA Plan also provides that it "shall be governed by, and interpreted in accordance with, the laws of the State of New York."
37As a result of this disposition, we need not resolve the issues of the proper parties to an appeal under Rule 11Aa3-2(e), the participation of interested entities in such an appeal, and the procedural rules governing a proceeding under the Rule.
38We have considered all of the parties' contentions. We have rejected or sustained these contentions to the extent that they are inconsistent or in accord with the views expressed in this opinion.