Summary of Meeting with the American Petroleum Institute (API)

Regarding the Proposed Stationary Existing RICE NESHAP

August 5, 2009

Attendees

Bob Wayland, EPA	Jim McCarthy, IES (by phone)

Melanie King, EPA	Janet Bounds, Chevron (by phone)

Michael Horowitz, EPA (by phone)	Shankar Ananthakrishna, Chevron (by
phone)

Tanya Parise, AGTI	Rebecca Rentz, Bracewell & Giuliani (by phone)

Stephanie Meadows, API	Jack Maley, Exterran (by phone)

Matt Todd, API	Gerald Meinecke, Exterran (by phone)

Jeff Adams, BP	Kyle Jantzen, Exterran (by phone)

Tom Monahan, ExxonMobil

	Jeff Panek, IES

Purpose of Meeting

	The purpose of this meeting was to discuss the proposed national
emission standards for hazardous air pollutants (NESHAP) for existing
stationary reciprocating internal combustion engines (RICE).  The
proposed NESHAP for existing stationary RICE was published in the
Federal Register on March 5, 2009 (74 FR 9698).

Summary of Meeting

General

The American Petroleum Institute (API) requested this meeting with EPA
to discuss the recently proposed NESHAP for stationary engines.  API has
previously worked with EPA on other rulemakings affecting stationary
engines and met with EPA earlier on the rule on May 14, 2009.  API’s
primary purpose for this meeting was to get an update from EPA on those
issues brought up during the May meeting.  A list of the issues was
provided to EPA by API and is included as Attachment 1 to this meeting
summary.  The summary of this meeting will be available in the docket
for this rulemaking (Docket ID No. EPA-HQ-OAR-2008-0708).

API indicated that it has started collecting a group of people to
develop an engine test program, but that the current matrix of testing
is substantial and that some bounds are needed to limit the test matrix.
 API stressed that timing is an issue with the tight court-ordered final
rulemaking deadline in mind, therefore it is really important to define
exactly what type of emissions testing information is needed.

EPA said that the option of splitting the rule into two separate
rulemakings for diesel and gas engines has been discussed, but that it
is unlikely that separate rules will be developed.  EPA recommended that
API proceed under the assumption that no extension will be provided for
natural gas engines.

Specific Issues

The specific issues that API discussed during the meeting are described
below.  Further details on these issues and a complete list of API’s
issues can be found in Attachment 1.

1. Method 323

	API wanted to know if EPA would allow Method 323 in the final
rulemaking and if EPA would consider including emissions data captured
by Method 323 in a revised floor analysis.  API indicated that it has
been talking to EPA Region 8 regarding the method and believes that it
is possible that the issues related to the method are strictly
associated with one particular testing firm.  For that reason, API
believes that it may be appropriate to allow the method, which could
produce reliable results and provide a more reasonable alternative to
FTIR testing, which is currently the only allowable method.  If only
FTIR testing is allowed, API did not believe it could generate any
significant data by the September/October timeframe.  EPA asked if API
could provide pieces of information that EPA could use, but API was
hesitant because it was concerned that providing limited data would not
be representative of all engines.

	EPA pointed out that only having FTIR as an available and approved test
method should only be an issue that is related to formaldehyde testing
for rich burn engines because EPA could not establish a relationship
between formaldehyde and carbon monoxide (CO) for rich burn engines.
However, for lean burn engines, EPA determined that CO is an appropriate
surrogate for formaldehyde and consequently for hazardous air pollutants
(HAP).  In other words, API could use portable analyzers to capture CO
data and even if API has previous CO data available, it could provide
that to EPA.  For rich burn engines, EPA needs to document that there is
a relationship between formaldehyde and some other pollutant that could
be more easily measured, such as total hydrocarbons (THC) or volatile
organic compounds (VOC).  EPA could then use THC or VOC as a surrogate
for HAP emissions from rich burn engines.

	EPA indicated that it would check with EPA’s Emission Measurement
Center to determine if there is any latitude with regards to Method 323
and get back to API on this issue as soon as possible.

2. Rural vs. Urban Distinction

	On the topic of rural versus urban area source engines, EPA indicated
that it is considering various different options, including looking at
the Oil and Natural Gas (ONG) MACT that API asked if EPA was
contemplating following.  API would be willing to provide more
information and EPA noted that any technical information on this subject
would be helpful in finalizing the rule.

3. SSM Limits

	EPA indicated that it is reviewing the comments submitted on the
proposed SSM approach.  EPA is considering the comments that recommended
work practice standards would be appropriate for SSM.  If EPA determines
that work practices are the MACT floor, then EPA would need to include
very specific work practices.  EPA indicated that it would appreciate
any information from API on work practices that are used to limit
emissions during startup.

4. Subcategories

	EPA indicated that on the topic of subcategories there has not been
much discussion yet.  API made the point that there are several engines
that operate cyclically, which does not go well with a steady-state
rulemaking and that special provisions are needed for non-steady state
operations, according to API.  API urged EPA to consider the bullets in
the agenda list.  Also, API made the point that no limited use category
was included in the proposal, but was included in the original
rulemaking for engines above 500 horsepower (HP) at major sources.

5. Emissions Data

	EPA indicated that it has not received any emissions data as of yet for
stationary engines.  Exterran mentioned that it would be providing
emissions data to EPA, but EPA has not received it yet.  The only data
EPA has received post-proposal is data for landfill and digester gas
engines.

6. Cost Analysis

API indicated that it would provide more supporting information on the
cost numbers it provided in the comments on the rule.  API said that it
would be helpful to know the cost effectiveness threshold that EPA
considers reasonable.  EPA said that it would reanalyze the costs
associated with the rule.

7. Maintenance Practices

As with the requirements for SSM periods, EPA indicated that if
maintenance practices are to be included in the final rule, such
practices need to have substance and be reasonable and enforceable.

8. Streamlining Requirements

On the issue of streamlining requirements, EPA noted that it wished to
minimize the compliance and enforcement burden as much as possible, but
that EPA is more limited under this section 112 of the CAA rulemaking as
opposed to what EPA could do under section 111 of the CAA (i.e., in the
New Source Performance Standards (NSPS)).  However, EPA will do what it
can to clarify and minimize confusion in the final rule.  API made the
point that requirements are confusing and suggested that if certain
engines could demonstrate compliance by meeting the NSPS, that would be
helpful.

9. Other Issues

EPA could not tell API what will happen on the SSM issue.  EPA also
suggested that API focus on the category of engines of greater concern
and try to gather data for those engines.  API asked how it should
account for variability and if EPA planned to gather additional
information on the efficiency of add-on controls because 90 percent
reduction is not achievable by all engines.  API recommended that if EPA
obtain vendor information that EPA ask the vendors for catalyst
warranties and specifications as well.  EPA asked that API send any
information it has available on these issues.  API also asked if EPA
would provide an exemption or adopt less stringent requirements (e.g.,
work practices) for smaller engines like those under 100 HP.  EPA
indicated that it could not answer that at this time.  Attachment 1

Existing Engine NESHAP Presentation by API

 PAGE

 PAGE   2


[Federal Register Volume 85, Number 117 (Wednesday, June 17, 2020)]
[Notices]
[Pages 36627-36630]
[FR Doc No: 2020-12986]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89047; File No. SR-CboeBZX-2020-048]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Its Fee Schedule

June 11, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on June 2, 2020, Cboe BZX Exchange, Inc. (the ``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') is filing
with the Securities and Exchange Commission (``Commission'') a proposed
rule change to amend its Fee Schedule. The text of the proposed rule
change is provided in Exhibit 5.
    The text of the proposed rule change is also available on the
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the

proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend its fee schedule for its equity
options platform (``BZX Options'').\3\
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    \3\ The Exchange initially filed the proposed fee changes on
June 1, 2020 (SR-CboeBZX-2020-046). On June 2, 2020, the Exchange
withdrew that filing and submitted this filing.
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    The Exchange first notes that it operates in a highly competitive
market in which market participants can readily direct order flow to
competing venues if they deem fee levels at a particular venue to be
excessive or incentives to be insufficient. More specifically, the
Exchange is only one of 16 options venues to which market participants
may direct their order flow. Based on publicly available information,
no single options exchange has more than 19% of the market share and
currently the Exchange represents only approximately 9% of the market
share.\4\ Thus, in such a low-concentrated and highly competitive
market, no single options exchange, including the Exchange, possesses
significant pricing power in the execution of option order flow. The
Exchange believes that the ever-shifting market share among the
exchanges from month to month demonstrates that market participants can
shift order flow, or discontinue to reduce use of certain categories of
products, in response to fee changes. Accordingly, competitive forces
constrain the Exchange's transaction fees, and market participants can
readily trade on competing venues if they deem pricing levels at those
other venues to be more favorable. The Exchange's fee schedule sets
forth standard rebates and rates applied per contract. For example, the
Exchange assesses a standard rebate of $0.25 per contract for Customer
orders that add liquidity in Penny Pilot Securities and a standard
rebate of $0.85 per contract in Non-Penny Pilot Securities.
Additionally, in response to the competitive environment, the Exchange
also offers tiered pricing which provides Members opportunities to
qualify for higher rebates or reduced fees where certain volume
criteria and thresholds are met. Tiered pricing provides an incremental
incentive for Members to strive for higher tier levels, which provides
increasingly higher benefits or discounts for satisfying increasingly
more stringent criteria.
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    \4\ See Cboe Global Markets U.S. Options Market Month-to-Date
Volume Summary (May 29, 2020), available at https://markets.cboe.com/us/options/market_statistics/.
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    For example, the Exchange currently offers four Customer Non-Penny
Pilot Add Volume Tiers under footnote 12 of the fee schedule which
provide enhanced rebates between $0.92 and $1.05 per contract for
qualifying Customer orders which meet certain add liquidity thresholds
and yield fee code NY.\5\ Under the current Customer Non-Penny Pilot
Add Volume Tiers, a Member may receive an enhanced rebate where the
Member has an ADAV \6\ in Customer orders, or Customer and Market Maker
and/or Firm orders greater or equal to a specified percentage of OCV.
\7\ The Exchange now proposes to adopt a Customer Non-Penny Pilot Add
Volume Tier 5.
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    \5\ Orders yielding fee code NY are Customer orders that add
liquidity in Non-Penny Pilot securities and are offered a rebate of
$0.85.
    \6\ ``ADAV'' means average daily added volume calculated as the
number of contracts added, ``ADRV'' means average daily removed
volume calculated as the number of contracts removed, and ``ADV''
means average daily volume calculated as the number of contracts
added or removed, combined, per day.
    \7\ ``OCC Customer Volume'' or ``OCV'' means the total equity
and ETF options volume that clears in the Customer range at the
Options Clearing Corporation (``OCC'') for the month for which the
fees apply, excluding volume on any day that the Exchange
experiences an Exchange System Disruption and on any day with a
scheduled early market close.
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    The Exchange believes the proposed Customer Non-Penny Pilot Add
Volume Tier will provide Members an additional opportunity to receive
an enhanced rebate for meeting the corresponding proposed criteria. The
Exchange believes the proposed tier, along with the existing tiers,
also provide an incremental incentive for Members to strive for the
highest tier levels, which provide increasingly higher rebates for such
transactions. Particularly, the Exchange proposes to add new Customer
Non-Penny Pilot Add Volume Tier 5, which would provide an enhanced
rebate of $1.06 per contract on qualifying orders (i.e., yielding fee
code NY) where a Member has (1) an ADAV in Customer orders greater than
or equal to 2.00% of average OCV; and (2) an ADAV in Customer Non-Penny
orders greater than or equal to 1.00% of average OCV. The proposed tier
provides an additional opportunity for Members to achieve an increased
enhanced rebate on their Customer Non-Penny liquidity adding orders
(NY) by reaching a new Customer Non-Penny Pilot tier. Specifically, the
proposed fee change is designed to encourage overall Customer liquidity
adding order flow (both Penny and Non-Penny orders). The Exchange
believes that incentivizing more Customer order flow will create more
trading opportunities, which, in turn attracts Market-Makers. A
resulting increase in Market-Maker activity may facilitate tighter
spreads, which may lead to additional increase of order flow in Non-
Penny orders from other market participants, further contributing to a
deeper, more liquid market to the benefit of all market participants by
creating a more robust and well-balanced market ecosystem.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent
with Section 6 of the Act,\8\ in general, and furthers the requirements
of Section 6(b)(4),\9\ in particular, as it is designed to provide for
the equitable allocation of reasonable dues, fees and other charges
among its facilities and does not unfairly discriminate between
customers, issuers, brokers or dealers. The Exchange operates in a
highly competitive market in which market participants can readily
direct order flow to competing venues if they deem fee levels at a
particular venue to be excessive or incentives to be insufficient. The
proposed rule change reflects a competitive pricing structure designed
to incentivize market participants to direct their order flow to the
Exchange, which the Exchange believes would enhance market quality to
the benefit of all Members.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(4).
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    In particular, the Exchange believes the proposed tier is
reasonable because it provides an additional opportunity for Members to
receive a higher rebate by providing additional criteria they can reach
for. The Exchange notes that volume-based incentives and discounts have
been widely adopted by exchanges,\10\ including the Exchange,\11\

and are reasonable, equitable and non-discriminatory because they are
open to all Members on an equal basis and provide additional benefits
or discounts that are reasonably related to (i) the value to an
exchange's market quality and (ii) associated higher levels of market
activity, such as higher levels of liquidity provision and/or growth
patterns. Additionally, as noted above, the Exchange operates in a
highly competitive market. The Exchange is only one of several options
venues to which market participants may direct their order flow, and it
represents a small percentage of the overall market. Competing options
exchanges offer similar tiered pricing structures to that of the
Exchange, including schedules of rebates and fees that apply based upon
Members achieving certain volume and/or growth thresholds. These
competing pricing schedules, moreover, are presently comparable to
those that the Exchange provides, including pricing incentives tied to
comparable tiers.\12\
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    \10\ See e.g., BOX Options Fee Schedule, Section 1(A)(1) [sic],
which offers tiered rebates for Public Customer orders in Non Penny
Pilot Classes for members that reach certain thresholds of ``maker''
customer volume in multiply-listed options classes ranging from
$0.15 to $0.60; Cboe EDGX U.S. Options Exchange Fee Schedule,
Footnote 1, Customer Volume Tiers, which provide tiered rebates for
Customer Non-Penny and Penny orders where Members meet certain
volume thresholds, ranging from $0.10 to $0.21.
    \11\ See e.g., The Exchange's Fee Schedule, Footnotes 1 and 12,
Customer Penny Pilot and Non-Penny Pilot Volume Tiers which provide
enhanced rebates for Customer orders where Members meet certain
volume thresholds ranging from $0.35 to $1.05.
    \12\ See supra note 10.
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    Moreover, the Exchange believes proposed Customer Non-Penny Pilot
Add Volume Tier 5 is a reasonable means to encourage Members to
increase their liquidity on the Exchange, specifically their Customer
add volume order flow. The Exchange believes that adopting an
additional tier under the Customer Non-Penny Pilot Add Volume Tiers
will encourage Members to increase their general Customer liquidity
adding order flow (both in Penny and Non-Penny securities) on the
Exchange in order to achieve the proposed increased enhanced rebate on
their qualifying orders (i.e., yielding fee code NY). Increased
Customer liquidity benefits all investors by attracting Market-Makers,
which facilitates tighter spreads, signaling additional corresponding
order flow (thus, more execution opportunities) from other types of
market participants. This overall increase in activity deepens the
Exchange's liquidity pool, offers additional cost savings, supports the
quality of price discovery, promotes market transparency and improves
market quality, for all investors.
    The Exchange also believes that the proposed enhanced rebate is
reasonable based on the difficulty of satisfying the tier's criteria
and ensures the proposed rebate and criteria thresholds appropriately
reflect the incremental difficulty to achieve the existing Customer
Non-Penny Pilot Add Volume Tiers. The proposed criteria under Tier 5
remains in line with the incremental increases in ADAV as a percentage
of average OCV from Tier 1 through Tier 3 for Customer orders or for
both Customer orders plus other firm-type orders. For example, the
proposed criteria in Tier 5 poses an incremental increase in difficulty
from Tier 4 (which may be met if a Member adds an ADAV in Customer
orders greater than or equal to 2.10% of average OCV) as the sum of
overall Customer orders greater than or equal to 2.00% of average OCV
plus Customer Non-Penny orders greater than or equal to 1.00% of
average OCV presents a two-pronged criteria with thresholds that hover
around or are higher than thresholds in preceding tiers. Thus, the
Exchange believes the two criteria in proposed Tier 5 pose, in total,
an incrementally more difficult tier that Members may strive to
achieve. As such, the Exchange believes the enhanced rebate of $1.06
offered under proposed Tier 5, over the $1.05 enhanced rebate offered
under Tier 4, is a reasonable, incremental increase that corresponds to
the incremental increase in difficulty in achieving proposed Tier 5.
    The Exchange believes that the proposal represents an equitable
allocation of fees and is not unfairly discriminatory because all
Members will be eligible for the proposed tier and the corresponding
enhanced rebate will apply uniformly to all Members that reach the
proposed tier criteria. That is, the proposed tiers are designed as an
incentive to any and all Members interested in meeting the tier
criteria to submit additional order flow to the Exchange and each will
receive the proposed enhanced rebate if the tier criteria is met.
Further, the Exchange offers similar tiered pricing to Firm, Broker
Dealer, Joint-Back Office,\13\ Away Market Maker,\14\ and Market Maker
\15\ orders for liquidity adding volume and corresponding rebates for
their qualifying Non-Penny Pilot orders.
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    \13\ See the Exchange's Fee Schedule, Footnote 8, Firm, Broker
Dealer, and Joint Back Office Non-Penny Pilot Add Volume Tiers,
wherein Tier 4 offers a rebate of up to $0.82 per contract to
Members satisfying the tier.
    \14\ See the Exchange's Fee Schedule, Footnote 11, Away Market
Maker Non-Penny Pilot Add Volume Tiers, wherein Tier 2 offers a
rebate of up to $0.52 per contract to Members satisfying the tier.
    \15\ See the Exchange's Fee Schedule, Footnote 7, Market Maker
Non-Penny Pilot Add Volume Tiers, wherein the applicable tiers offer
rebates ranging from $0.45 up to $0.88 per contract.
---------------------------------------------------------------------------

    Additionally, the Exchange believes that a couple of Members have a
reasonable opportunity to satisfy the tier's criteria, which is more
stringent than other existing Customer Non-Penny Pilot Add Volume
Tiers. While the Exchange has no way of knowing whether this proposed
rule change would definitively result in any particular Market Maker
qualifying for the proposed tier, the Exchange anticipates at least one
or two Members meeting, or being reasonably able to meet, the proposed
criteria; however, the proposed tier is open to any Member that
satisfies the tier's criteria. The Exchange believes the proposed tier
could provide an incentive for other Members to submit additional
liquidity on the Exchange to qualify for the proposed enhanced rebate.
The Exchange also notes that the proposed tier will not adversely
impact any Member's pricing or their ability to qualify for other
rebate tiers. Rather, should a Member not meet the proposed criteria,
the Member will merely not receive the corresponding enhanced rebate.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will
impose any burden on intramarket or intermarket competition that is not
necessary or appropriate in furtherance of the purposes of the Act.
Rather, as discussed above, the Exchange believes that the proposed
change would encourage the submission of additional liquidity to a
public exchange, thereby promoting market depth, price discovery and
transparency and enhancing order execution opportunities for all
Members. As a result, the Exchange believes that the proposed change
furthers the Commission's goal in adopting Regulation NMS of fostering
competition among orders, which promotes ``more efficient pricing of
individual stocks for all types of orders, large and small.'' \16\
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    \16\ Securities Exchange Act Release No. 51808, 70 FR 37495,
37498-99 (June 29, 2005) (S7-10-04) (Final Rule).
---------------------------------------------------------------------------

    The Exchange believes the proposed rule change does impose any
burden on intramarket competition that is not necessary or appropriate
in furtherance of the purposes of the Act. Particularly, the proposed
change applies uniformly to market participants. As discussed above,
the Exchange believes that adopting a tier with additional criteria to
the existing Customer Non-Penny Pilot Add Volume Tiers will encourage
Members to increase their order flow in Non-Penny securities on the
Exchange. Increased liquidity benefits all investors by deepening the
Exchange's liquidity pool, offering additional flexibility for all
investors to enjoy cost savings, supporting the quality of price

discovery, promoting market transparency and improving investor
protection. Also, as indicated above, the Exchange does not believe
that the proposed rule change would impose any burden on intramarket
competition that is not necessary or appropriate in furtherance of the
purposes of the Act as it offers similar tiered pricing to Firm, Broker
Dealer, Joint-Back Office,\17\ Away Market Maker,\18\ and Market Maker
\19\ orders for liquidity adding volume and corresponding rebates for
their qualifying Non-Penny Pilot orders.
---------------------------------------------------------------------------

    \17\ See supra note 13.
    \18\ See supra note 14.
    \19\ See supra note 15.
---------------------------------------------------------------------------

    Next, the Exchange believes the proposed rule change does not
impose any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act. As previously
discussed, the Exchange operates in a highly competitive market.
Members have numerous alternative venues that they may participate on
and director their order flow, including 15 other options exchanges and
off-exchange venues. Additionally, the Exchange represents a small
percentage of the overall market. Based on publicly available
information, no single options exchange has more than 19% of the market
share.\20\ Therefore, no exchange possesses significant pricing power
in the execution of option order flow. Indeed, participants can readily
choose to send their orders to other exchange and off-exchange venues
if they deem fee levels at those other venues to be more favorable.
Moreover, the Commission has repeatedly expressed its preference for
competition over regulatory intervention in determining prices,
products, and services in the securities markets. Specifically, in
Regulation NMS, the Commission highlighted the importance of market
forces in determining prices and SRO revenues and, also, recognized
that current regulation of the market system ``has been remarkably
successful in promoting market competition in its broader forms that
are most important to investors and listed companies.'' \21\ The fact
that this market is competitive has also long been recognized by the
courts. In NetCoalition v. Securities and Exchange Commission, the D.C.
Circuit stated as follows: ``[n]o one disputes that competition for
order flow is `fierce.' . . . As the SEC explained, `[i]n the U.S.
national market system, buyers and sellers of securities, and the
broker-dealers that act as their order-routing agents, have a wide
range of choices of where to route orders for execution'; [and] `no
exchange can afford to take its market share percentages for granted'
because `no exchange possesses a monopoly, regulatory or otherwise, in
the execution of order flow from broker dealers'. . . .'' \22\
Accordingly, the Exchange does not believe its proposed fee change
imposes any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \20\ Supra note 4.
    \21\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37499 (June 29, 2005).
    \22\ NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010)
(quoting Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \23\ and paragraph (f) of Rule 19b-4 \24\
thereunder. At any time within 60 days of the filing of the proposed
rule change, the Commission summarily may temporarily suspend such 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 Act. If the Commission
takes such action, the Commission will institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78s(b)(3)(A).
    \24\ 17 CFR 240.19b-4(f).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-CboeBZX-2020-048 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CboeBZX-2020-048. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and 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, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CboeBZX-2020-048 and should be submitted
on or before July 8, 2020.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
---------------------------------------------------------------------------

    \25\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-12986 Filed 6-16-20; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register Volume 81, Number 186 (Monday, September 26, 2016)]
[Rules and Regulations]
[Pages 65924-65926]
[FR Doc No: 2016-22974]

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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 711

[EPA-HQ-OPPT-2009-0187; FRL-9952-64]
RIN 2070-AJ43

Chemical Data Reporting; 2016 Submission Period Extension

AGENCY: Environmental Protection Agency (EPA).

ACTION: Final rule.

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SUMMARY: EPA is amending the Toxic Substances Control Act (TSCA)
Chemical Data Reporting (CDR) regulations by extending the submission
deadline for 2016 reports from September 30, 2016 to October 31, 2016.
This is a one-time extension for the 2016 submission period only. The
CDR regulations require manufacturers (including importers) of certain
chemical substances included on the TSCA Chemical Substance Inventory
(TSCA Inventory) to report current data on the manufacturing,
processing, and use of the chemical substances.

DATES: This final rule is effective September 26, 2016.

ADDRESSES: The docket for this action, identified by docket
identification (ID) number EPA-HQ-OPPT-2009-0187, is available at
http://www.regulations.gov or at the Office of Pollution Prevention and
Toxics Docket (OPPT Docket), Environmental Protection Agency Docket
Center (EPA/DC), West William Jefferson Clinton Bldg., Rm. 3334, 1301
Constitution Ave. NW., Washington, DC. The Public Reading Room is open
from 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding legal
holidays. The telephone number for the Public Reading Room is (202)
566-1744, and the telephone number for the OPPT Docket is (202) 566-
0280. Please review the visitor instructions and additional information
about the docket available at http://www.epa.gov/dockets.

FOR FURTHER INFORMATION CONTACT:
    For technical information contact: Susan Sharkey, Chemical Control
Division (7405M), Office of Pollution Prevention and Toxics,
Environmental Protection Agency, 1200 Pennsylvania Ave. NW.,
Washington, DC 20460-0001; telephone number:<PHONE_NUMBER>; email
address<EMAIL_ADDRESS>    For general information contact: The TSCA-Hotline, ABVI-Goodwill,
422 South Clinton Ave., Rochester, NY 14620; telephone number: (202)
554-1404; email address<EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION:

I. Does this action apply to me?

    You may be potentially affected by this action if you manufacture
(including import and manufacture as a byproduct) chemical substances
listed on the TSCA Inventory. The following list of North American
Industrial Classification System (NAICS) codes is not intended to be
exhaustive, but rather provides a guide to help readers determine
whether this document applies to them. Potentially affected entities
may include but are not limited to:
     Chemical manufacturers (including importers) (NAICS codes
325 and 324110, e.g., chemical manufacturing and processing and
petroleum refineries).
     Chemical users and processors who may manufacture a
byproduct chemical substance (NAICS codes 22, 322, 331, and 3344, e.g.,
utilities, paper manufacturing, primary metal manufacturing, and
semiconductor and other electronic component manufacturing).

II. Background

A. What action is the Agency taking?

    The 2016 CDR submission period is from June 1 to September 30, 2016
(40 CFR 711.20). EPA is issuing this amendment to extend the deadline
for 2016 CDR submission reports until October 31, 2016. This is a one-
time extension: Subsequent submission periods (recurring every four
years, next in 2020) are not being amended.
    The Agency is taking this action in response to concerns raised by
the regulated community about their ability to submit the required
information within the prescribed period. The written request to extend
the CDR submission period is included in the docket (see ADDRESSES).
The compelling concerns raised by industry include delays in reporting
as a result of issues associated with several aspects of electronic
reporting. EPA believes it is appropriate to extend the reporting
period to allow the regulated community additional time to submit their
reports. With respect to the timing of this action, the need for the
Agency to extend the deadline arose, in part, as a result of issues
experienced by the regulated community with several aspects of
electronic reporting that were brought to the Agency's attention only
recently. Specifically, these issues include difficulties with inexact
entries when using XML Schema and the length of time for data
validation.

B. What is the Agency's authority for taking this action?

    The CDR rule was issued pursuant to the authority of TSCA section
8(a), 15 U.S.C. 2607(a). Under section 553(b)(3)(B) of the
Administrative Procedure Act (APA), 5 U.S.C. 553(b)(3)(B), the Agency
may issue a final rule without a prior proposal if it finds that notice
and public participatory procedures are impracticable, unnecessary, or
contrary to the public interest. In this case, for the extension
sought, the Agency does find that normal notice and public process
rulemaking is impracticable. Given that the current reporting deadline
is September 30, 2016, it is impracticable to follow notice and comment
procedures on an extension of that deadline, because that process would
not allow the rule to be finalized before the current reporting
deadline. The Agency only recently learned that the regulated community
was having difficulty related to the required electronic reporting
mechanism. Individual entities provided information about technical
issues and reporting difficulties, but the collective significance of
these issues was not apparent until the Agency completed review of a
letter from the American Chemistry Council dated August 30, 2016 (Ref.
1).
    This action does not alter the substantive CDR reporting
requirements in any way. The Agency also believes the one-time
extension will not result in a significant delay in the processing and
availability of CDR information to potential users. Further, this
action is consistent with the public interest because it is designed to
facilitate compliance with the CDR rule and to ensure that the 2016
collection includes accurate data on chemical manufacturing,
processing, and use in the United States. Finally, any impact on the
regulated community is expected to be beneficial given that the one-
time extension provides additional time to submit accurate CDR reports
to EPA.
    Similarly, under APA section 553(d), 5 U.S.C. 553(d), the Agency
may make a rule immediately effective ``for good cause found and
published with the rule.'' For the reasons discussed in this unit, EPA
believes that there is ``good cause'' to make this amendment effective
upon publication in the Federal Register.

III. References

    The following is a listing of the documents that are specifically
referenced in this document. The docket includes these documents and
other information considered by EPA, including documents that are
referenced within the documents that are included in the docket, even
if the referenced document is not physically located in the docket. For
assistance in locating these other documents, please consult the
technical person listed under FOR FURTHER INFORMATION CONTACT.
    1. American Chemistry Council. ``Request for an Extension to the
TSCA Chemical Data Reporting (CDR) 2016 Submission Period [Letter].''
August 30, 2016.

IV. Statutory and Executive Order Reviews

    Additional information about these statutes and Executive Orders
can be found at http://www2.epa.gov/laws-regulations/laws-and-executive-orders.

A. Executive Order 12866 and Executive Order 13563

    This action is classified as a final rule because it makes an
amendment to the Code of Federal Regulations (CFR). The amendment to
the CFR is necessary to allow for a one-time extension to the 2016 CDR
reporting period. This action does not impose any new requirements or
amend substantive requirements. This action is not a ``significant
regulatory action'' under Executive Order 12866, entitled ``Regulatory
Planning and Review'' (58 FR 51735, October 4, 1993) and Executive
Order 13563 entitled ``Improving Regulation and Regulatory Review'' (76
FR 3821, January 21, 2011).

B. Paperwork Reduction Act (PRA)

    This final rule does not contain any new or revised information
collections subject to OMB approval under the PRA, 44 U.S.C. 3501 et
seq.

C. Regulatory Flexibility Act (RFA)

    This final rule is not subject to the RFA, 5 U.S.C. 601 et seq. The
RFA applies only to rules subject to notice and comment rulemaking
requirements under the APA, 5 U.S.C. 553, or any other statute. This
rule is not subject to notice and comment requirements under the APA
because the Agency has invoked the APA ``good cause'' exemption.

D. Unfunded Mandates Reform Act (UMRA) and Executive Orders 13132 and
13175

    This action will not have substantial direct effects on State or
tribal governments, on the relationship between the Federal Government
and States or Indian tribes, or on the distribution of power and
responsibilities between the Federal Government and States or Indian
tribes. As a result, no action is required under Executive Order 13132,
entitled ``Federalism'' (64 FR 43255, August 10, 1999), or under
Executive Order 13175, entitled ``Consultation and Coordination with
Indian Tribal Governments'' (65 FR 67249, November 9, 2000). Nor does
it impose any enforceable duty or contain any unfunded mandate as
described under Title II of UMRA, 2 U.S.C. 1531-1538.

E. Executive Orders 13045, 13211, and 12898

    This action is not a ``significant regulatory action'' as defined
by Executive Order 12866. As a result, this action is not subject to
Executive Order 13045, entitled ``Protection of Children from
Environmental Health Risks and Safety Risks'' (62 FR 19885, April 23,
1997) and Executive Order 13211 entitled ``Actions Concerning
Regulations That Significantly Affect Energy Supply, Distribution, or
Use'' (66 FR 28355, May 22, 2001). In addition, this action also does
not require any special considerations under Executive Order 12898
entitled ``Federal Actions to Address Environmental Justice in

Minority Populations and Low-Income Populations'' (59 FR 7629, February
16, 1994).

F. National Technology Transfer and Advancement Act (NTTAA)

    This action does not involve any technical standards that would
require Agency consideration of voluntary consensus standards pursuant
to section 12(d) of the NTTAA, 15 U.S.C. 272 note.

V. Congressional Review Act (CRA)

    This action is subject to the CRA, 5 U.S.C. 801 et seq., and EPA
will submit a rule report to each House of the Congress and to the
Comptroller General of the United States. This action is not a ``major
rule'' as defined by 5 U.S.C. 804(2).

List of Subjects in 40 CFR Part 711

    Environmental protection, Chemicals, Confidential Business
Information (CBI), Hazardous materials, Importer, Manufacturer,
Reporting and recordkeeping requirements.

    Dated: September 16, 2016.
Jim Jones,
Assistant Administrator, Office of Chemical Safety and Pollution
Prevention.

    Therefore, 40 CFR chapter I is amended as follows:

PART 711--[AMENDED]

0
 1. The authority citation for part 711 continues to read as follows:

    Authority:  15 U.S.C. 2607(a).

0
2. In Sec.  711.20, revise the second and third sentences to read as
follows.

Sec.  711.20  When to report.

    * * * The 2016 CDR submission period is from June 1, 2016 to
October 31, 2016. Subsequent recurring submission periods are from June
1 to September 30 at 4-year intervals, beginning in 2020.* * *

[FR Doc. 2016-22974 Filed 9-23-16; 8:45 am]
 BILLING CODE 6560-50-P


the availability and value of research, would stand ready and be
required to demonstrate that such expenditures were bona fide.'' See
also 1986 Release, 51 FR at 16006-16007.
---------------------------------------------------------------------------

    A money manager satisfies Section 28(e) if he or she can
demonstrate that the item is eligible under the language of the
statute, the manager has used the item in performing investment
decision-making responsibilities for accounts over which he exercises
investment discretion, and, in good faith, the manager believes that
the amount of commissions paid is reasonable in relation to the value
of the research or brokerage product or service received, either in
terms of the particular transaction or the manager's overall
responsibilities for discretionary accounts.\151\ Thus, for example, a
money manager may purchase an eligible item of research with client
commissions if he or she properly uses the information in formulating
an investment decision, but another money manager cannot rely on
Section 28(e) to acquire the very same item if the manager does not use
the item for investment decisions or if the money manager determines
that the commissions paid for the item are not reasonable with respect
to the value of the research or brokerage received. Similarly, a money
manager may not obtain eligible products, such as market data, to
camouflage the payment of higher commissions to broker-dealers for
ineligible services, such as shelf space or client referrals.\152\ In
this instance, the money manager could not make the determination, in
good faith, that the commission rate was reasonable in relation to the
value of the Section 28(e) eligible products because the commission
would incorporate a payment to the broker-dealer for the non-Section
28(e) services. Further, if research products or services that are
eligible under Section 28(e)(3) have been simply copied, repackaged, or
aggregated, the money manager must make a good faith determination that
any additional commissions paid in respect of such copying,
repackaging, or aggregation services are reasonable. Finally, where a
broker-dealer also offers its research for an unbundled price, that
price should inform the money manager as to its market value

and help the manager make its good faith determination.
---------------------------------------------------------------------------

    \151\ If the money manager seeks the protection of the safe
harbor, he or she should take care to analyze whether products and
services provided by a broker-dealer and used in connection with
advised accounts satisfy the eligibility and use standards for the
safe harbor.
    \152\ Rule 12b-1(h) under the Investment Company Act prohibits
funds from using brokerage to pay for distribution. See Investment
Company Act Release No. 26591 (Sept. 2, 2004), 69 FR 54728 (Sept. 9,
2004).
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H. Third-Party Research

    The Proposing Release asked whether the Commission's discussion of
third-party research offered sufficient guidance in this area.\153\
Regarding third-party research, several commenters expressly endorsed
the Commission's view that independent research providers should be
accorded equal treatment with proprietary research providers.\154\ None
of the commenters disputed this point. Accordingly, we reiterate our
views on this issue below.
---------------------------------------------------------------------------

    \153\ See Proposing Release, Question 5.
    \154\ AmBankers; Bloomberg; BNY 1; Investorside.
---------------------------------------------------------------------------

    Third-party research arrangements can benefit advised accounts by
providing greater breadth and depth of research. First, these
arrangements can provide money managers with the ability to choose from
a broad array of independent research products and services. Second,
the manager can use third-party arrangements to obtain specialized
research that is particularly beneficial to the advised accounts. We
believe that the safe harbor encompasses third-party research and
proprietary research on equal terms.

I. Client Commission Arrangements Under Section 28(e)

    The Proposing Release asked whether the Commission's discussion of
arrangements under Section 28(e) offered sufficient guidance in this
area.\155\ We received a substantial number of comments on industry
practices related to client commission arrangements under Section
28(e).\156\ Based on these comments and for the reasons discussed
below, we are modifying our interpretation of ``provided by'' and
``effecting'' under Section 28(e).\157\ In order to determine whether
our guidance requires further clarification, we are soliciting
additional comment on our revised interpretation of the safe harbor
with respect to client commission arrangements under Section 28(e).
---------------------------------------------------------------------------

    \155\ See Proposing Release, Question 5.
    \156\ BNY 1; Bloomberg; CL King; Commission Direct; CAPIS;
E*Trade; EuroIRP; Instinet; Interstate Group; IAA; ICI; IMA; JP
Morgan 1 and JP Morgan 2; Mellon; Merrill; Morgan Stanley; NSCP;
Reuters; Riedel; SIA; STA; T. Rowe Price; UBS; George 1, George 2,
and George 3.
    \157\ 157 Section 28(e)(1) states in relevant part: ``No person
* * * shall be deemed to have acted unlawfully or to have breached a
fiduciary duty * * * solely by reason of his having caused the
account to pay a member of an exchange, broker, or dealer an amount
of commission for effecting a securities transaction in excess of
the amount of commission another member of an exchange, broker, or
dealer would have charged for effecting that transaction, if such
person determined in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research
services provided by such member, broker, or dealer, viewed in terms
of either that particular transaction or his overall
responsibilities with respect to the accounts as to which he
exercises investment discretion.'' 15 U.S.C. 78bb(e)(1) (emphasis
added).
---------------------------------------------------------------------------

    Twenty-four commenters addressed arrangements under Section
28(e).\158\ Although some commenters supported the Commission's
guidance with respect to Section 28(e) arrangements,\159\ others
expressed concern that the proposal (and, in particular, the
requirement that introducing broker-dealers must perform certain
minimum functions in order to ``provide'' research under the safe
harbor) could have unwarranted and harmful policy consequences, such as
reducing independent research and increasing the costs that the clients
of money managers pay for brokerage and research.\160\ Some of the
commenters that objected to the proposed approach on this issue stated
that some introducing broker-dealers that facilitate access to valuable
research may not satisfy the minimum requirements that the Release
would impose, and may have to discontinue operations. They recommended
that the Commission eliminate the minimum requirements or modify them
so that introducing broker-dealers can more easily satisfy them. In
addition, several commenters asked the Commission to consider a broader
interpretation of the ``provided by'' concept under Section 28(e).\161\
These commenters argued that Section 28(e) arrangements have become
more complex and less transparent than if broker-dealers were permitted
to engage in these arrangements unencumbered by the requirement that
the broker ``effecting'' the transaction also must be ``providing'' the
research. Both groups of commenters recommended that the Commission
interpret Section 28(e) to allow money managers the maximum flexibility
to seek best execution and, separately, obtain good research, by
permitting a broker to be responsible for execution and another party
to be responsible for providing eligible research.
---------------------------------------------------------------------------

    \158\ BNY 1; Bloomberg; CL King; Commission Direct; CAPIS;
E*Trade; EuroIRP; Instinet; Interstate Group; IAA; ICI; IMA; JP
Morgan 1 and JP Morgan 2; Mellon; Merrill; Morgan Stanley; NSCP;
Reuters; Riedel; SIA; STA; T. Rowe Price; UBS; George 1, George 2,
and George 3.
    \159\ BNY 1; George 2; Interstate; Reuters.
    \160\ Bloomberg; CAPIS; E*Trade; EuroIRP; ICI; Instinet; IMA;
NSCP; JP Morgan 1; Riedel; STA; SIA; Merrill; Morgan Stanley. These
commenters noted that investors' costs could increase if introducing
broker-dealers must add staff and/or trading desks to fulfill the
minimum requirements and raise their fees accordingly. Implicit
transaction costs could also increase if these broker-dealers build
trade execution capabilities so that they satisfy the four minimum
criteria but are inexpert at execution.
    \161\ Commission Direct; EuroIRP; IMA; T. Rowe Price.
---------------------------------------------------------------------------

    In addition, several commenters noted that the United Kingdom's
regulatory efforts in this area allow money managers to use client
commissions to pay separately for trade execution by the broker-dealer
that can provide the best execution and ask the executing broker-dealer
to allocate a portion of the commission directly to an independent
research provider or allocate a portion of the commission to a pool of
``credits'' maintained by the broker-dealer and from which the broker-
dealer, at the direction of the money manager, may pay independent
research providers, without requiring that the executing broker-dealer
be legally responsible for the research.\162\ As noted above, some
commenters believed that Section 28(e) arrangements in the United
States reflect a market inefficiency if the manager seeks to use client
commissions to pay for research under Section 28(e) and uses this
middle-man to access independent research providers.
---------------------------------------------------------------------------

    \162\ Commission Direct; EroIRP; IMA; JP Morgan 1. In addition
the SIA expressed concern over cross-border harmonization, noting
that the Commission's four minimum functions for introducing broker-
dealers may impose stricter requirements than those in place in the
U.K. with respect to client commission arrangements.
---------------------------------------------------------------------------

    These comments highlight the considerable variety of arrangements
under Section 28(e) that the industry has developed to seek to obtain
the benefits that inure to investors from best execution on orders for
advised accounts and providing money managers with both third-party and
proprietary brokerage and research products and services of value to
the advised accounts. Based on the additional information regarding
current industry practices provided by these comments and consideration
of congressional intent behind Section 28(e), we are revising our
interpretation of the safe harbor to address the industry's innovative
Section 28(e) arrangements and permit the industry to flexibly
structure arrangements that are consistent with the statute and best
serve investors. We are soliciting additional comment on client
commission arrangements under the safe harbor because of the many
variations and complexity of these arrangements. In particular, we
solicit comment on whether this guidance is sufficient to address this
area.

1. Statutory Linkage Between ``Provided by'' and ``Effecting''
    Section 28(e) requires that the broker-dealer providing the
research also be involved in effecting the trade.\163\ The statutory
linkage of the ``provided by'' and ``effecting'' elements in Section
28(e) was principally intended to preclude the practice of paying
``give-ups.'' \164\ Specifically, when brokerage commissions were fixed
before 1975, a ``give-up'' was a payment to another broker-dealer of a
portion of the commission required to be charged by the executing
broker-dealer.\165\ A principal concern regarding ``give-ups'' was that
managers used them to direct client commissions to broker-dealers in
exchange for providing services that benefited the money manager but
had no benefit for his clients--such as to reward broker-dealers for
distribution or for steering clients to the manager. The broker-dealer
receiving the give-up may have had no role in the transaction
generating the commission, and it may not even have known where or when
the trade was executed. Because the portion of the commission ``given
up'' is a charge on client accounts and because the broker-dealer
receiving the ``give-up'' did nothing in connection with the securities
trade to benefit investors, the Commission found that these
arrangements violated the securities laws.\166\ In enacting Section
28(e), Congress addressed the issue of give-ups by indicating that the
provision did not apply when the money manager made payment to one
broker-dealer for the services performed by another broker-dealer.\167\
In the 1986 Release, the Commission departed from a strict
interpretation of the ``provided by'' provision when it concluded that
payment of a part of a commission to a broker-dealer who is a ``normal
and legitimate correspondent'' of the executing or clearing broker-
dealer would not necessarily be a ``give-up,'' outside the protection
of Section 28(e).\168\ We believe that both the legislative history and
the Commission's prior interpretations in this area reflect an effort
to safeguard against money managers and broker-dealers using Section
28(e) arrangements as mechanisms for the manager to use client
commissions to make concealed payments to a broker-dealer that did not
provide any services to benefit the advised accounts.
---------------------------------------------------------------------------

    \163\ 15 U.S.C. 78bb(e).
    \164\ In enacting Section 28(e), Congress described give-ups as
a ``regrettable chapter in the history of the securities industry
and the limited definition of fiduciary responsibility added to the
law by this bill in no way permits its return.'' Joint Explanatory
Statement of the Comm. of Conference, Securities Act Amendments of
1975, H.R. Conf. Rep. No. 94-229, at 108 (1975), reprinted in 1975
U.S.C.C.A.N. 321, 339.
    \165\ Give-ups took, several forms, but typically occurred when
a mutual fund (or its money manager or underwriter) directed an
executing broker-dealer to pay a portion of a commission payment to
another broker-dealer that was a member of the same exchange as the
executing broker-dealer. The give-up often was payment for other
services (that may have been unrelated to the trade) provided to the
fund (or its adviser or underwriter) by the give-up recipient. See
Division of Market Regulation, U.S. Securities and Exchange
Commission, Market 2000: an Examination of Current Equity Market
Developments (Jan. 1994), 1994 SEC LEXIS at 32-33 (citing Special
Study, H.R. Doc. No. 88-95, pt. 2, at 316-317 and pt. 4, at 213-14).
This type of give-up produced a conflict of interest for the adviser
``between the interest of fund shareholders in lower commission
charges and the interest of mutual fund advisers and underwriters in
stimulating the sale of additional shares through directing a split
of commission charges.'' Special Study, H.R. Doc. No. 88-95, pt. 2,
at 318.
    \166\ See, e.g., Provident Management Corp., 44 SEC 442, 445-47
(Dec. 1, 1970) (finding violations of the antifraud provisions of
the federal securities laws where unaffiliated broker-dealers who
participated with the fund's officers, adviser, and affiliated
broker-dealer in a reciprocal arrangement in which fund transactions
were placed with unaffiliated broker-dealer in exchange for payment
to affiliated broker-dealer of ``clearance commissions'' on
unrelated transactions for which affiliated broker-dealer performed
no function).
    The Commission has found it a violation of the antifraud
provisions of the securities laws to interpose an unnecessary party
in a transaction, resulting in payment to the interposed party, and
an additional cost to the fiduciary account. See Delaware Management
Co., 43 SEC 392 (1967) (interpositioning broker between adviser and
market maker caused adviser to pay unnecessary brokerage costs and
violated the adviser's duty of best execution).
    \167\ Joint Explanatory Statement of the Comm. of Conference,
Securities Acts Amendments of 1975, H.R. Conf. Rep. No. 94-229, at
109 (1975), reprinted in 1975 U.S.C.C.A.N. 321. See also 1986
Release, 51 FR at 16007; 1976 Release, 41 FR at 13679.
    \168\ 1986 Release, 51 FR at 16007 (``Section 28(e) was not
intended to exclude from its coverage the payment of commissions
made in good faith to an introducing broker for execution and
clearing services performed in whole or in part by the introducing
broker's normal and legitimate correspondent.''); 1976 Release, 41
FR at 13678-79 (Where ``fudiciaries * * * [ask] the broker, retained
to effect a transaction for the account of a beneficiary, to ``give
up'' part of the commission negotiated by the broker and the
fiduciary to another broker designated by the fiduciary for whom the
executing or clearing broker is not a normal and legitimate
correspondent[,] * * * [t]he Commission does not believe that
Section 28(e) would apply.''
---------------------------------------------------------------------------

    As noted above, the industry has developed many types of Section
28(e) arrangements. Some investment managers today use these
arrangements to execute trades with one broker-dealer and obtain
research and other services from a different broker-dealer. In some
Section 28(e) arrangements, the introducing broker-dealer accepts
orders from its customers and then may execute the trade and provide
research, while a second broker-dealer clears and settles the
transaction. In other arrangements, an introducing broker-dealer
facilitates access to research and has little, if any, role in
accepting customer orders or in executing, clearing, or settling any
portion of the trade. Rather, another broker-dealer (often the clearing
broker) executes, clears, and settles the trade, receiving a portion of
the commission for its services. In some instances, the introducing
broker is unaware of the daily trading activity of its customers
because the orders are sent by the money manager directly (and only) to
the clearing broker-dealer.\169\ In addition, several commenters
endorsed arrangements similar to those that have developed in the
United Kingdom, in which money managers direct broker-dealers to
collect and pool client commissions that may have been generated from
orders executed at that broker-dealer, and periodically direct the
broker-dealer to pay for research that the money manager has determined
is valuable.\170\
---------------------------------------------------------------------------

    \169\ The 1986 Release suggested that protection of Section
28(e) would not be lost merely because the money manager by-passed
the order desk of the introducing broker and called his orders
directly into the clearing broker. 1986 Release, 51 FR at 16007.
    \170\ Commission Direct; EuroIRP; IMA; JP Morgan 1; T. Rowe
Price.
---------------------------------------------------------------------------

    As discussed above, the legislative history behind the linkage
created between the ``provided by'' and ``effecting'' statutory
language in Section 28(e) indicates that Congress was concerned that
the safe harbor ``would be asserted as a shield behind which the give-
ups and reciprocal practices which were so notorious during the late
1960's could be reinstituted.'' \171\ Since passage of the safe harbor
in the 1970's, specialization and innovation in the financial industry
have resulted in the functional separation of execution and research.
Thus, efficient execution venues provide good, low-cost execution while
research providers offer valuable research ideas that can benefit
managed accounts. We believe that this separation of functions is
beneficial to the money managers' clients, and Section 28(e)
arrangements that promote functional allocation of these services are
not the same as ``give-ups.''
---------------------------------------------------------------------------

    \171\ Joint Explanatory Statement of the Committee of
Conference, Securities Acts Amendments of 1975, H.R. Conf. Rep. 94-
229, at 108 (1975), reprinted in 1975 U.S.C.C.A.N. 321, 339.
---------------------------------------------------------------------------

2. ``Effecting'' Transactions
    Section 28(e) arrangements typically involve clearing agreements
pursuant to

SRO rules.\172\ These SRO rules require that introducing and clearing
firms contractually agree to allocate enumerated functions, but do not
mandate how the functions should be divided (i.e., they do not specify
the functions that must be done by the introducing broker-dealer or
clearing broker-dealer).\173\ The Commission has stated that, under
Section 28(e), it contemplates that in correspondent relationships, an
``introducing broker-dealer would be engaged in securities activities
of a more extensive nature than merely the receipt of commissions paid
to [them] by other broker-dealers for `research services' provided to
money managers.'' \174\ The Proposing Release identified four minimum
criteria that an introducing broker-dealer must satisfy in order to be
``effecting'' transactions.
---------------------------------------------------------------------------

    \172\ See, e.g., NYSE Rule 382, ``Carrying Agreements,'' 2 NYSE
Guide ] 2382, Rule 382; NASD Rule 3230, ``Clearing Agreements'';
NASD Rules of Fair Practice, Section 47, Article III; American Stock
Exchange Rule 400 (mirrors the provisions of NYSE Rule 382(b)).
    \173\ For example, NYSE Rule 382 specifies that each fully-
disclosed clearing agreement between SRO members shall allocate to
the respective member the following functions: (i) opening,
approving, and monitoring of accounts; (ii) extension of credit;
(iii) maintenance of books and records; (iv) receipt and delivery of
funds and securities; (v) safeguarding of funds and securities; (vi)
confirmations and statements; (vii) acceptance of orders and
execution of transactions. NYSE Rule 382(b). Further, the clearing
broker must provide annually to the introducing broker-dealer a list
of reports to assist the introducing broker to supervise and monitor
its customer accounts and to fulfill its responsibilities under the
agreement as well as deliver, and retain a copy of, those reports
that the introducing broker requests. NYSE Rule 382(e)(1) and (2).
    \174\ 1986 Release, 51 FR at 16007, quoting Data Exchange
Securities, No-Action Letter (Apr. 20, 1981).
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    Based on the comments received, which are discussed above, we
recognize the benefit to investors of money managers being able to
functionally separate trade execution from access to valuable research.
At the same time, we believe that the statutory term ``effecting''
requires that, in order for the money manager to use the safe harbor, a
broker-dealer that is ``effecting'' the trade must perform at least one
of four minimum functions and take steps to see that the other
functions have been reasonably allocated to one or another of the
broker-dealers in the arrangement in a manner that is fully consistent
with their obligations under SRO and Commission rules.\175\ The four
functions are: (1) Taking financial responsibility for all customer
trades until the clearing broker-dealer has received payment (or
securities), i.e., one of the broker-dealers in the arrangement must be
at risk for the customer's failure to pay; (2) making and/or
maintaining records relating to customer trades required by Commission
and SRO rules, including blotters and memoranda of orders; (3)
monitoring and responding to customer comments concerning the trading
process; and (4) generally monitoring trades and settlements.\176\ In
addition, of course, a broker-dealer is effecting securities
transactions if it is executing, clearing, or settling the trade.
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    \175\ Introducing and clearing brokers still remain subject to
all applicable securities laws and regulations and SRO rules. For
instance, nothing in this release changes in any way the
applicability of anti-money laundering laws and regulations
applicable to an introducing broker or a clearing broker. See, e.g.,
Currency and Foreign Transactions Reporting Act of 1970 (``Bank
Secrecy Act''), [31 U.S.C. 5311 et seq.] (as amended by the Uniting
and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (``USA Patriot Act''),
Pub. L. No. 107-56, sec. 314, 326, 115 Stat. 272); Treasury
regulations adopted under the Bank Secrecy Act [31 CFR Part 103];
Exchange Act Rule 17a-8 [17 CFR 240.17a-8]; NYSE Rule 445; NASD Rule
3011. This interpretation also does not alter the introducing broker
and the clearing broker's supervisory obligations. See, e.g.,
Exchange Act Section 15(b)(4)(E) [15 U.S.C. 78o(b)(4)(E)]; NYSE
Rules 342 and 405; NASD Rules 3010, 3012, and 3013. This
interpretation also does not alter a broker-dealer's best execution
obligation to its customers. See, e.g., NASD Rule 2320; NASD Notice
to Members 01-22 (Apr. 2001).
    \176\ See 1986 Release, 51 FR at 16007, citing SEI Financial
Services Co., No-Action Letter (Dec. 15, 1983), in which the
introducing broker in a correspondent relationship performed these
functions.
    In particular, one of the broker-dealers to the Section 28(e)
arrangement must be aware of and monitor daily trading activity of
customers even where the money manager sends orders directly to (and
only to) the clearing broker.
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3. Research Services Must Be ``Provided by'' the Broker-Dealer
    Section 28(e) requires that the broker-dealer receiving commissions
for ``effecting'' transactions must ``provide'' the brokerage or
research services. The Commission has interpreted this to permit money
managers to use client commissions to pay for research produced by
someone other than the executing broker-dealer, in certain
circumstances (referred to as ``third-party research'').\177\ The
Commission also has clarified that research provided in third-party
arrangements is eligible under Section 28(e) even if the money manager
participates in selecting the research services or products that the
broker-dealer will provide.\178\ In addition, the Commission has stated
that the third party also may send the research directly to the broker-
dealer's customer.\179\ In the Proposing Release, the Commission
restated its previous view that the broker-dealer must have the legal
obligation to pay for the research in order to be considered
``providing'' the brokerage and research services under Section
28(e).\180\ We continue to believe that a broker-dealer that is legally
obligated to pay for research is ``providing'' research under the safe
harbor. In addition, as stated above, based on the legislative history
of Section 28(e), the comments received in response to the Proposing
Release, and the benefits to investors of flexibility in these
arrangements, we are modifying our interpretation of ``provided by.''
\181\
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    \177\ See 1976 Release, 41 FR at 13679 (Section 28(e) ``might,
under appropriate circumstances, be applicable to situations where a
broker provides a money manager with research produced by third
parties''). See also 1986 Release, 51 FR at 16007 (``Although the
legislative history of Section 28(e) includes a strong statement
that commission dollars may be paid only to the broker-dealer that
`provides' both the execution and research services and that the
section does not authorize the resumption of `give-ups,' it seems
unlikely that Congress intended to forbid certain common practices
that were then considered permissible and whose elimination would be
anti-competitive.''); III Report, 19 SEC Docket at 932 (broker need
not produce research services ``in house'').
    \178\ Exchange Act Release No. 17371 (Dec. 12, 1980), 45 FR
83707, 83714 n.54 (Dec. 19, 1980) (``Papilsky Release''). See 1986
Release, 51 FR at 16007. In the Papilsky Release, the Commission
addressed Section 28(e) and third-party research in the context of
defining ``bona fide research'' for purposes of NASD rules that
relate to obtaining research in a fixed-price offering.
    \179\ Papilsky Release, 45 FR at 83714 n.54. See 1986 Release,
51 FR at 16007.
    \180\ See 1986 Release, 51 FR at 16007; III Report, 19 SEC
Docket at 932.
    \181\ As noted above, this Release replaces Sections II and III
of the 1986 Release, which include the ``provided by''
interpretation. See text accompanying note 68.
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    We believe that the safe harbor was not meant to allow money
managers to use Section 28(e) arrangements to conceal the payment of
client commissions to intermediaries (including broker-dealers) that
provide benefits only to the money manager. In particular, we interpret
Section 28(e) to be available as a safe harbor for the money manager in
situations where broker-dealers use a money manager's client
commissions to pay for eligible research and brokerage for which such
broker-dealer is not directly obligated to pay if such broker-dealer
pays the research preparer directly and takes steps to assure itself
that the client commissions that the manager directs it to use to pay
for such services are used only for eligible brokerage and research.
Accordingly, for purposes of Section 28(e), we believe that the
following attributes will help determine whether the broker-dealer that
is effecting transactions for the advised accounts has satisfied the
``provided by'' element, and the Section 28(e) safe harbor is

available to a money manager: \182\ (i) the broker-dealer pays the
research preparer directly; (ii) the broker-dealer reviews the
description of the services to be paid for with client commissions
under the safe harbor for red flags that indicate the services are not
within Section 28(e) and agrees with the money manager to use client
commissions only to pay for those items that reasonably fall within the
safe harbor; \183\ and (iii) the broker-dealer develops and maintains
procedures so that research payments are documented and paid for
promptly.\184\
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    \182\ In Section 28(e) arrangements involving multiple broker-
dealers, at least one of the broker-dealers (but not necessarily
all) must satisfy the requirements for ``effecting'' transactions
and ``providing'' research.
    \183\ In all Section 28(e) arrangements, including those in
which the broker-dealer is legally obligated to pay for the
research, the broker-dealer may be subject to liability for aiding
and abetting violations by money managers where the broker-dealer
pays for services that are not within Section 28(e). See e.g.,
Portfolio Advisory Services, LLC, and Cedd L. Moses, Advisers Act
Release No. 2038, 77 SEC Docket 2759-31 (June 20, 2002); Dawson-
Samberg Capital Management, Inc. and Judith A. Mack, Advisers Act
Release No. 1889, 54 SEC 786 (Aug. 3, 2000); Founders Asset
Management LLC and Bjorn K. Borgen, Advisers Act Release No. 1879,
54 SEC 762 (June 15, 2000); Marvin & Palmer Associates, Inc., et
al., Advisers Act Release No. 1841, 70 SEC Docket 1643 (Sept. 30,
1999); Republic New York Sec. Corp. and James Edward Sweeney,
Exchange Act Release No. 41036, 53 SEC 1283 (Feb. 10, 1999); SEC v.
Sweeney Capital Management, Inc., Litigation Release No. 15664, 66
SEC Docket 1613 (Mar. 10, 1998), 1999 U.S. Dist. LEXIS 22298 (1999)
(order granting permanent injunction and other relief); Renaissance
Capital Advisers, Inc., Advisers Act Release No. 1688, 66 SEC Docket
408 (Dec. 22, 1997); Oakwood Counselors, Inc., Advisers Act Release
No. 1614, 63 SEC Docket 2034 (Feb. 11, 1997); SEC v. Galleon Capital
Mgmt., Litigation Release No. 14315, 57 SEC Docket 2593 (Nov. 1,
1994).
    \184\ A broker-dealer would need to satisfy the ``effecting''
and ``provided by'' elements of Section 28(e) only where the money
manager seeks to operate within the safe harbor. If the money
manager is operating in part outside of the safe harbor, the broker-
dealer would need to satisfy the ``effecting'' and ``provided by''
elements only with respect to the portion of the money manager's
business for which the manager seeks to operate within the safe
harbor.
    Prompt payment is relevant to the determination of whether the
broker-dealer has ``provided'' research because it assures that the
research and the payment are linked, thereby preserving the
statutory language requiring that the broker-dealer that ``effects''
the transactions for the advised accounts ``provides'' the research.
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4. Legal Obligations of Parties to Section 28(e) Arrangements
    The Proposing Release stated that parties to arrangements under
Section 28(e) must determine whether they are contributing to a
violation of law, including whether the involvement of other parties is
appropriate.\185\ Commenters expressed concern that this statement
imposed heightened responsibility on money managers and broker-
dealers.\186\ To clarify, the Commission intends only to remind parties
to Section 28(e) arrangements that, under existing law, money managers
may be subject to liability under federal securities laws, ERISA, and
state law, and broker-dealers may be subject to liability if they aid
and abet another person's violation of a provision of the securities
laws.\187\ For example, if a broker-dealer knows that a money manager
has represented to its clients that he will operate solely within
Section 28(e),\188\ and the adviser asks the broker-dealer to pay for
office furniture and computer terminals, which under this release are
not eligible under the safe harbor, the broker-dealer may risk aiding
and abetting liability.
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    \185\ Exchange Act Release No. 52635 (Oct. 19, 2005), 70 FR
61700 (Oct. 25, 2005).
    \186\ BNY 1; IAA; ICI; Mellon; NSCP; T.Rowe Price.
    \187\ See, e.g., supra, notes 28-31 and accompanying text;
Exchange Act Sec.  15(b)(4)(iv)(E) and Advisers Act Sec.  203(e)(6);
III Report, 19 SEC Docket at 933 (Where brokers and money managers
were aware that an intermediary was providing research to money
managers in exchange for directing brokerage to the intermediary's
designated brokers, but brokers had limited participation in
providing the research, ``those involved should have realized that
the arrangement was not permitted by Section 28(e) * * *. [B]rokers
should have been alerted to the possibility of conduct which
contravened applicable fiduciary principles and the federal
securities laws.''). See also Exchange Act Release No. 11629 (Sept.
3, 1975), (``A broker which causes or assists an institution to
violate a duty to the investor may be aiding and abetting a
fraudulent or deceptive act or practice.''); 1976 Release, 41 FR at
13679 (``[N]or may money managers, under the authority of Section
28(e), direct brokers employed by them to make `give up' payments *
* *. [B]rokers should recognize that their compliance with any
direction or suggestion by a fiduciary which would appear to involve
a violation of the fiduciary's duty to its beneficiaries could
implicate them in a course of conduct violating the anti-fraud
provisions of the federal securities laws.'').
    \188\ Advisers that are not required to operate within the safe
harbor may voluntarily choose to do so, and may represent to their
clients that they do so. However, if an adviser that represents to
its clients that he will operate within Section 28(e) and fails to
do so, the representation is false and the conduct may be a
violation of Section 206 of the Advisers Act and Section 10(b) of
the Exchange Act and Rule 10b-5. Advisers to mutual funds and ERISA
plans must operate within the safe harbor with respect to those
clients because of Section 17(e) of the Investment Company Act or
ERISA. See supra notes 30-31 and accompanying text.
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IV. Request for Comments

    The Commission will consider further comment on evolving
developments in connection with industry practices with respect to
client commission arrangements under the safe harbor identified in
Section III.I of this Release to evaluate whether additional guidance
might be appropriate in the future. Based on any comments received, the
Commission may, but need not, supplement the guidance in this Release
in the future.

V. Implementation

    The Proposing Release asked whether the Commission should allow
market participants some period of time to implement the
interpretation, and requested examples of potential implementation
issues.\189\ Fifteen commenters requested that the Commission establish
a grace period for industry participants to implement the Commission's
interpretative guidance of between three months \190\ to at least one
year.\191\ Several commenters urged the Commission to issue the
interpretation without any phase-in period.\192\ Several of these
commenters suggested that the Commission should delay the effectiveness
of its final interpretive guidance in order to allow existing annual
contracts among money managers and broker-dealers to expire \193\ or to
review their arrangements in light of the Commission's final
interpretation \194\; others indicated that an implementation period is
important to accommodate significant operational changes in the
industry, including any changes necessitated in the agreements among
money managers and broker dealers.\195\
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    \189\ Proposing Release, Question 10.
    \190\ T. Rowe Price.
    \191\ CAPIS; IAA; IMA; Mellon; Merrill; NSCP; Seward & Kissel;
SIA; UBS. Three commenters recommended six months. BNY 1; George 2;
ITG. Two commenters suggested that the Commission provide the
industry an unspecified ``reasonable'' period of time within which
to comply with the Commission's interpretation. Charles River;
E*Trade.
    \192\ Investorside; Reuters.
    \193\ CAPIS; IAA; Mellon; Merrill; NSCP; Seward & Kissel.
    \194\ BNY 1; ITG.
    \195\ SIA; UBS.
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    Since participants have relied on the Commission's prior
interpretations, the Commission believes that they should be entitled
to continue to rely on them for a period of time. We believe that,
considering the views expressed in the comment letters, an appropriate
period for market participants to continue to rely on the Commission's
prior interpretations is six months. The interpretation set forth in
this Release is effective immediately upon its publication in the
Federal Register, on July 24, 2006. Market participants may continue to
rely on the Commission's prior interpretations for six months following
the publication of this Release in the Federal Register, that is, until
January 24, 2007.

List of Subjects in 17 CFR Part 241

    Securities.

Amendments to the Code of Federal Regulations

0
For the reasons set out in the preamble, the Commission is amending
Title 17, chapter II of the Code of Federal Regulations as set forth
below:

PART 241--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES
EXCHANGE ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER

    Part 241 is amended by adding Release No. 34-54165 and the release
date of July 18, 2006 to the list of interpretive releases.

    Dated: July 18, 2006.

    By the Commission.
Nancy M. Morris,
Secretary.
[FR Doc. 06-6410 Filed 7-21-06; 8:45 am]

BILLING CODE 8010-01-P