[Federal Register Volume 76, Number 46 (Wednesday, March 9, 2011)]
[Notices]
[Pages 13012-13014]
[FR Doc No: 2011-5303]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64023; File No. SR-BX-2011-012]

Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of
Filing and Order Granting Accelerated Approval of Proposed Rule Change
To Prohibit Members From Voting Uninstructed Shares on Certain Matters

March 3, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on February 18, 2011, NASDAQ OMX BX, Inc. (the ``Exchange'' or ``BX'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II 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 and is approving the proposed rule change on an accelerated
basis.
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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 the
Substance of the Proposed Rule Change

    The Exchange proposes to modify Rule 2251 to prohibit members from
voting on the election of a member of the board of directors of an
issuer (except for a vote with respect to the uncontested election of a
member of the board of directors of any investment company registered
under the Investment Company Act of 1940), executive compensation, or
any other significant matter, as determined by the Commission, unless
instructed by the beneficial owner of the shares. The text of the
proposed rule change is below. Proposed new language is in italics;
proposed deletions are in brackets.\3\
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    \3\ Changes are marked to the rule text that appears in the
electronic manual of Nasdaq [sic] found at http://nasdaqomxbx.cchwallstreet.com.
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2251. Forwarding of Proxy and Other Issuer-Related Materials

    (a)-(c) No change.
    (d) Notwithstanding the foregoing, an Exchange Member that is not
the beneficial owner of a security registered under Section 12 of the
Act is prohibited from granting a proxy to vote the security in
connection with a shareholder vote on the election of a member of the
board of directors of an issuer (except for a vote with respect to the
uncontested election of a member of the board of directors of any
investment company registered under the Investment Company Act of
1940), executive compensation, or any other significant matter, as
determined by the Commission, by rule, unless the beneficial owner of
the security has instructed the member to vote the proxy in accordance
with the voting instructions of the beneficial owner.

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
    Section 957 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the ``Dodd-Frank Act'') adopted new Section 6(b)(10) of
the Securities Exchange Act.\4\ This new provision requires all
national securities exchanges to adopt rules that prohibit their
members from voting on the election of a member of the board of
directors of an issuer (except for a vote with respect to the
uncontested election of a member of the board of directors of any
investment company registered under the Investment Company Act of
1940), executive compensation, or any other significant matter, as
determined by the Commission, unless the member receives voting
instructions from the beneficial owner of the shares.
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    \4\ 15 U.S.C. 78f(b)(10).

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    BX Rule 2251 governs when BX members may vote shares held for
customers by adopting the FINRA rule on this point. The FINRA rule, in
turn, prohibits members from voting any uninstructed shares, but also
permits the member to follow the rules of another SRO instead.\5\ In
order to assure compliance, in all cases, with newly adopted Section
6(b)(10), the Exchange proposes to modify Rule 2251 to provide that in
no event could a member vote uninstructed shares on the election of a
member of the board of directors of an issuer (except for a vote with
respect to the uncontested election of a member of the board of
directors of any investment company registered under the Investment
Company Act of 1940), executive compensation, or any other significant
matter, as determined by the Commission, unless instructed by the
beneficial owner of the shares.
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    \5\ The Commission notes that the FINRA rule, and by reference
BX's rule, only allows a member to follow the rules of another SRO
of which it is a member, provided that the records of the member
clearly indicate the procedure it is following. See FINRA Rule
2251(c)(2).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6 of the Act,\6\ in general and with
Sections 6(b)(5) and 6(b)(10) of the Act,\7\ in particular. Section
6(b)(5) requires that the rules of a national securities exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in facilitating transactions in
securities, and to remove impediments to and perfect the mechanism of a
free and open market and a national market system. The proposed rule
change is consistent with this requirement in that it will protect
investors and the public interest by adopting the requirements of
Section 957 of the Dodd-Frank Act. Section 6(b)(10) requires that a
national securities exchange's rules must prohibit any member that is
not the beneficial owner of a security registered under Section 12 from
granting a proxy to vote the security in connection with a shareholder
vote on the election of a member of the board of directors of an issuer
(except for a vote with respect to the uncontested election of a member
of the board of directors of any investment company registered under
the Investment Company Act of 1940), executive compensation, or any
other significant matter, as determined by the Commission. The proposed
rule change will adopt the prohibition required by Section 6(b)(10) and
is therefore consistent with that provision.
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    \6\ 15 U.S.C. 78f.
    \7\ 15 U.S.C. 78f(b)(5) and (10).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, 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 e-mail to<EMAIL_ADDRESS>Please include
File Number SR-BX-2011-012 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-BX-2011-012. This file
number should be included on the subject line if e-mail 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 Web site (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
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal offices of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-BX-2011-012 and should be
submitted on or before March 30, 2011.

IV. Commission's Findings and Order Granting Accelerated Approval of
the Proposed Rule Change

    In its filing, BX requested that the Commission approve the
proposal on an accelerated basis so that the Exchange could immediately
comply with the requirements imposed by the Dodd-Frank Act. After
careful consideration, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange.\8\
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    \8\ In approving this rule change, the Commission notes that it
has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
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    The Commission believes that the proposal is consistent with
Section 6(b)(10) \9\ of the Act, which requires that national
securities exchanges adopt rules prohibiting members that are not
beneficial holders of a security from voting uninstructed proxies with
respect to the election of a member of the board of directors of an
issuer (except for uncontested elections of directors for companies
registered under the Investment Company Act), executive compensation,
or any other significant matter, as determined by the Commission by
rule. The Commission also believes that the proposal is consistent with
Section 6(b)(5) \10\ of the Act, which provides, among other things,
that the rules of the Exchange must be designed to promote just and
equitable principles of trade, remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest, and are not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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    \9\ 15 U.S.C. 78f(b)(10).
    \10\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposal is consistent with
Section 6(b)(10) of the Act because it adopts revisions that comply
with that section. As noted in the accompanying Senate Report, Section
957, which adopts

Section 6(b)(10), reflects the principle that ``final vote tallies
should reflect the wishes of the beneficial owners of the stock and not
be affected by the wishes of the broker that holds the shares.'' \11\
The proposed rule change will make BX compliant with the new
requirements of Section 6(b)(10) by specifically prohibiting, in BX's
rule language, broker-dealers, who are not beneficial owners of a
security, from voting uninstructed shares in connection with a
shareholder vote on the election of a member of the board of directors
of an issuer (except for a vote with respect to the uncontested
election of a member of the board of directors of any investment
company registered under the Investment Company Act of 1940), executive
compensation, or any other significant matter, as determined by the
Commission by rule, unless the member receives voting instructions from
the beneficial owner of the shares.\12\
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    \11\ See S. Rep. No. 111-176, at 136 (2010).
    \12\ The Commission has not, to date, adopted rules concerning
other significant matters where uninstructed broker votes should be
prohibited, although it may do so in the future. Should the
Commission adopt such rules, we would expect BX to adopt
coordinating rules promptly to comply with the statute.
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    The Commission believes that the proposal is consistent with
Section 6(b)(5) of the Act because the proposal will further investor
protection and the public interest by assuring that shareholder votes
on the election of the board of directors of an issuer (except for a
vote with respect to the uncontested election of a member of the board
of directors of any investment company registered under the Investment
Company Act of 1940) and on executive compensation matters are made by
those with an economic interest in the company, rather than by a broker
that has no such economic interest, which should enhance corporate
governance and accountability to shareholders.\13\
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    \13\ As the Commission stated in approving NYSE rules
prohibiting broker voting in the election of directors, having those
with an economic interest in the company vote the shares, rather
than the broker who has no such economic interest, furthers the goal
of enfranchising shareholders. See Securities Exchange Act Release
No. 60215 (July 1, 2009), 74 FR 33293 (July 10, 2009) (SR-NYSE-2006-
92).
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    Based on the above, the Commission finds that the BX proposal will
further the purposes of Sections 6(b)(5) and 6(b)(10) of the Act
because it should enhance corporate accountability to shareholders
while also serving to fulfill the Congressional intent in adopting
Section 6(b)(10) of the Act.
    The Commission also finds good cause, pursuant to Section 19(b)(2)
of the Act,\14\ for approving the proposed rule change prior to the
30th day after the date of publication of notice in the Federal
Register. Section 6(b)(10) of the Act, enacted under Section 957 of the
Dodd-Frank Act, does not provide for a transition phase, and requires
rules of national securities exchanges to prohibit broker voting on the
election of a member of the board of directors of an issuer (except for
a vote with respect to the uncontested election of a member of the
board of directors of any investment company registered under the
Investment Company Act of 1940), executive compensation, or any other
significant matter, as determined by the Commission by rule. The
Commission believes that good cause exists to grant accelerated
approval to the Exchange's proposal, because it will conform BX Rule
2251 to the requirements of Section 6(b)(10) of the Act. Moreover, the
Commission notes that BX's proposed rule change is identical to Nasdaq
Rule 2251(d), which was previously approved by the Commission and for
which no comments were received.\15\ Therefore, the Exchange's proposed
rule change raises no new regulatory issues.
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    \14\ 15 U.S.C. 78s(b)(2).
    \15\ See Securities Exchange Act Release No. 62992 (September
24, 2010), 75 FR 60844 (October 1, 2010) (SR-Nasdaq-2010-114).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\16\ that the proposed rule change (SR-BX-2011-012) be, and it
hereby is, approved on an accelerated basis.
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    \16\ 15 U.S.C. 78s(b)(2).
    \17\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-5303 Filed 3-8-11; 8:45 am]
BILLING CODE 8011-01-P


largely retaining its legal and compliance burden per-broker-dealer
estimates as proposed.
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    \250\ As stated above, the Commission now estimates that the
total initial legal and compliance burden is 50 hours, and not 35.
See supra Section III.D.2.
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3. Total Cost
    The Commission believes that this Rule would have its greatest
impact on broker-dealers that provide ``unfiltered'' or ``naked''
access, and that the majority of broker-dealers with market access are
likely to be able to substantially satisfy the requirements of the Rule
with much of their current existing risk management controls and
supervisory procedures. However, for broker-dealers that would need to
develop or substantially upgrade their systems the cost would vary
considerably.
    We note that the potential range of costs would vary considerably,
depending upon the needs of the broker-dealer and its current risk
management controls and supervisory procedures. Once again, we provide
an illustrative set of calculations for a scenario where 5% of
respondents under the Rule need to build risk control management
systems from scratch, while the other 95% only need to upgrade and
modify their pre-existing risk control management systems.
    The Commission estimates that if 69 broker-dealers build risk
management systems from scratch and modify their compliance procedures
accordingly, the total initial cost could be approximately as much as
$20.9 million. The cost to build the risk control management systems
would be $18.7 million for 69 broker-dealers,\251\ while the cost to
initially develop or modify compliance procedures for the same would be
approximately $32,200 per broker-dealer,\252\ or $2.2 million for 69
broker-dealers. The total initial cost to build systems from scratch is
thus estimated to be approximately $20.9 million.
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    \251\ See supra Section IV.B.1.
    \252\ See supra Section IV.B.2.
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    By contrast, the Commission estimates that if the remaining 1,306
broker-dealers would upgrade their pre-existing risk control management
systems and modify their compliance procedures accordingly, the total
initial cost would be approximately as much as $93.6 million. The cost
to upgrade the risk control management systems would be $51.6 million
for 1,306 broker-dealers,\253\ while the cost to initially develop or
modify compliance procedures for the same would be approximately
$32,200 per broker-dealer,\254\ or $42.1 million for 1,306 broker-
dealers. The total initial cost is thus estimated to be approximately
$93.6 million.
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    \253\ See supra Section IV.B.1.
    \254\ See supra Section IV.B.2.
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    The total annual initial cost for all 1,375 broker-dealers is
estimated to be approximately $114.4 million.\255\
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    \255\ $20.9 million (initial cost for 69 broker-dealers building
a system from scratch) + $93.6 million (initial cost for 1,306
broker-dealers upgrading pre-existing systems) = approximately
$114.4 million.
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    The total annual ongoing cost for all 1,375 broker-dealers to
maintain a risk management control system and annual review and
modification of applicable compliance policies and procedures could be
approximately as much as $112.9 million. The annual technology cost to
maintain a risk management control system would be approximately
$47,300 per broker-dealer,\256\ or $65 million for 1,375 broker-
dealers, while the cost for annual review and modification of
applicable compliance policies and procedures would be approximately
$34,800 per broker-dealer,\257\ or $47.9 million for 1,375 broker-
dealers. The total annual ongoing cost for all 1,375 broker-dealers is
estimated to be approximately $112.9 million. It should be noted that
the total cost estimate has been increased from the Proposing Release's
total cost estimate to reflect the revised number of respondents
affected under the Rule.
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    \256\ See supra note 228.
    \257\ See supra notes 240, 241, and 242.
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    The Commission believes that in many cases broker-dealers whose
business activities include proprietary trading, traditional agency
brokerage activities, and direct market access, would find that their
current risk management controls and supervisory procedures may
substantially satisfy the requirements of the Rule, and require minimal
material modifications. Such broker or dealers would experience the
market-wide benefits of the proposal with limited additional costs
related to their own compliance.

V. Consideration of Burden on Competition, and Promotion of Efficiency,
Competition and Capital Formation

    Section 3(f) of the Exchange Act \258\ requires the Commission,
whenever it engages in rulemaking and is required to consider or
determine whether an action is necessary or appropriate in the public
interest, to consider, in addition to the protection of investors,
whether the action would promote efficiency, competition, and capital
formation. In addition, Section 23(a)(2) of the

Exchange Act \259\ requires the Commission, when making rules under the
Exchange Act, to consider the impact of such rules on competition.
Section 23(a)(2) also prohibits the Commission from adopting any rule
that would impose a burden on competition not necessary or appropriate
in furtherance of the purposes of the Exchange Act.
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    \258\ 15 U.S.C. 78c(f).
    \259\ 15 U.S.C. 78w(a)(2).
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A. Competition

    In the Proposing Release, we considered in turn the impact of
Proposed Rule 15c3-5 on the market center and broker-dealer industries.
Information provided by market centers and broker-dealers in their
registrations and filings with us and with FINRA informs our views on
the structure of the markets in these industries. We begin our
consideration of potential competitive impacts with observations of the
current structure of these markets.
    The broker-dealer industry, including market makers, is a highly
competitive industry, with most trading activity concentrated among
several dozen large participants and with thousands of small
participants competing for niche or regional segments of the market.
    There are approximately 5,178 registered broker-dealers, of which
890 are small broker-dealers.\260\ The Commission estimates that 1,295
brokers or dealers would have market access as defined under the
proposed rule.\261\ In addition, the Commission estimates that 80
brokers or dealers operate registered, active ATSs, bringing the total
estimate of broker-dealers that would be subject to the requirements of
the rule to 1,375. Of these 1,375 brokers or dealers, the Commission
estimates that approximately 21 of those are small broker-dealers. To
limit costs and make business more viable, small broker-dealers often
contract with larger broker-dealers to handle certain functions, such
as clearing and execution, or to update their technology. Larger
broker-dealers typically enjoy economies of scale over small broker-
dealers and compete with each other to service the smaller broker-
dealers, who are both their competitors and their customers.
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    \260\ These numbers are based on the Commission's staff review
of 2007 and 2008 FOCUS Report filings reflecting registered broker-
dealers. The number does not include broker-dealers that are
delinquent on FOCUS Report filings.
    \261\ Proposing Release, 75 FR at 4018.
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    Rule 15c3-5 is intended to address a broker-dealer's obligations
generally with respect to market access risk management controls across
markets, to prohibit the practice of ``unfiltered'' or ``naked'' access
to an exchange or an ATS where customer order flow does not pass
through the broker-dealer's systems or filters prior or to entry on an
exchange or ATS, and to provide uniform standards that would be
interpreted and enforced in a consistent manner. Such requirements may
promote competition by establishing a level playing field for broker-
dealers in market access, in that each broker or dealer would be
subject to the same requirements in providing access.
    The Rule will require brokers or dealers that offer market access,
including those providing sponsored or direct market access to
customers, to implement appropriate risk management controls and
supervisory procedures to manage the financial and regulatory risks of
this business activity. As noted above, we expect there to be costs of
implementing and monitoring these systems. However, we do not believe
that the costs overall will create or increase any burdens of entry
into the broker-dealer industry.
    The costs to implement appropriate risk management controls and
supervisory procedures to manage the financial and regulatory risks may
disproportionately impact small-or medium-sized broker-dealers. In
particular, the costs of instituting such controls and procedures could
be a larger portion of revenues for small- and medium-sized broker-
dealers than for larger broker dealers. In addition, to the extent that
the cost of obtaining sponsored access increases, the increases could
be a larger portion of the revenues of small- and medium-sized broker-
dealers. This could impair the ability of small- and medium-sized
broker-dealers to compete for order routing business with larger firms,
limiting choice and incentives for innovation in the broker dealer
industry. However, the effect on smaller broker-dealers could be
mitigated, to some extent, by purchasing a risk management solution
from a third-party vendor.
    The trading industry is a highly competitive one, characterized by
ease of entry. In fact, the intensity of competition across trading
platforms in this industry has increased dramatically in the past
decade as a result of market reforms and technological advances. This
increase in competition has resulted in substantial decreases in market
concentration, effective competition for the securities exchanges, a
proliferation of trading platforms competing for order flow, and
significant decreases in trading fees. The low barriers to entry for
equity trading venues are shown by new entities, primarily ATSs,
continuing to enter the market. Currently, there are approximately 50
registered ATSs that trade equity securities. The Commission within the
past few years has approved applications by BATS and Nasdaq to become
registered as national securities exchanges for trading equities, and
approved proposed rule changes by two existing exchanges--ISE and
CBOE--to add equity trading facilities to their existing options
business. Moreover, on March 12, 2010, Direct Edge received formal
approval from the Commission for its platforms to operate as facilities
to two newly created national securities exchanges. We believe that
competition among trading centers has been facilitated by Rule 611 of
Regulation NMS,\262\ which encourages quote-based competition between
trading centers; Rule 605 of Regulation NMS,\263\ which empowers
investors and broker-dealers to compare execution quality statistics
across trading centers; and Rule 606 of Regulation NMS,\264\ which
enables customers to monitor order routing practices.
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    \262\ 17 CFR 242.611.
    \263\ 17 CFR 242.605.
    \264\ 17 CFR 242.606.
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    Market centers compete with each other in several ways. National
exchanges compete to list securities; market centers compete to attract
order flow to facilitate executions; and market centers compete to
offer access to their markets to members or subscribers. In this last
area of competition, one could argue that the ability to access a
market through sponsored access or direct market access could
substitute for becoming a member or subscriber. Of course, there are
both benefits and responsibilities in being a member or subscriber that
do not accrue directly to someone using sponsored access or direct
market access. Nonetheless, to the extent that these forms of market
access are substitutes for membership, an increase in the costs of
sponsored access or direct market access may make a potential member
more likely to decide to become a member or subscriber. At the same
time, market centers may reduce the cost of access to members or
subscribers in order to attract trading flow to their venue.
    The Commission solicited comments regarding the effect of the Rule
on competition among market centers and broker-dealers. A number of
commenters argued that the Rule will lead to small liquidity providers
being driven from the market and an increased concentration of firms
providing market access, thus reducing the available

choice for end-clients.\265\ Specifically, one commenter noted in
particular that without sponsored access, smaller broker-dealers will
be unable to compete with larger market participants because direct
exchange connectivity and lower latency times are cost-prohibitive for
smaller competitors.\266\ Moreover, smaller broker-dealers rely on
trade flow aggregation to reach the most favorable fee tiers and
overcome the handicap of uncompetitive pricing.\267\
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    \265\ See Fortis Letter at 16, Jane Street Letter at 2.
    \266\ See Jane Street Letter at 2.
    \267\ Id.
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    The Commission acknowledges that the Rule may indeed have adverse
competitive effects on small broker-dealers. The Commission
nevertheless places particular emphasis on the significant benefits
that the Rule provides to the markets, such as the protection of market
integrity and efficiency. Although the Rule may indeed lead to a
consolidation among smaller brokers and dealers that would in turn
potentially reduce competition among broker-dealers and increase
trading costs for consumers, the Commission believes that such costs
are justified by the benefits provided to investors, and the financial
system as a whole, in preventing unfiltered market access. After
careful consideration of the relevant facts and comments received, the
Commission has determined that any burden on competition imposed by
Rule 15c3-5 is necessary or appropriate in the furtherance of the
purposes of the Exchange Act noted above.

B. Capital Formation

    A purpose of Rule 15c3-5 is to strengthen investor confidence and,
in doing so, to give investors greater incentive to participate in the
markets, resulting in the promotion of capital formation. In deciding
to adopt the Rule, the Commission has given significant consideration
to the potential undermining of public confidence in the securities
markets resulting from disorderly markets that could result from
inadequate risk management controls and unfiltered sponsored access.
The Commission believes that the mitigation of the risk of disorderly
markets should help ensure the integrity of the U.S. markets and
provide the investing public with greater confidence that intentional,
bona fide transactions are being executed across the national market
system. Rule 15c3-5 should promote confidence as well as participation
in the market by enhancing the fair and efficient operation of the U.S.
securities markets, thus promoting capital formation.
    One commenter contended that the Rule's measures alone will likely
have an insignificant effect on market integrity and protection of the
public interest, as they are targeted towards systemic risk and not
investor protection.\268\ The Commission disagrees with the commenter's
delineation between systemic risk and investor protection and the
implicit assumption that the two are mutually exclusive. The Commission
strongly believes that by helping to prevent unfiltered sponsored
access, the Rule reduces the risk of disorderly markets. The Rule is
expected to bolster investors' confidence that the markets are less
likely to experience such unpredictable events, thus increasing market
participants' incentive to remain invested in the markets and
bolstering capital formation.
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    \268\ See Fortis Letter at 14.
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C. Efficiency

    By addressing broker-dealer obligations with respect to market
access risk controls across markets, and by having the effect of
prohibiting ``unfiltered'' or ``naked'' access, the Rule would provide
uniform standards that would be interpreted and enforced in a
consistent manner. Rule 15c3-5 would help to facilitate and maintain
stability in the markets and help ensure that they function
efficiently.
    In recent years, the development and growth of automated electronic
trading has allowed ever increasing volumes of securities transactions
across the multitude of trading centers that constitute the U.S.
national market system. The Commission believes that the risk
management controls and procedures that brokers and dealers would be
required to include as part of their compliance systems should help
prevent erroneous and unintended trades from occurring and thereby
contribute to market efficiency. For example, Rule 15c3-5 requires that
a broker-dealer with market access implement pre-trade risk management
controls that, among other things, prevent the entry of erroneous or
duplicative orders. These types of pre-trade risk management controls
should serve to limit the number of erroneous or unintended orders from
entering an exchange or ATS, thereby limiting the occurrence of
erroneous or unintended executions. The Commission believes that
certainty of an execution is integral to the operations of an efficient
market. By limiting the potential for erroneous executions, Rule 15c3-5
should serve to enhance market efficiency by minimizing the number of
trades that are subsequently broken and enhance price efficiency by
ensuring that publicly reported transaction prices are valid.

VI. Final Regulatory Flexibility Analysis

    The Commission has prepared the following Final Regulatory
Flexibility Analysis (``FRFA''), in accordance with the provisions of
the Regulatory Flexibility Act (``RFA''),\269\ regarding Rule 15c3-5
under the Securities Exchange Act of 1934.
---------------------------------------------------------------------------

    \269\ 5 U.S.C. 604(a).
---------------------------------------------------------------------------

A. Need for Rule 15c3-5

    Over the past decade, the proliferation of sophisticated, high-
speed trading technology has changed the way broker-dealers trade for
their accounts and as an agent for their customers. Current SRO rules
and interpretations governing electronic access to markets have sought
to address the risks of this activity. However, the Commission believes
that more comprehensive standards that apply consistently across the
markets are needed to effectively manage the financial, regulatory, and
other risks, such as legal and operational risks, associated with
market access.
    The Commission notes that these risks are present whenever a
broker-dealer trades as a member of an exchange or subscriber to an
ATS, whether for its own proprietary account or as agent for its
customers, including traditional agency brokerage and through direct
market access or sponsored access arrangements. For this reason, new
Rule 15c3-5 is drafted broadly to cover all forms of access to trading
on an exchange or ATS provided directly by a broker-dealer. The
Commission believes a broker-dealer with market access should assure
the same basic types of controls are in place whenever it uses its
special position as a member of an exchange, or subscriber to an ATS,
to access those markets as well as when a broker-dealer operator of an
ATS provides access to its ATS to a non-broker-dealer. The Commission,
however, is particularly concerned about the quality of broker-dealer
risk controls in sponsored access arrangements, where the customer
order flow does not pass through the broker-dealer's systems prior to
entry on an exchange or ATS.

B. Significant Issues Raised by Public Comment

    In the Proposing Release, the Commission requested comment on

matters discussed in the IRFA.\270\ While the Commission did receive
comment letters that discussed the overall number of respondents that
would be affected by the proposed new rule,\271\ the Commission did not
receive any comments that specifically addressed the number of small
entities that would be affected.
---------------------------------------------------------------------------

    \270\ See Proposing Release, 75 FR at 4028.
    \271\ See supra Section III.C.
---------------------------------------------------------------------------

    Several commenters stated that the Rule would have an impact on
smaller broker-dealers. The commenters noted that sponsored access is a
competitive tool for small broker-dealers that serves to level the
playing field between smaller and larger market participants.\272\ By
prohibiting unfiltered sponsored access, the Rule would prevent small
broker-dealers from offering reduced latency times that larger entities
are able to offer through direct exchange connectivity.\273\ Moreover,
some commenters believed that the Rule would hinder small broker-
dealers from aggregating trade flow with others to reach more favorable
fee tiers.\274\ The commenters asserted that as a result, the new rule
may have the unintended negative effect of driving small liquidity
providers out of the market and reducing overall marketplace
liquidity.\275\
---------------------------------------------------------------------------

    \272\ See, e.g., Jane Street Letter at 1-2; Scottrade Letter at
1; Wedbush Letter at 3-4; ABA Letter at 6-7; and Carter Letter at 4-
5.
    \273\ See Jane Street Letter at 1-2; Wedbush Letter at 3-4;
Carter Letter at 4-5.
    \274\ See Jane Street Letter at 1-2.
    \275\ See Jane Street Letter at 1-2; Scottrade Letter at 1.
---------------------------------------------------------------------------

    Another commenter noted that for some smaller proprietary trading
firms, the expanded risk management requirements in the Rule would make
it impossible for their current business models to be successful. In
particular, the commenter asserted that increased latency times
required to send the firms' orders through a broker-dealer's risk
management systems would render their trading algorithms ineffective.
As a result, this type of business model would no longer be
viable.\276\
---------------------------------------------------------------------------

    \276\ See ABA Letter at 7.
---------------------------------------------------------------------------

    The Commission recognizes that small broker-dealers are faced with
significant competitive concerns from larger market participants, and
that the new rule will eliminate speed advantages gained through
unfiltered sponsored access. However, the Commission notes that all
broker-dealers will be prohibited from offering unfiltered sponsored
access, not just small broker-dealers. The Rule may affect the efficacy
of market participant trading algorithms. However, the Commission
continues to believe that the potentially negative competitive effects
on small broker-dealers are justified by the benefits of eliminating
the substantial market risks that sponsored access imposes on all
market participants, regardless of their size. As the Commission
previously stated in the Initial Regulatory Flexibility Analysis in the
Proposal, only a small number of the broker-dealers would be classified
as ``small businesses.'' \277\ Given the relative importance of
safeguarding against the risk of disorderly markets, the competitive
effects that the Rule may impose on that small number of respondents is
appropriate.
---------------------------------------------------------------------------

    \277\ See Proposing Release, 75 FR at 4027.
---------------------------------------------------------------------------

C. Small Entities Subject to the Rule

    For purposes of Commission rulemaking in connection with the RFA, a
broker-dealer is a small business if its total capital (net worth plus
subordinated liabilities) on the last day of its most recent fiscal
year was $500,000 or less, and is not affiliated with any entity that
is not a ``small business.'' \278\ The Commission staff estimates that
at year-end 2008 there were 1,095 broker or dealers which were members
of an exchange, and 21 of those were classified as ``small
businesses.'' \279\ In addition, the Commission estimates that there
were 200 brokers or dealers that were subscribers to ATSs but not
members of an exchange.\280\ The Commission estimates that, of those
200 brokers or dealers, only a small number would be classified as
``small businesses.''
---------------------------------------------------------------------------

    \278\ 17 CFR 240.0-10(c).
    \279\ See Proposing Release, 75 FR at 4027.
    \280\ Id.
---------------------------------------------------------------------------

    Currently, most small brokers or dealers, when accessing an
exchange or ATS in the ordinary course of their business, should
already have risk management controls and supervisory procedures in
place. The extent to which such small brokers or dealers would be
affected economically under the Rule would depend significantly on the
financial and regulatory risk management controls that already exist in
the broker or dealer's system, as well as the nature of the broker or
dealer's business. In many cases, the Rule may be substantially
satisfied by a small broker-dealer's pre-existing financial and
regulatory risk management controls and current supervisory procedures.
Further, staff discussions with various industry participants indicated
that very few, if any, small broker-dealers with market access provide
other persons with ``unfiltered'' access, which may require more
significant systems upgrades to comply with the Rule. Therefore, these
brokers or dealers should only require limited updates to their systems
to meet the requisite risk management controls and other requirements
in the Rule. The Rule also would impact small brokers or dealers that
utilize risk management technology provided by a vendor or some other
third party; however, the proposed requirement to directly monitor the
operation of the financial and regulatory risk management controls
should not impose a significant cost or burden because the Commission
understands that such technology allows the broker or dealer to
exclusively manage such controls.\281\
---------------------------------------------------------------------------

    \281\ The Commission's understanding is based on discussions
with various industry participants.
---------------------------------------------------------------------------

D. Reporting, Recordkeeping, and Other Compliance Requirements

    The Rule will require brokers or dealers to establish, document,
and maintain certain risk management controls and supervisory
procedures reasonably designed to limit financial exposure and ensure
compliance with applicable regulatory requirements as well as regularly
review such controls and procedures, and document the review, and
remediate issues discovered to assure overall effectiveness of such
controls and procedures. The financial and regulatory risk management
controls and supervisory procedures required by the Rule must be under
the direct and exclusive control of the broker or dealer with market
access. The Rule, however, permits a broker-dealer providing market
access to reasonably allocate, by written contract, control over
specific regulatory risk management controls and supervisory procedures
to a customer that is a broker-dealer, so long as the broker-dealer
providing market access has a reasonable basis for determining that
such customer, based on its position in the transaction and
relationship with an ultimate customer, has better access than the
broker-dealer with market access to that ultimate customer and its
trading information such that it can more effectively implement the
specified controls or procedures than the broker-dealer providing
market access. Each such broker or dealer will be required to preserve
a copy of its supervisory procedures and a written description of its
risk management controls as part of its books and records in a manner
consistent with Rule 17a-4(e)(7) under the Exchange Act. Such regular
review will be required to be conducted in accordance with written
procedures and would be required to be

documented. The broker or dealer will be required to preserve a copy of
such written procedures, and documentation of each such review, as part
of its books and records in a manner consistent with Rule 17a-4(e)(7)
under the Exchange Act, and Rule 17a-4(b) under the Exchange Act,
respectively.
    In addition, the Chief Executive Officer (or equivalent officer)
will be required to certify annually that the broker or dealer's risk
management controls and supervisory procedures comply with the proposed
rule, and that the broker-dealer conducted such review. Such
certifications will be required to be preserved by the broker or dealer
as part of its books and records in a manner consistent with Rule 17a-
4(b) under the Exchange Act. Most small brokers or dealers currently
should already have supervisory procedures and record retention systems
in place. The Rule will require small brokers or dealers to update
their procedures and perform additional internal compliance functions.
Based on discussions with industry participants and the Commission's
prior experience with broker-dealers, the Commission estimates that
implementation of a regular review, modification of applicable
compliance policies and procedures, and preservation of such records
would require, on average, 60 hours of compliance staff time for
brokers or dealers depending on their business model.\282\ The
Commission believes that the business models of small brokers or
dealers would necessitate less than the average of 60 hours.
---------------------------------------------------------------------------

    \282\ See supra Section III.D.2.
---------------------------------------------------------------------------

E. Agency Action To Minimize Effects on Small Entities

    Pursuant to Section 3(a) of the Regulatory Flexibility Act,\283\
the Commission must consider certain types of alternatives, including:
(1) The establishment of differing compliance or recording requirements
or timetables that take into account the resources available to small
entities; (2) the clarification, consolidation, or simplification of
compliance and reporting requirements under the rule for small
entities; (3) the use of performance rather than design standards; and
(4) an exemption from coverage of the rule, or any part of the rule,
for small entities.
---------------------------------------------------------------------------

    \283\ 5 U.S.C. 603(c).
---------------------------------------------------------------------------

    The Commission considered whether it would be necessary or
appropriate to establish different compliance or reporting requirements
or timetables; or to clarify, consolidate, or simplify compliance and
reporting requirements under the Rule for small entities. Because the
Rule is designed to mitigate, as discussed in detail throughout this
release, significant financial and regulatory risks, the Commission
believes that small entities should be covered by the Rule. The
proposed rule includes performance standards. The Commission also
believes that the Rule is flexible enough for small broker-dealers to
comply with the Rule without the need for the establishment of
differing compliance or reporting requirements for small entities, or
exempting them from the Rule's requirements.

VII. Statutory Authority

    Pursuant to the Exchange Act and particularly, Sections 2, 3(b),
11A, 15, 17(a) and (b), and 23(a) thereof, 15 U.S.C. 78b, 78c(b), 78k-
1, 78o, 78q(a) and (b), and 78w(a), the Commission adopts Rule 15c3-5
under the Exchange Act that would require broker-dealers with market
access, or that provide a customer or any other person with market
access through use of its market participant identifier or otherwise,
to establish appropriate risk management controls and supervisory
systems.

Text of Rule 15c3-5

List of Subjects in 17 CFR Part 240

    Brokers, Reporting and recordkeeping requirements, Securities.

0
For the reasons set out in the preamble, 17 CFR part 240 is amended as
follows.

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

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

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5,
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4,
80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise
noted.
* * * * *

0
2. Section 240.15c3-5 is added to read as follows:

Sec.  240.15c3-5  Risk management controls for brokers or dealers with
market access.

    (a) For the purpose of this section:
    (1) The term market access shall mean:
    (i) Access to trading in securities on an exchange or alternative
trading system as a result of being a member or subscriber of the
exchange or alternative trading system, respectively; or
    (ii) Access to trading in securities on an alternative trading
system provided by a broker-dealer operator of an alternative trading
system to a non-broker-dealer.
    (2) The term regulatory requirements shall mean all federal
securities laws, rules and regulations, and rules of self-regulatory
organizations, that are applicable in connection with market access.
    (b) A broker or dealer with market access, or that provides a
customer or any other person with access to an exchange or alternative
trading system through use of its market participant identifier or
otherwise, shall establish, document, and maintain a system of risk
management controls and supervisory procedures reasonably designed to
manage the financial, regulatory, and other risks of this business
activity. Such broker or dealer shall preserve a copy of its
supervisory procedures and a written description of its risk management
controls as part of its books and records in a manner consistent with
Sec.  240.17a-4(e)(7). A broker-dealer that routes orders on behalf of
an exchange or alternative trading system for the purpose of accessing
other trading centers with protected quotations in compliance with Rule
611 of Regulation NMS (Sec.  242.611) for NMS stocks, or in compliance
with a national market system plan for listed options, shall not be
required to comply with this rule with regard to such routing services,
except with regard to paragraph (c)(1)(ii) of this section.
    (c) The risk management controls and supervisory procedures
required by paragraph (b) of this section shall include the following
elements:
    (1) Financial risk management controls and supervisory procedures.
The risk management controls and supervisory procedures shall be
reasonably designed to systematically limit the financial exposure of
the broker or dealer that could arise as a result of market access,
including being reasonably designed to:
    (i) Prevent the entry of orders that exceed appropriate pre-set
credit or capital thresholds in the aggregate for each customer and the
broker or dealer and, where appropriate, more finely-tuned by sector,
security, or otherwise by rejecting orders if such orders would exceed
the applicable credit or capital thresholds; and
    (ii) Prevent the entry of erroneous orders, by rejecting orders
that exceed appropriate price or size parameters, on an order-by-order
basis or over a short period of time, or that indicate duplicative
orders.

    (2) Regulatory risk management controls and supervisory procedures.
The risk management controls and supervisory procedures shall be
reasonably designed to ensure compliance with all regulatory
requirements, including being reasonably designed to:
    (i) Prevent the entry of orders unless there has been compliance
with all regulatory requirements that must be satisfied on a pre-order
entry basis;
    (ii) Prevent the entry of orders for securities for a broker or
dealer, customer, or other person if such person is restricted from
trading those securities;
    (iii) Restrict access to trading systems and technology that
provide market access to persons and accounts pre-approved and
authorized by the broker or dealer; and
    (iv) Assure that appropriate surveillance personnel receive
immediate post-trade execution reports that result from market access.
    (d) The financial and regulatory risk management controls and
supervisory procedures described in paragraph (c) of this section shall
be under the direct and exclusive control of the broker or dealer that
is subject to paragraph (b) of this section.
    (1) Notwithstanding the foregoing, a broker or dealer that is
subject to paragraph (b) of this section may reasonably allocate, by
written contract, after a thorough due diligence review, control over
specific regulatory risk management controls and supervisory procedures
described in paragraph (c)(2) of this section to a customer that is a
registered broker or dealer, provided that such broker or dealer
subject to paragraph (b) of this section has a reasonable basis for
determining that such customer, based on its position in the
transaction and relationship with an ultimate customer, has better
access than the broker or dealer to that ultimate customer and its
trading information such that it can more effectively implement the
specified controls or procedures.
    (2) Any allocation of control pursuant to paragraph (d)(1) of this
section shall not relieve a broker or dealer that is subject to
paragraph (b) of this section from any obligation under this section,
including the overall responsibility to establish, document, and
maintain a system of risk management controls and supervisory
procedures reasonably designed to manage the financial, regulatory, and
other risks of market access.
    (e) A broker or dealer that is subject to paragraph (b) of this
section shall establish, document, and maintain a system for regularly
reviewing the effectiveness of the risk management controls and
supervisory procedures required by paragraphs (b) and (c) of this
section and for promptly addressing any issues.
    (1) Among other things, the broker or dealer shall review, no less
frequently than annually, the business activity of the broker or dealer
in connection with market access to assure the overall effectiveness of
such risk management controls and supervisory procedures. Such review
shall be conducted in accordance with written procedures and shall be
documented. The broker or dealer shall preserve a copy of such written
procedures, and documentation of each such review, as part of its books
and records in a manner consistent with Sec.  240.17a-4(e)(7) and Sec.
240.17a-4(b), respectively.
    (2) The Chief Executive Officer (or equivalent officer) of the
broker or dealer shall, on an annual basis, certify that such risk
management controls and supervisory procedures comply with paragraphs
(b) and (c) of this section, and that the broker or dealer conducted
such review, and such certifications shall be preserved by the broker
or dealer as part of its books and records in a manner consistent with
Sec.  240.17a-4(b).
    (f) The Commission, by order, may exempt from the provisions of
this section, either unconditionally or on specified terms and
conditions, any broker or dealer, if the Commission determines that
such exemption is necessary or appropriate in the public interest
consistent with the protection of investors.

    By the Commission.

    Dated: November 3, 2010.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-28303 Filed 11-12-10; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register Volume 79, Number 9 (Tuesday, January 14, 2014)]
[Notices]
[Pages 2507-2508]
[FR Doc No: 2014-00568]

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DEPARTMENT OF TRANSPORTATION

National Highway Traffic Safety Administration

[Docket No. NHTSA-2013-0102; Notice 1]

Morgan 3 Wheeler Limited, Receipt of Petition for Decision of
Inconsequential Noncompliance

AGENCY: National Highway Traffic Safety Administration (NHTSA),
Department of Transportation (DOT).

ACTION: Receipt of petition.

-----------------------------------------------------------------------

SUMMARY: Morgan 3 Wheeler Limited (Morgan) \1\ has determined that
certain model year (MY) 2012 and 2013 Morgan model M3W three-wheeled
motorcycles, do not fully comply with paragraph S6 of Federal Motor
Vehicle Safety Standard (FMVSS) No. 205, Glazing Materials. Morgan has
filed an appropriate report dated August 6, 2013, pursuant to 49 CFR
part 573, Defect and Noncompliance Responsibility and Reports.
---------------------------------------------------------------------------

    \1\ Morgan 3 Wheeler Limited is an English corporation that
manufactures motor vehicles.

DATES: The closing date for comments on the petition is February 13,
---------------------------------------------------------------------------
2014.

ADDRESSES: Interested persons are invited to submit written data,
views, and arguments on this petition. Comments must refer to the
docket and notice number cited at the beginning of this notice and be
submitted by any of the following methods:
     Mail: Send comments by mail addressed to: U.S. Department
of Transportation, Docket Operations, M-30, West Building Ground Floor,
Room W12-140, 1200 New Jersey Avenue SE., Washington, DC 20590.
     Hand Deliver: Deliver comments by hand to: U.S. Department
of Transportation, Docket Operations, M-30, West Building Ground Floor,
Room W12-140, 1200 New Jersey Avenue SE., Washington, DC 20590. The
Docket Section is open on weekdays from 10 a.m. to 5 p.m. except
Federal Holidays.
     Electronically: Submit comments electronically by: Logging
onto the Federal Docket Management System (FDMS) Web site at http://www.regulations.gov/. Follow the online instructions for submitting
comments. Comments may also be faxed to<PHONE_NUMBER>.
    Comments must be written in the English language, and be no greater
than 15 pages in length, although there is no limit to the length of
necessary attachments to the comments. If comments are submitted in
hard copy form, please ensure that two copies are provided. If you wish
to receive confirmation that your comments were received, please
enclose a stamped, self-addressed postcard with the comments. Note that
all comments received will be posted without change to http://www.regulations.gov, including any personal information provided.
    Documents submitted to a docket may be viewed by anyone at the
address and times given above. The documents may also be viewed on the
Internet at http://www.regulations.gov by following the online
instructions for accessing the dockets. DOT's complete Privacy Act
Statement is available for review in the Federal Register published on
April 11, 2000, (65 FR 19477-78).
    The petition, supporting materials, and all comments received
before the close of business on the closing date indicated below will
be filed and will be considered. All comments and supporting materials
received after the closing date will also be filed and will be
considered to the extent possible. When the petition is granted or
denied, notice of the decision will be published in the Federal
Register pursuant to the authority indicated below.

SUPPLEMENTARY INFORMATION:
    I. Morgan's petition: Pursuant to 49 U.S.C. 30118(d) and 30120(h)
(see implementing rule at 49 CFR part 556), Morgan submitted a petition
for an exemption from the notification and remedy requirements of 49
U.S.C. Chapter 301 on the basis that this noncompliance is
inconsequential to motor vehicle safety.
    This notice of receipt of Morgan's petition is published under 49
U.S.C. 30118 and 30120 and does not represent any agency decision or
other exercise of judgment concerning the merits of the petition.
    II. Vehicles involved: Affected are approximately 139 MY 2012 and
2013 Morgan model M3W three-wheeled motorcycles manufactured during the
period August 1, 2012 to August 14, 2013.
    III. Noncompliance: Morgan explains that the noncompliance is that
the wind deflectors on the vehicles do not have the markings required
by FMVSS No. 205.
    IV. Rule Text: Paragraph S6 of FMVSS No. 205 requires in pertinent
part:

    S6.1 A prime glazing material manufacturer must certify, in
accordance with 49 U.S.C. 30115, each piece of glazing material to
which this standard applies that is designed--
    (a) As a component of any specific motor vehicle or camper; or
    (b) To be cut into components for use in motor vehicles or items
of motor vehicle equipment.
    S6.2 A prime glazing manufacturer certifies its glazing by
adding to the marks required by section 7 of ANSI/SAE Z26.1-1996, in
letters and numerals of the same size, the symbol ``DOT'' and a
manufacturer's code mark that NHTSA assigns to the manufacturer.
NHTSA will assign a code mark to a manufacturer after the
manufacturer submits a written request to the Office of Vehicle
Safety Compliance, National Highway Traffic Safety Administration,
400 Seventh Street SW., Washington, DC 20590. The request must
include the company name, address, and a statement from the
manufacturer certifying its status as a prime glazing manufacturer
as defined in S4.
    S6.3 A manufacturer or distributor who cuts a section of glazing
material to which this standard applies, for use in a motor vehicle
or camper, must--
    (a) Mark that material in accordance with section 7 of ANSI/SAE
Z26.1-1996; and
    (b) Certify that its product complies with this standard in
accordance with 49 U.S.C. 30115.

    V. Summary of Morgan's Analyses: Morgan stated its belief that the
subject noncompliance is inconsequential to motor vehicle safety for
the following reasons:

    a. The wind deflector fitted in the M3W uses glazing that
conforms to item 6 ANSI 226.1-1996-windshields for motorcycles. It
is so small (its dimensions are 1O x 5) that
it is not requisite for driving visibility.
    b. Morgan owners will go to Morgan dealers for replacement of
the wind deflector.
    c. The noncompliance is not likely to increase the safety risk
to individual occupants who experience the type of injurious event
against which the standard was designed to protect.
    d. There have been no reports of any safety issues. Both in the
US and the rest of the world, Morgan knows of no injuries caused by
the noncompliance.
    e. The subject noncompliance here is inconsequential in view of
the nature of the vehicle in question because Morgan possesses
attributes enumerated in several previous NHTSA inconsequential
noncompliance determinations that it believes can be applied to a
decision on its petition. See Morgan's petition for a complete
discussion of its reasoning.

    Morgan additionally stated that it shall as regards ongoing
production; mark the wind deflector to comply with the FMVSS No. 205
requirements.
    In summation, Morgan believes that the described noncompliance of
the subject vehicles is inconsequential to motor vehicle safety, and
that its petition, to exempt from providing

recall notification of noncompliance as required by 49 U.S.C. 30118 and
remedying the recall noncompliance as required by 49 U.S.C. 30120
should be granted.
    NHTSA notes that the statutory provisions (49 U.S.C. 30118(d) and
30120(h)) that permit manufacturers to file petitions for a
determination of inconsequentiality allow NHTSA to exempt manufacturers
only from the duties found in sections 30118 and 30120, respectively,
to notify owners, purchasers, and dealers of a defect or noncompliance
and to remedy the defect or noncompliance. Therefore, any decision on
this petition only applies to the vehicles that Morgan no longer
controlled at the time it determined that the noncompliance existed.
However, a decision on this petition cannot relieve vehicle
distributors and dealers of the prohibitions on the sale, offer for
sale, introduction or delivery for introduction into interstate
commerce of the noncompliant motor vehicles under their control after
Morgan notified them that the subject noncompliance existed.

    Authority:  (49 U.S.C. 30118, 30120: Delegations of authority at
49 CFR 1.95 and 501.8)

    Issued on: January 9, 2014.
Claude H. Harris,
Director, Office of Vehicle Safety Compliance.
[FR Doc. 2014-00568 Filed 1-13-14; 8:45 am]
BILLING CODE 4910-59-P


[Federal Register Volume 82, Number 12 (Thursday, January 19, 2017)]
[Rules and Regulations]
[Pages 6218-6221]
[FR Doc No: 2017-00439]

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DEPARTMENT OF COMMERCE

Bureau of Industry and Security

15 CFR Parts 742 and 748

[Docket No. 170104015-7015-01]
RIN 0694-AH26

Amendments to the Export Administration Regulations Implementing
an Additional Phase of India-U.S. Export Control Cooperation

AGENCY: Bureau of Industry and Security, Commerce.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: In this final rule, the Bureau of Industry and Security (BIS)
amends the Export Administration Regulations (EAR) to implement the
India-U.S. Joint Statement of June 7, 2016 (June Statement), which
recognized the United States and India as Major Defense Partners. This
rule amends the EAR by establishing a licensing policy of general
approval for exports or

reexports to or transfers within India of items subject to the EAR and
controlled only for National Security or Regional Stability reasons. In
addition, BIS amends the end use and end user provisions of the
Validated End User (VEU) authorization to state that items obtained
under authorization VEU in India may be used for either civil or
military end uses other than those that are for use in nuclear,
``missile,'' or chemical or biological weapons activities.

DATES: This rule is effective January 19, 2017.

FOR FURTHER INFORMATION CONTACT: Alexander Lopes, Director, Office of
Nonproliferation Controls and Treaty Compliance, Bureau of Industry and
Security, Phone:<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

Background

    As announced by President Obama and India's Prime Minister Singh in
a U.S.-India Joint Statement on November 8, 2010, the United States and
India formally committed to work together to strengthen the global
nonproliferation and export control framework and further transform
bilateral export control cooperation to realize the full potential of
the global strategic partnership between the two countries. The leaders
agreed to take mutual steps to expand cooperation in civil space,
defense, and other high-technology sectors. The steps agreed to by the
United States included the removal of Indian defense and space-related
entities from the Entity List (Supplement No. 4 to part 744 of the EAR)
and the realignment of India in U.S. export control regulations.
Additionally, the 2010 Joint Statement announced that the United States
``intend[ed] to support India's full membership in the four
multilateral export control regimes (Nuclear Suppliers Group, Missile
Technology Control Regime, Australia Group, and Wassenaar Arrangement)
in a phased manner, and to consult with regime members to encourage the
evolution of regime membership criteria,'' while maintaining these
regimes' core principles, ``as the Government of India took steps
towards the full adoption of the regimes' export control requirements
to reflect its prospective membership, with both processes moving
forward together.''
    To date, BIS has published two rules implementing the President's
and Prime Minister's commitments. The first rule, published on January
25, 2011 (76 FR 4228), revised certain export and reexport controls for
India, including the removal of nine Indian entities from the Entity
List. In addition, BIS amended the EAR to remove India from Country
Groups D:2, D:3 and D:4, and added India to Country Group A:2.
    In the second rule, published January 23, 2015 (80 FR 3463), BIS
amended the EAR, in furtherance of the United States' commitment to the
bilateral understanding, by removing India from Crime Control (CC)
columns 1 and 3 and from Regional Stability (RS) column 2 on the
Commerce Country Chart in Supplement No. 1 to Part 738 of the EAR,
because the Government of India had taken appropriate steps to ensure
that U.S.-origin items controlled for CC and RS reasons are not
reexported from India without a license. Although the second rule
removed the license requirement for the majority of items controlled
for CC or RS reasons and destined for India, a license requirement
remained for items controlled under export control classification
numbers (ECCNs) 6A003.b.4.b and 9A515.e for RS column 2 reasons when
destined to India.
    In addition, BIS published on August 17, 2016, a third rule (81 FR
54721) that was not specific to the bilateral understanding but
nonetheless removed a related requirement to include a destination
control statement on shipping documents for items controlled for CC
columns 1 and 3, and RS column 2 reasons when the items are exported to
India.

New Amendments

    In this rule, BIS implements an additional step in furtherance of
the U.S.-India bilateral understanding and global strategic
partnership. On June 7, 2016, the United States and India issued a
Joint Statement entitled, ``The United States and India: Enduring
Global Partners in the 21st Century.'' Specifically, in this rule, BIS
implements the understanding between the United States and India
expressed in the June Statement regarding U.S. export control policy
toward India by establishing a new paragraph (b)(8) in Sec.  742.4
(National Security) and a new paragraph (b)(5) in Sec.  742.6 (Regional
Stability). These new provisions establish licensing policies of
general approval for exports or reexports to or transfers within India
of items subject to the EAR, including ``600 series'' military items,
for civil or military end uses in India or for the ultimate end use by
the Government of India, for reexport to a Country Group A:5 country,
or for return to the United States, so long as such items are not for
use in nuclear, ``missile,'' or chemical or biological weapons
activities. This rule does not amend any other licensing policies in
part 742 such as those with respect to Missile Technology items. The
rule also does not amend any licensing policies pertaining to naval
nuclear propulsion. The Country Group A:5 countries are listed in
Supplement Number 1 to part 740 and are often informally referred to as
the ``STA-36'' countries because they are the list of countries to
which exports under License Exception Strategic Trade Authorization are
authorized pursuant to the conditions and limitations of section
740.20(b)(3).
    In addition, BIS amends the end user and end use provisions of the
Validated End User (VEU) authorization in Sec.  748.15 (Authorization
Validated End-User (VEU)), paragraphs (a) (eligible end user provision)
and (d) (end-use restrictions), to allow that items obtained under
authorization VEU in India may be used for civil or military end uses
other than those that involve items controlled for MT reasons, or if
for use in nuclear, ``missile,'' or chemical or biological weapons
activities. Section 748.15(c) does not change the January 23, 2015 (80
FR 3463), amendment to the EAR regarding the export and reexport of
Crime Control (CC) columns 1 and 3 items to India. Conforming changes
are made to paragraph (7)(ii) in Supplement No. 8 to Part 748
(Information Required in Requests for Validated End-User (VEU)
Authorization). No other material changes are made in this rule to the
VEU program, such as the process for approving a VEU, VEU compliance
obligations, the rules pertaining to VEUs in China, or the process of
identifying approved VEUs and eligible items and facilities in
Supplement No. 7 to Part 748.

Export Administration Act

    Although the Export Administration Act expired on August 20, 2001,
the President, through Executive Order 13222 of August 17, 2001, 3 CFR,
2001 Comp., p. 783 (2002), as amended by Executive Order 13637 of March
8, 2013, 78 FR 16129 (March 13, 2013), and as extended most recently by
the Notice of August 4, 2016, 81 FR 52587 (August 8, 2016), has
continued the EAR in effect under the International Emergency Economic
Powers Act. BIS continues to carry out the provisions of the Export
Administration Act, as appropriate and to the extent permitted by law,
pursuant to Executive Order 13222 as amended by Executive Order 13637.

Rulemaking Requirements

    1. Executive Orders 13563 and 12866 direct agencies to assess all
costs and

benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, public health and safety
effects, distributive impacts, and equity). Executive Order 13563
emphasizes the importance of quantifying both costs and benefits, of
reducing costs, of harmonizing rules, and of promoting flexibility.
This rule has been determined to be not significant for purposes of
Executive Order 12866.
    2. Notwithstanding any other provision of law, no person is
required to respond to, nor shall any person be subject to a penalty
for failure to comply with, a collection of information subject to the
requirements of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et
seq.) (PRA), unless that collection of information displays a currently
valid Office of Management and Budget (OMB) control number. This rule
involves a collection of information approved under OMB control number
0694-0088--Simplified Network Application Process--Redesign System
(SNAP-R) and the Multipurpose Export License Application, which carries
an annual estimated burden of 31,833 hours. BIS believes that this rule
will not have a material impact on that burden because this rule does
not increase or decrease BIS's existing licensing requirements. To the
extent that it has any impact, BIS believes that the benefits of this
rule justify any additional (and likely minimal) additional burden it
might create. Send comments regarding this burden estimate or any other
aspect of this collection of information, including suggestions for
reducing the burden, to Jasmeet K. Seehra, Office of Management and
Budget, by email at<EMAIL_ADDRESS>or by fax to<PHONE_NUMBER>.
    3. This rule does not contain policies with Federalism implications
as that term is defined under Executive Order 13132.
    4. The provisions of the Administrative Procedure Act (5 U.S.C.
553) requiring notice of proposed rulemaking and the opportunity for
public participation, and a delay in effective date, are inapplicable
because this regulation involves a military or foreign affairs function
of the United States (see 5 U.S.C. 553(a)(1)). This rule advances
essential foreign policy, national security, and nonproliferation goals
of the United States and a critical strategic partner, India.
Subsequent agency deliberations following the June Statement culminated
in this framework for regulatory implementation of the Statement. Delay
in implementing this rule to obtain public comment or for any other
reason would undermine the good faith timeliness in which the United
States signed, and now implements, the Statement and, therefore, would
undermine the foreign policy objectives that the rule is intended to
serve. Further, no other law requires that a notice of proposed
rulemaking or an opportunity for public comment be given for this rule.
Because a notice of proposed rulemaking and an opportunity for public
comment are not required for this rule under 5 U.S.C. 553, or by any
other law, the requirements of the Regulatory Flexibility Act (5 U.S.C.
601 et seq.) are not applicable.

List of Subjects

15 CFR Part 742

    Exports, Terrorism.

15 CFR Part 748

    Administrative practice and procedure, Exports, Reporting and
recordkeeping requirements.

    Accordingly, 15 CFR parts 742 and 748 of the EAR (15 CFR parts 730
through 774) are amended as follows:

PART 742--CONTROL POLICY--CCL BASED CONTROLS

0
1. The authority citation for 15 CFR part 742 continues to read as
follows:

    Authority: 50 U.S.C. 4601 et seq.; 50 U.S.C. 1701 et seq.; 22
U.S.C. 3201 et seq.; 42 U.S.C. 2139a; 22 U.S.C. 7201 et seq.; 22
U.S.C. 7210; Sec. 1503, Pub. L. 108-11, 117 Stat. 559; E.O. 12058,
43 FR 20947, 3 CFR, 1978 Comp., p. 179; E.O. 12851, 58 FR 33181, 3
CFR, 1993 Comp., p. 608; E.O. 12938, 59 FR 59099, 3 CFR, 1994 Comp.,
p. 950; E.O. 13026, 61 FR 58767, 3 CFR, 1996 Comp., p. 228; E.O.
13222, 66 FR 44025, 3 CFR, 2001 Comp., p. 783; Presidential
Determination 2003-23, 68 FR 26459, 3 CFR, 2004 Comp., p. 320;
Notice of November 12, 2015, 80 FR 70667 (November 13, 2015); Notice
of August 4, 2016, 81 FR 52587 (August 8, 2016).

0
2. Section 742.4 is amended by adding paragraph (b)(8) to read as
follows:

Sec.  742.4  National security.

* * * * *
    (b) * * *
    (8) For India, there is a general policy of approval for license
applications to export, reexport, or transfer items, including ``600
series'' items, for civil or military end uses in India, for ultimate
end use by the Government of India, for reexport to countries in
Country Group A:5, or for return to the United States, so long as such
items are not for use in nuclear, ``missile,'' or chemical or
biological weapons activities.
* * * * *

0
3. Section 742.6 is amended by adding paragraph (b)(7) to read as
follows:

Sec.  742.6   Regional Stability.

* * * * *
    (b) * * *
    (7) For India, there is a general policy of approval for license
applications to export, reexport, or transfer items, including ``600
series'' items, for civil or military end uses in India, for ultimate
end use by the Government of India, for reexport to countries in
Country Group A:5, or for return to the United States, so long as such
items are not for use in nuclear, ``missile,'' or chemical or
biological weapons activities.
* * * * *

PART 748--APPLICATIONS (CLASSIFICATION, ADVISORY, AND LICENSE) AND
DOCUMENTATION

0
4. The authority citation for 15 CFR part 748 continues to read as
follows:

    Authority: 50 U.S.C. 4601 et seq.; 50 U.S.C. 1701 et seq.; 22
U.S.C. 3201 et seq.; 42 U.S.C. 2139a; 22 U.S.C. 7201 et seq.; 22
U.S.C. 7210; Sec. 1503, Pub. L. 108-11, 117 Stat. 559; E.O. 12058,
43 FR 20947, 3 CFR, 1978 Comp., p. 179; E.O. 12851, 58 FR 33181, 3
CFR, 1993 Comp., p. 608; E.O. 12938, 59 FR 59099, 3 CFR, 1994 Comp.,
p. 950; E.O. 13026, 61 FR 58767, 3 CFR, 1996 Comp., p. 228; E.O.
13222, 66 FR 44025, 3 CFR, 2001 Comp., p. 783; Presidential
Determination 2003-23, 68 FR 26459, 3 CFR, 2004 Comp., p. 320;
Notice of November 12, 2015, 80 FR 70667 (November 13, 2015); Notice
of August 4, 2016, 81 FR 52587 (August 8, 2016).

0
5. Section 748.15 is amended by revising paragraphs (a)(2) and (d)
introductory text to read as follows:

Sec.  748.15   Authorization Validated End-User (VEU).

* * * * *
    (a) * * *
    (2) In evaluating an end user for eligibility under authorization
VEU, the ERC will consider a range of information, including such
factors as: The entity's record of exclusive engagement in appropriate
end-use activities; the entity's compliance with U.S. export controls;
the need for an on-site review prior to approval; the entity's
capability of complying with the requirements of authorization VEU; the
entity's agreement to on-site reviews by representatives of the U.S.
Government to ensure adherence to the conditions of the VEU
authorization; and the entity's relationships with U.S. and foreign
companies. In addition, when evaluating the eligibility of an end user,
the ERC will consider the status of

export controls and the support and adherence to multilateral export
control regimes of the government of the eligible destination.
* * * * *
    (d) End-use restrictions. Items obtained under authorization VEU in
China may be used only for civil end uses and may not be used for any
activities described in part 744 of the EAR. Items obtained under
authorization VEU in India may be used for either civil or military end
uses and may not be used for any activities described in part 744 of
the EAR. Exports, reexports, or transfers made under authorization VEU
may be made to an end user listed in Supplement No. 7 to this part only
if the items will be consigned to and for use by the validated end
user. Eligible end-users who obtain items under VEU may only:
* * * * *

0
6. Paragraph (7)(ii) of the section titled Required Information for
Validated End-User Authorization Requests in Supplement No. 8 to part
748 is revised to read as follows:

Supplement No. 8 to Part 748--Information Required in Requests for
Validated End-User (VEU) Authorization

* * * * *

Required Information for Validated End-User Authorization Requests

* * * * *
    (7) * * *
    (ii) Understands and will abide by all authorization VEU end-use
restrictions, including the requirement that items received under
authorization VEU will only be used for authorized end-uses and may
not be used for any activities described in part 744 of the EAR;
* * * * *

    Dated: January 6, 2017.
Kevin J. Wolf,
Assistant Secretary for Export Administration.
[FR Doc. 2017-00439 Filed 1-18-17; 8:45 am]
 BILLING CODE 3510-33-P


[Federal Register: January 24, 2008 (Volume 73, Number 16)]
[Notices]
[Page 4306-4307]
[DOCID:fr24ja08-137]

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DEPARTMENT OF TRANSPORTATION

Pipeline and Hazardous Materials Safety Administration, Office of
Hazardous Materials Safety

Notice of Applications for Modification of Special Permit

AGENCY: Pipeline and Hazardous Materials Safety Administration (PHMSA),
DOT.

ACTION: List of Applications for Modifications of Special Permit.

-----------------------------------------------------------------------

SUMMARY: In accordance with the procedures governing the application
for, and the processing of, special permits from the Department of
Transportation's Hazardous Material Regulations (49 CFR part 107,
subpart B), notice is hereby given that the Office of Hazardous
Materials Safety has received the application described herein. This
notice is abbreviated to expedite docketing and public notice. Because
the sections affected, modes of transportation, and the nature of
application have been shown in earlier

Federal Register publications, they are not repeated here. Requests of
modifications of special permits (e.g., to provide for additional
hazardous materials, packaging design changes, additional mode of
transportation, etc.) are described in footnotes to the application
number. Application numbers with the suffix ``M'' demote a modification
request. These applications have been separated from the new
application for special permits to facilitate processing.

DATES: Comments must be received on or before February 8, 2008.

ADDRESS COMMENTS TO: Record Center, Pipeline and Hazardous Materials
Safety Administration, U.S. Department of Transportation, Washington,
DC 20590.
    Comments should refer to the application number and be submitted in
triplicate. If confirmation of receipt of comments is desired, include
a self-addressed stamped postcard showing the special permit number.

FOR FURTHER INFORMATION CONTACT: Copies of the applications are
available for inspection in the Records Center, East Building, PHH-30,
1200 New Jersey Avenue, SE., Washington, DC or at http://dms.dot.gov.

    This notice of receipt of applications for modification of special
permit is published in accordance with part 107 of the Federal
hazardous materials transportation law (49 U.S.C. 5117(b); 49 CFR
1.53(b)).

    Issued in Washington, DC on January 14, 2008.
Delmer F. Billings,
Director, Office of Hazardous Materials, Special Permits and Approvals.

                                          Modification Special Permits
----------------------------------------------------------------------------------------------------------------
                                                                                Nature of special
   Application  No.           Docket  No.           Applicant        Regulation(s)  affected     permit thereof
----------------------------------------------------------------------------------------------------------------
14318-M...............  PHMSA-23861...........  Lockheed Martin    49 CFR 173.315............  To modify the
                                                 Corporation                                    special permit
                                                 (Former Grantee:                               to clarify the
                                                 Lockheed-Martin                                requirement for
                                                 Technical                                      a dedicated
                                                 Operations)                                    enclosed metal-
                                                 Vandenberg AFB,                                sided truck.
                                                 CA.
14608-M...............  ......................  Ultimate           49 CFR 173.304............  To reissue the
                                                 Adventure                                      special permit
                                                 Ballooning, LLC                                originally
                                                 Washington, MO.                                issued on an
                                                                                emergency basis
                                                                                for the
                                                                                transportation
                                                                                in commerce of
                                                                                non-DOT
                                                                                specification
                                                                                tanks that
                                                                                contain propane.
----------------------------------------------------------------------------------------------------------------

[FR Doc. 08-249 Filed 1-23-08; 8:45 am]

BILLING CODE 4909-60-M