81 FR 18902 - Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Delete From the Rulebook Section 10, Limitations on Dealings, of Chapter VII, Market Participants
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 81, Issue 63 (April 1, 2016)
Federal Register Volume 81, Issue 63 (April 1, 2016)
| Page Range | 18902-18907 | |
| FR Document | 2016-07337 |
[Federal Register Volume 81, Number 63 (Friday, April 1, 2016)] [Notices] [Pages 18902-18907] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-07337] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-77460; File No. SR-NASDAQ-2016-040] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Delete From the Rulebook Section 10, Limitations on Dealings, of Chapter VII, Market Participants March 28, 2016. 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 March 22, 2016, The NASDAQ Stock Market LLC (``Exchange'') filed with the Securities and Exchange Commission (``SEC'' or ``Commission'') the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Exchange has designated this proposal as a ``non-controversial'' proposed rule change pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6)(iii) thereunder,\4\ which renders it effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ 15 U.S.C. 78s(b)(3)(A). \4\ 17 CFR 240.19b-4(f)(6)(iii). --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to delete from the Exchange's rulebook Section 10, Limitations on Dealings, of Chapter VII, Market Participants. The text of the proposed rule change is available on the Exchange's Web site at http://nasdaq.cchwallstreet.com, at the principal office of the Exchange, 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 is proposing to adopt a principles-based approach to prohibit the misuse of material nonpublic information by NOM Options Market Makers (``Market Makers'') by deleting from the Exchange's rulebook Section 10, Limitations on Dealings, of Chapter VII, Market Participants (the ``Market Maker Restrictions''). In doing so, the Exchange would harmonize its rules governing Exchange Options Participants,\5\ generally, and Exchange Market Makers, in particular, relating to protecting against the misuse of material, non-public information. --------------------------------------------------------------------------- \5\ The term ``Options Participant'' or ``Participant'' means a firm or organization that is registered with the Exchange pursuant to Chapter II of the NOM Rules for purposes of participating in options trading on NOM as a ``Nasdaq Options Order Entry Firm'' or ``Nasdaq Options Market Maker''. --------------------------------------------------------------------------- The Exchange believes that the Market Maker Restrictions are no longer necessary because all Market Makers are subject to the Exchange's general principles-based requirements governing the protection against the misuse of material, non-public information, pursuant to Chapter III, Business Conduct, Section 4, Prevention of the Misuse of Material Nonpublic Information, discussed below, which obviates the need for separately-prescribed requirements for a subset of market participants on the Exchange. Additionally, there is no separate regulatory purpose served by having separate rules for Market Makers. The Exchange notes that this proposed rule change will not decrease the protections against the misuse of material, non-public information; instead, it is designed to provide more flexibility to market participants. This is a competitive filing that is based on a proposal recently submitted by NYSE [[Page 18903]] MKT LLC (``NYSE MKT'') and approved by the Commission.\6\ --------------------------------------------------------------------------- \6\ See Securities Exchange Act Release No. 75432 (July 13, 2015), 80 FR 42597 (July 17, 2015) (Order Approving SR-NYSEMKT-2015- 23). See also Securities Exchange Act Release Nos. 75792 (August 31, 2015), 80 FR 53606 (September 4, 2015) (SR-ISE-2015-26) and 76687 (December 18, 2015), 80 FR 80403 (December 24, 2015) (SR-PHLX-2015- 85). --------------------------------------------------------------------------- A Market Maker is an Options Participant registered with the Exchange for the purpose of making markets in options contracts traded on the Exchange and that is vested with the rights and responsibilities specified in Chapter VII of the NOM rules.\7\ Importantly, all Market Makers have access to the same information in the Exchange's order book. Moreover, Market Makers have no agency obligations on the Exchange's order book. Notwithstanding that Market Makers have access to the same Exchange trading information as all other market participants on the Exchange, the Exchange has specific rules governing how Market Makers may operate. --------------------------------------------------------------------------- \7\ See Chapter I, General Provisions, Section 1, Definitions, subsection (a)(26). --------------------------------------------------------------------------- Proposed Rule Change The Exchange believes that the Market Maker Restrictions are no longer necessary and proposes to delete them. The Exchange also believes that Chapter III, Section 4, governing the misuse of material, non-public information, provides for an appropriate, principles-based approach to prevent the market abuses the Market Maker Restrictions are designed to address. Specifically, Chapter III, Section 4, provides that every Options Participant shall establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of the Participant's business, to prevent the misuse of material nonpublic information by such Participant or persons associated with such Participant in violation of the federal securities laws or the Rules thereunder, and the Rules of the Exchange. Chapter III, Section 4, provides that misuse of material nonpublic information includes, but is not limited to: (i) Trading in any securities issued by a corporation, or in any related securities or related options or other derivative securities, while in possession of material nonpublic information concerning that corporation; (ii) trading in an underlying security or related options or other derivative securities, while in possession of material nonpublic information concerning imminent transactions in the underlying security or related securities; and (iii) disclosing to another person any material nonpublic information involving a corporation whose shares are publicly traded or disclosing an imminent transaction in an underlying security or related securities for the purpose of facilitating the possible misuse of such material nonpublic information. Subsection (c) of Chapter III, Section 4, requires each Options Participant to establish, maintain, and enforce certain policies and procedures as appropriate for the nature of each Participant's business.\8\ Under the rule, Participants that are required to file Form X-17A-5 under the Exchange Act or Rules thereunder, with the Exchange on an annual basis only, shall, contemporaneously with those submissions, file attestations signed by such Participants stating that the procedures mandated by this Section have been established, enforced and maintained. The rule requires any Options Participant or associated person who becomes aware of any possible misuse of material nonpublic information to promptly notify Nasdaq Regulation. --------------------------------------------------------------------------- \8\ In particular, the rule requires that (i) all associated persons must be advised in writing of the prohibition against the misuse of material nonpublic information; (ii) signed attestations from the Participant and all associated persons affirming their awareness of, and agreement to abide by, the aforementioned prohibitions must be maintained for at least three (3) years, the first two (2) years in an easily accessible place; (iii) records of all brokerage accounts maintained by the Participant and all associated persons must be acquired and maintained for at least three (3) years, the first two (2) years in an easily accessible place, and such brokerage accounts must be reviewed periodically by the Participant for the purpose of detecting the possible misuse of material nonpublic information; and (iv) any business dealings the Participant may have with any corporation whose securities are publicly traded, or any other circumstances that may result in the Participant receiving, in the ordinary course of business, material nonpublic information concerning any such corporation, must be identified and documented. --------------------------------------------------------------------------- Finally, subsection (f) of Chapter III, Section 4, specifies that it may be considered conduct inconsistent with just and equitable principles of trade for any Participant or person associated with a Participant who has knowledge of all material terms and conditions of (i) an order and a solicited order, (ii) an order being facilitated or submitted to NOM for price improvement (e.g., price improving orders), or (iii) orders being crossed; the execution of which are imminent, to enter, based on such knowledge, an order to buy or sell an option for the same underlying security as any option that is the subject of the order, or an order to buy or sell the security underlying such class, or an order to buy or sell any related instrument until (a) the terms and conditions of the order and any changes in the terms and conditions of the order of which the Participant or person associated with the Participant has knowledge are disclosed, or (b) the trade can no longer reasonably be considered imminent in view of the passage of time since the order was received. It states that the terms of an order are ``disclosed'' to NOM Option Participants when the order is entered into the NOM Book. For purposes of subsection (f), an order to buy or sell a ``related instrument'' means, in reference to an index option, an order to buy or sell securities comprising 10% or more of the component securities in the index or an order to buy or sell a futures contract on an economically equivalent index. Because Options Participants are already subject to the requirements of Chapter III, Section 4, as described above, the Exchange does not believe it necessary to separately require specific limitations on Market Makers. Deleting the Market Maker Restrictions including its requirements for specific procedures would provide Market Makers flexibility to adapt their policies and procedures as appropriate to reflect changes to their business model, business activities, or the securities market in a manner similar to how Options Participants on the Exchange currently operate and consistent with Chapter III, Section 4. Options Participants registered as Market Makers have certain rights and bear certain responsibilities beyond those of other Options Participants.\9\ [[Page 18904]] Market Makers are distinguished under Exchange rules from other Options Participants in that Market Makers have quoting obligations.\10\ However, none of these heightened obligations or different entitlements provides different or greater access to nonpublic information than any other Options Participant on the Exchange. Accordingly, because Market Makers do not have any trading advantages at the Exchange due to their market role, the Exchange believes they should be subject to the same rules as other Options Participants regarding the protection against the misuse of material non-public information, which in this case is existing Chapter III, Section 4.\11\ --------------------------------------------------------------------------- \9\ Chapter VII, Section 5, Obligations of Market Makers, of the NOM rules provides that in registering as a Market Maker, an Options Participant commits himself to various obligations and that transactions of a Market Maker in its market making capacity must constitute a course of dealings reasonably calculated to contribute to the maintenance of a fair and orderly market. The rule states that Market Makers should not make bids or offers or enter into transactions that are inconsistent with such course of dealings and that ordinarily, Market Makers are expected to (i) during trading hours, maintain a two-sided market, pursuant to Section 6(d)(i) of Chapter VII, in those options in which the Market Maker is registered to trade, in a manner that enhances the depth, liquidity and competitiveness of the market, (ii) [Reserved], (iii) engage, to a reasonable degree under the existing circumstances, in dealings for their own accounts when there exists, or it is reasonably anticipated that there will exist, a lack of price continuity, a temporary disparity between the supply of (or demand for) a particular option contract, or a temporary distortion of the price relationships between option contracts of the same class, (iv) compete with other Market Makers in all options in which the Market Maker is registered to trade, (v) make markets that will be honored for the number of contracts entered into NOM's System in all options in which the Market Maker is registered to trade (vi) update quotations in response to changed market conditions in all options in which the Market Maker is registered to trade (vii) maintain active markets in all options in which the Market Maker is registered, and (viii) honor all orders that the Trading System routes to away markets pursuant to Chapter XII of the NOM rules. Section 5 further provides that Market Makers should not effect purchases or sales on NOM except in a reasonable and orderly manner. If Nasdaq Regulation finds any substantial or continued failure by a Market Maker to engage in a course of dealings as specified in paragraph (a) of Section 5, such Market Maker will be subject to disciplinary action or suspension or revocation of registration in one or more of the securities in which the Market Maker is registered. \10\ Section 6, Market Maker Quotations, of Chapter VII, Market Participants, details specific Market Maker quoting obligations. \11\ The Exchange notes that by deleting the Market Maker Restrictions, the Exchange would no longer require specific information barriers for Market Makers or require pre-approval of any information barriers that a Market Maker would erect for purposes of protecting against the misuse of material non-public information. However, the policies and procedures of Market Makers, including those relating to information barriers, would be subject to review by FINRA, on behalf of the Exchange, pursuant to a Regulatory Services Agreement. --------------------------------------------------------------------------- The Exchange is not proposing to change what is considered to be material, nonpublic information that an affiliated brokerage business of a Market Maker could share with such Market Maker. In that regard, the proposed rule change will not permit affiliates of a Market Maker to have access to any non-public order or quote information of the Market Maker, including hidden or undisplayed size or price information of such orders or quotes. Affiliates of Market Makers would only have access to orders and quotes that are publicly available to all market participants. Members do not expect to receive any additional order or quote information as a result of this proposed rule change. The Exchange does not believe that there will be any material change to member information barriers as a result of the removal of the Exchange pre-approval requirement. The Exchange has rules prohibiting Options Participants from disadvantaging their customers or other market participants by improperly capitalizing on the Options Participant's access to or receipt of material, non-public information.\12\ --------------------------------------------------------------------------- \12\ For example, Chapter XI, Doing Business with the Public, Section 8, Supervision of Accounts, provides in part that each member that conducts a public customer options business shall ensure that its written supervisory system policies and procedures pursuant to NASD Rules 3010, 3012, and 3013 adequately address the member's public customer options business. The Exchange has separately filed a proposed rule change to replace references to these NASD rules with FINRA rules which have replaced them. See SR-NASDAQ-2016-038 filed March 14, 2016. --------------------------------------------------------------------------- Further, the Exchange does not believe there will be any material change to Market Maker information barriers as a result of removal of the Exchange's pre-approval requirements. In fact, the Exchange anticipates that eliminating the pre-approval requirement should facilitate implementation of changes to Market Maker information barriers as necessary to protect against the misuse of material, non- public information. The Exchange also suggests that the pre-approval requirement is unnecessary because Market Makers do not have agency responsibilities to orders in the book, or time and place information advantages because of their market role. The Exchange notes that its proposed principles-based approach to protecting against the misuse of material non-public information for all its Options Participants is consistent with recently filed and approved rule changes for NYSE MKT, NYSE Arca Equities, Inc. (``NYSE Arca''), BATS Exchange, Inc. (``BATS''), and New York Stock Exchange LLC (``NYSE'') governing cash equity market makers on those respective exchanges.\13\ --------------------------------------------------------------------------- \13\ See Securities Exchange Act Release No. 75432 (July 13, 2015), 80 FR 42597 (July 17, 2015) (Order Approving Adopting a Principles-Based Approach to Prohibit the Misuse of Material Nonpublic Information by Specialists and e-Specialists by Deleting Rule 927.3NY and Section (f) of Rule 927.5NY). See also Securities Exchange Act Release Nos. 60604 (Sept. 2, 2009), 76 FR 46272 (Sept. 8, 2009) (SR-NYSEArca-2009-78) (Order approving elimination of NYSE Arca rule that required market makers to establish and maintain specifically prescribed information barriers, including discussion of NYSE Arca and Nasdaq rules) (``Arca Approval Order''); 61574 (Feb. 23, 2010), 75 FR 9455 (Mar. 2, 2010) (SR-BATS-2010-003) (Order approving amendments to BATS Rule 5.5 to move to a principles-based approach to protecting against the misuse of material, nonpublic information, and noting that the proposed change is consistent with the approaches of NYSE Arca and Nasdaq) (``BATS Approval Order''); and 72534 (July 3, 2014), 79 FR 39440 (July 10, 2014), SR-NYSE-2014- 12) (Order approving amendments to NYSE Rule 98 governing designated market makers to move to a principles-based approach to prohibit the misuse of material non-public information) (``NYSE Approval Order''); and 76687 (December 18, 2015), 80 FR 80403 (December 24, 2015) (SR-PHLX-2015-85). --------------------------------------------------------------------------- Except for prescribed rules relating to floor-based designated market makers on the NYSE, who have access to specified non-public trading information, each of these exchanges have moved to a principles-based approach to protecting against the misuse of material non-public information. In connection with approving those rule changes, the Commission found that, with adequate oversight by the exchanges of their members, eliminating prescriptive information barrier requirements should not reduce the effectiveness of exchange rules requiring members to establish and maintain systems to supervise the activities of members, including written procedures reasonably designed to ensure compliance with applicable federal securities law and regulations, and with the rules of the applicable exchange. The Exchange believes that a principles-based rule applicable to members of options markets would be equally effective in protecting against the misuse of material non-public information.\14\ Indeed, Chapter III, Section 4, is currently applicable to Market Makers and already requires policies and procedures reasonably designed to protect against the misuse of material nonpublic information, which is similar to the respective NYSE MKT, NYSE Arca Equities, BATS, and NYSE rules governing cash equity market makers. The Exchange believes Chapter III, Section 4, provides appropriate protection against the misuse of material nonpublic information by Market Makers such that there is no further need for prescriptive information barrier requirements as set forth in the Market Maker Restrictions. --------------------------------------------------------------------------- \14\ International Securities Exchange, Inc. (``ISE'') and BOX Options Exchange LLC (``BOX'') have recently taken a similar approach. See Notice of Filing and Immediate Effectiveness of Proposed Rule Change Adopting a Principles-Based Approach to Prohibit the Misuse of Material, Non-public Information by Market Makers by Deleting Rule 810, Securities Exchange Act Release No. 75792 (August 31, 2015), 80 FR 53606 (September 4, 2015) (SR-ISE- 2015-26). See also Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Adopt a Principles-based Approach to Prohibit the Misuse of Material Nonpublic Information by Market Makers, Securities Exchange Act Release No. 75916 (September 14, 2015), 80 FR 56503 (September 18, 2015) (SR-BOX-2015-31). --------------------------------------------------------------------------- The Exchange notes that even with this proposed rule change, pursuant to Chapter III, Section 4, a Market Maker would still be obligated to ensure that its policies and procedures reflect the current state of its business and continue to be reasonably designed to achieve compliance with applicable federal securities law and regulations, including without limitation, Regulation [[Page 18905]] SHO \15\ under the Act and Section 15(g) of the Act,\16\ and with applicable Exchange rules, including being reasonably designed to protect against the misuse of material, non-public information. --------------------------------------------------------------------------- \15\ The Commission adopted a narrow exception to Regulation SHO's ``locate'' requirement only for market makers engaged in bona fide market making in the security at the time they effect the short sale. See 17 CFR 242.203(b)(2)(iii). See also Exchange Act Release No. 50103 (July 28, 2004), 69 FR 48008, 48015 (Aug. 6, 2004); Exchange Act Release No. 58775 (Oct. 14, 2008), 73 FR 61690, 61698-9 (Oct. 17, 2008). Broker-dealers would not be able to rely on the Exchange's or any self-regulatory organization's designation of market marking for eligibility for the bona-fide market making exception to the ``locate'' requirement, as such designations are distinct and independent from Regulation SHO. Eligibility for the bona-fide market making exception depends on the facts and circumstances and a determination of bona-fide market making is based on the Commission's factors outlined in the aforementioned Regulation SHO releases. It should also be noted that a determination of bona-fide market making is relevant for the purposes of close-out obligations under Rule 204 of Regulation SHO. See 17 CFR 242.204(a)(3). \16\ 15 U.S.C. 78o(g). --------------------------------------------------------------------------- While information barriers would not specifically be required under the proposal, Chapter III, Section 4, already requires that an Options Participant consider its business model or business activities in structuring its policies and procedures, which may dictate that an information barrier or a functional separation be part of the appropriate set of policies and procedures that would be reasonably designed to achieve compliance with applicable securities law and regulations, and with applicable Exchange rules. The Exchange believes that the proposed reliance on principles- based Chapter III, Section 4 would ensure that a Market Maker would be required to protect against the misuse of any material non-public information. Chapter III, Section 4 already requires that firms refrain from trading while in possession of material non-public information concerning imminent transactions in the security or related product. The Exchange believes that moving to a principles-based approach rather than prescribing how and when to wall off a Market Maker from the rest of the firm would provide Market Makers with flexibility when managing risk across a firm, including integrating options positions with other positions of the firm or, as applicable, by the respective independent trading unit. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act \17\ in general, and furthers the objectives of Section 6(b)(5) of the Act \18\ in particular, in that it is designed to promote just and equitable principles of trade, to 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. The Exchange believes that the proposed rule change would remove impediments to and perfect the mechanism of a free and open market by adopting a principles based approach to permit a member or member organization to maintain and enforce policies and procedures to, among other things, prohibit the misuse of material non-public information and provide flexibility on how a Market Maker structures its operations. --------------------------------------------------------------------------- \17\ 15 U.S.C. 78f(b). \18\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- The Exchange notes that the proposed rule change is based on an approved rule of the Exchange to which members and member organizations are subject--Section 4, Prevention of the Misuse of Material Nonpublic Information, of Chapter III, Business Conduct--and harmonizes the rules governing Options Participants. Moreover, Market Makers would continue to be subject to federal and Exchange requirements for protecting material non-public order information.\19\ --------------------------------------------------------------------------- \19\ See 15 U.S.C. 78o(g) and Chapter III, Section 4 of the Exchange's rulebook. --------------------------------------------------------------------------- The Exchange believes that the proposed rule change would remove impediments to and perfect the mechanism of a free and open market because it would harmonize the Exchange's approach to protecting against the misuse of material nonpublic information and no longer subject Market Makers to prescriptive requirements. The Exchange does not believe that the existing prescriptive requirements applicable to Market Makers are narrowly tailored to their roles because Market Makers do not have access to Exchange trading information in a manner different from any other market participant on the Exchange. The Exchange further believes the proposal is designed to prevent fraudulent and manipulative acts and practices and to promote just and equitable principles of trade because existing rules make clear to members and member organizations the type of conduct that is prohibited by the Exchange. While the proposal eliminates prescriptive requirements relating to the misuse of material non-public information, Market Makers would remain subject to existing Exchange rules requiring them to establish and maintain systems to supervise their activities, and to create, implement, and maintain written procedures that are reasonably designed to comply with applicable securities laws and Exchange rules, including the prohibition on the misuse of material, nonpublic information. Additionally, the policies and procedures of Market Makers, including those relating to information barriers, would be subject to review by FINRA, on behalf of the Exchange. The Exchange notes that the proposed rule change would still require that Market Makers maintain and enforce policies and procedures reasonably designed to ensure compliance with applicable federal securities laws and regulations and with Exchange rules. Even though there would no longer be pre-approval of Market Maker information barriers, any Market Maker written policies and procedures would continue to be subject to oversight by the Exchange and therefore the elimination of prescribed restrictions should not reduce the effectiveness of the Exchange rules to protect against the misuse of material non-public information. Rather, Options Participants will be able to utilize a flexible, principles-based approach to modify their policies and procedures as appropriate to reflect changes to their business model, business activities, or to the securities market itself. Moreover, while specified information barriers may no longer be required, an Options Participant's business model or business activities may dictate that an information barrier or functional separation be part of the appropriate set of policies and procedures that would be reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable Exchange rules. The Exchange therefore believes that the proposed rule change will maintain the existing protection of investors and the public interest that is currently applicable to Market Makers, while at the same time removing impediments to and perfecting a free and open market by moving to a principles-based approach to protect against the misuse of material non-public information. 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 competition not necessary or appropriate in furtherance of the purposes of the Act. As indicated above, the rule change is being proposed as a competitive response to a filing [[Page 18906]] submitted by NYSE MKT that was recently approved by the Commission. The Exchange believes that the proposal will enhance competition by allowing Market Makers to comply with applicable Exchange rules in a manner best suited to their business models, business activities, and the securities markets, thus reducing regulatory burdens while still ensuring compliance with applicable securities laws and regulations and Exchange rules. The Exchange believes that the proposal will foster a fair and orderly marketplace without being overly burdensome upon Market Makers. Moreover, the Exchange believes that the proposed rule change would eliminate a burden on competition for Options Participants which currently exists as a result of disparate rule treatment between options and equities markets regarding how to protect against the misuse of material non-public information. For those members and member organizations that are also members of equity exchanges, their respective equity market maker operations are now subject to a principles-based approach to protecting against the misuse of material non-public information. The Exchange believes it would remove a burden on competition to enable members and member organizations to similarly apply a principles-based approach to protecting against the misuse of material nonpublic information in the options space as ISE has recently done. To this end, the Exchange notes that Chapter III, Section 4, still requires a Market Maker to evaluate its business to assure that its policies and procedures are reasonably designed to protect against the misuse of material nonpublic information. However, with this proposed rule change, an Options Participant that trades equities and options could look at its firm more holistically to structure its operations in a manner that provides it with better tools to manage its risks across multiple security classes, while at the same time protecting against the misuse of material non-public information. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the proposed rule change does not (i) significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6) thereunder.\20\ --------------------------------------------------------------------------- \20\ In addition, Rule 19b-4(f)(6)(iii) requires the Exchange to give the Commission written notice of the Exchange's intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has satisfied this requirement. --------------------------------------------------------------------------- A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the Act normally does not become operative for 30 days after the date of its filing. However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has asked the Commission to waive the 30-day operative delay so that the proposal may become operative immediately upon filing. Waiver of the 30-day operative delay would help facilitate the harmonization of information barrier rules across options exchanges. The Exchange represents that Exchange rules still require a Market Maker to evaluate its business to assure that its policies and procedures are reasonably designed to protect against the misuse of material nonpublic information. Further, the Exchange represents that the proposed rule change will not decrease the protections against the misuse of material, non-public information; instead, it is designed to provide more flexibility to market participants. Based on the foregoing, the Commission believes the waiver of the operative delay is consistent with the protection of investors and the public interest.\21\ The Commission hereby grants the waiver and designates the proposal operative upon filing. --------------------------------------------------------------------------- \21\ For purposes only of waiving the 30-day operative delay, the Commission has also considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). --------------------------------------------------------------------------- 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 shall institute proceedings to determine whether the proposed rule should be approved or disapproved. 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 CommentsUse the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to [email protected]. Please include File Number SR-NASDAQ-2016-040 on the subject line. Paper Comments Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-NASDAQ-2016-040. 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 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 Web site 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; 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-NASDAQ-2016-040 and should be submitted on or before April 22, 2016. [[Page 18907]] For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\22\ --------------------------------------------------------------------------- \22\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Robert W. Errett, Deputy Secretary. [FR Doc. 2016-07337 Filed 3-31-16; 8:45 am] BILLING CODE 8011-01-P
![18902 Federal Register / Vol. 81, No. 63 / Friday, April 1, 2016 / Notices
investors, or otherwise in furtherance of available publicly. All submissions II. Self-Regulatory Organization’s
the purposes of the Act. If the should refer to File Number SR– Statement of the Purpose of, and
Commission takes such action, the NYSEARCA–2016–48 and should be Statutory Basis for, the Proposed Rule
Commission shall institute proceedings submitted on or before April 22, 2016. Change
under section 19(b)(2)(B) 19 of the Act to For the Commission, by the Division of In its filing with the Commission, the
determine whether the proposed rule Trading and Markets, pursuant to delegated Exchange included statements
change should be approved or authority.20 concerning the purpose of and basis for
disapproved. Robert W. Errett, the proposed rule change and discussed
IV. Solicitation of Comments Deputy Secretary. any comments it received on the
[FR Doc. 2016–07332 Filed 3–31–16; 8:45 am] proposed rule change. The text of these
Interested persons are invited to
statements may be examined at the
submit written data, views and BILLING CODE 8011–01–P
places specified in Item IV below. The
arguments concerning the foregoing,
Exchange has prepared summaries, set
including whether the proposed rule
SECURITIES AND EXCHANGE forth in sections A, B, and C below, of
change is consistent with the Act.
COMMISSION the most significant aspects of such
Comments may be submitted by any of
statements.
the following methods:
[Release No. 34–77460; File No. SR– A. Self-Regulatory Organization’s
Electronic Comments NASDAQ–2016–040] Statement of the Purpose of, and
• Use the Commission’s Internet Statutory Basis for, the Proposed Rule
comment form (http://www.sec.gov/ Self-Regulatory Organizations; The Change
rules/sro.shtml); or NASDAQ Stock Market LLC; Notice of
• Send an email to rule-comments@ Filing and Immediate Effectiveness of 1. Purpose
sec.gov. Please include File Number SR– Proposed Rule Change To Delete From The Exchange is proposing to adopt a
NYSEARCA–2016–48 on the subject the Rulebook Section 10, Limitations principles-based approach to prohibit
line. on Dealings, of Chapter VII, Market the misuse of material nonpublic
Participants information by NOM Options Market
Paper Comments
Makers (‘‘Market Makers’’) by deleting
• Send paper comments in triplicate March 28, 2016.
from the Exchange’s rulebook Section
to Secretary, Securities and Exchange Pursuant to Section 19(b)(1) of the 10, Limitations on Dealings, of Chapter
Commission, 100 F Street NE., Securities Exchange Act of 1934 VII, Market Participants (the ‘‘Market
Washington, DC 20549–1090. (‘‘Act’’),1 and Rule 19b–4 thereunder,2 Maker Restrictions’’). In doing so, the
All submissions should refer to File notice is hereby given that on March 22, Exchange would harmonize its rules
Number SR–NYSEARCA–2016–48. This 2016, The NASDAQ Stock Market LLC governing Exchange Options
file number should be included on the (‘‘Exchange’’) filed with the Securities Participants,5 generally, and Exchange
subject line if email is used. To help the and Exchange Commission (‘‘SEC’’ or Market Makers, in particular, relating to
Commission process and review your ‘‘Commission’’) the proposed rule protecting against the misuse of
comments more efficiently, please use change as described in Items I and II material, non-public information.
only one method. The Commission will below, which Items have been prepared The Exchange believes that the
post all comments on the Commission’s by the Exchange. The Exchange has Market Maker Restrictions are no longer
Internet Web site (http://www.sec.gov/ designated this proposal as a ‘‘non- necessary because all Market Makers are
rules/sro.shtml). Copies of the controversial’’ proposed rule change subject to the Exchange’s general
submission, all subsequent pursuant to Section 19(b)(3)(A) of the principles-based requirements
amendments, all written statements Act 3 and Rule 19b–4(f)(6)(iii) governing the protection against the
with respect to the proposed rule thereunder,4 which renders it effective misuse of material, non-public
change that are filed with the upon filing with the Commission. The information, pursuant to Chapter III,
Commission, and all written Commission is publishing this notice to Business Conduct, Section 4, Prevention
communications relating to the solicit comments on the proposed rule of the Misuse of Material Nonpublic
proposed rule change between the change from interested persons. Information, discussed below, which
Commission and any person, other than I. Self-Regulatory Organization’s obviates the need for separately-
those that may be withheld from the Statement of the Terms of Substance of prescribed requirements for a subset of
public in accordance with the the Proposed Rule Change market participants on the Exchange.
provisions of 5 U.S.C. 552, will be Additionally, there is no separate
available for Web site viewing and The Exchange proposes to delete from regulatory purpose served by having
printing in the Commission’s Public the Exchange’s rulebook Section 10, separate rules for Market Makers. The
Reference Room, 100 F Street NE., Limitations on Dealings, of Chapter VII, Exchange notes that this proposed rule
Washington, DC 20549, on official Market Participants. change will not decrease the protections
business days between the hours of The text of the proposed rule change against the misuse of material, non-
10:00 a.m. and 3:00 p.m. Copies of the is available on the Exchange’s Web site public information; instead, it is
filing also will be available for at http://nasdaq.cchwallstreet.com, at designed to provide more flexibility to
inspection and copying at the principal market participants. This is a
asabaliauskas on DSK3SPTVN1PROD with NOTICES
the principal office of the Exchange, and
office of the Exchange. All comments at the Commission’s Public Reference competitive filing that is based on a
received will be posted without change; Room. proposal recently submitted by NYSE
the Commission does not edit personal
identifying information from 20 17 CFR 200.30–3(a)(12).
5 The term ‘‘Options Participant’’ or ‘‘Participant’’
submissions. You should submit only 1 15
means a firm or organization that is registered with
U.S.C. 78s(b)(1). the Exchange pursuant to Chapter II of the NOM
information that you wish to make 2 17 CFR 240.19b–4.
Rules for purposes of participating in options
3 15 U.S.C. 78s(b)(3)(A).
trading on NOM as a ‘‘Nasdaq Options Order Entry
19 15 U.S.C. 78s(b)(2)(B). 4 17 CFR 240.19b–4(f)(6)(iii). Firm’’ or ‘‘Nasdaq Options Market Maker’’.
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MKT LLC (‘‘NYSE MKT’’) and approved transactions in the underlying security order to buy or sell any related
by the Commission.6 or related securities; and (iii) disclosing instrument until (a) the terms and
A Market Maker is an Options to another person any material conditions of the order and any changes
Participant registered with the Exchange nonpublic information involving a in the terms and conditions of the order
for the purpose of making markets in corporation whose shares are publicly of which the Participant or person
options contracts traded on the traded or disclosing an imminent associated with the Participant has
Exchange and that is vested with the transaction in an underlying security or knowledge are disclosed, or (b) the trade
rights and responsibilities specified in related securities for the purpose of can no longer reasonably be considered
Chapter VII of the NOM rules.7 facilitating the possible misuse of such imminent in view of the passage of time
Importantly, all Market Makers have material nonpublic information. since the order was received. It states
access to the same information in the Subsection (c) of Chapter III, Section that the terms of an order are
Exchange’s order book. Moreover, 4, requires each Options Participant to ‘‘disclosed’’ to NOM Option Participants
Market Makers have no agency establish, maintain, and enforce certain when the order is entered into the NOM
obligations on the Exchange’s order policies and procedures as appropriate Book.
book. Notwithstanding that Market for the nature of each Participant’s For purposes of subsection (f), an
Makers have access to the same business.8 Under the rule, Participants order to buy or sell a ‘‘related
Exchange trading information as all that are required to file Form X–17A–5 instrument’’ means, in reference to an
other market participants on the under the Exchange Act or Rules index option, an order to buy or sell
Exchange, the Exchange has specific thereunder, with the Exchange on an securities comprising 10% or more of
rules governing how Market Makers annual basis only, shall, the component securities in the index or
may operate. contemporaneously with those an order to buy or sell a futures contract
submissions, file attestations signed by on an economically equivalent index.
Proposed Rule Change Because Options Participants are
such Participants stating that the
The Exchange believes that the procedures mandated by this Section already subject to the requirements of
Market Maker Restrictions are no longer have been established, enforced and Chapter III, Section 4, as described
necessary and proposes to delete them. maintained. The rule requires any above, the Exchange does not believe it
The Exchange also believes that Chapter Options Participant or associated person necessary to separately require specific
III, Section 4, governing the misuse of who becomes aware of any possible limitations on Market Makers. Deleting
material, non-public information, misuse of material nonpublic the Market Maker Restrictions including
provides for an appropriate, principles- information to promptly notify Nasdaq its requirements for specific procedures
based approach to prevent the market Regulation. would provide Market Makers flexibility
abuses the Market Maker Restrictions Finally, subsection (f) of Chapter III, to adapt their policies and procedures as
are designed to address. Section 4, specifies that it may be appropriate to reflect changes to their
Specifically, Chapter III, Section 4, considered conduct inconsistent with business model, business activities, or
provides that every Options Participant just and equitable principles of trade for the securities market in a manner
shall establish, maintain, and enforce any Participant or person associated similar to how Options Participants on
written policies and procedures with a Participant who has knowledge the Exchange currently operate and
reasonably designed, taking into of all material terms and conditions of consistent with Chapter III, Section 4.
consideration the nature of the (i) an order and a solicited order, (ii) an Options Participants registered as
Participant’s business, to prevent the order being facilitated or submitted to Market Makers have certain rights and
misuse of material nonpublic NOM for price improvement (e.g., price bear certain responsibilities beyond
information by such Participant or improving orders), or (iii) orders being those of other Options Participants.9
persons associated with such crossed; the execution of which are
Participant in violation of the federal imminent, to enter, based on such 9 Chapter VII, Section 5, Obligations of Market
securities laws or the Rules thereunder, knowledge, an order to buy or sell an
Makers, of the NOM rules provides that in
and the Rules of the Exchange. registering as a Market Maker, an Options
option for the same underlying security Participant commits himself to various obligations
Chapter III, Section 4, provides that
as any option that is the subject of the and that transactions of a Market Maker in its
misuse of material nonpublic market making capacity must constitute a course of
order, or an order to buy or sell the
information includes, but is not limited dealings reasonably calculated to contribute to the
security underlying such class, or an
to: (i) Trading in any securities issued maintenance of a fair and orderly market. The rule
by a corporation, or in any related states that Market Makers should not make bids or
8 In particular, the rule requires that (i) all offers or enter into transactions that are inconsistent
securities or related options or other associated persons must be advised in writing of the with such course of dealings and that ordinarily,
derivative securities, while in prohibition against the misuse of material Market Makers are expected to (i) during trading
possession of material nonpublic nonpublic information; (ii) signed attestations from hours, maintain a two-sided market, pursuant to
information concerning that the Participant and all associated persons affirming Section 6(d)(i) of Chapter VII, in those options in
their awareness of, and agreement to abide by, the which the Market Maker is registered to trade, in
corporation; (ii) trading in an aforementioned prohibitions must be maintained a manner that enhances the depth, liquidity and
underlying security or related options or for at least three (3) years, the first two (2) years in competitiveness of the market, (ii) [Reserved], (iii)
other derivative securities, while in an easily accessible place; (iii) records of all engage, to a reasonable degree under the existing
possession of material nonpublic brokerage accounts maintained by the Participant circumstances, in dealings for their own accounts
and all associated persons must be acquired and when there exists, or it is reasonably anticipated
information concerning imminent maintained for at least three (3) years, the first two that there will exist, a lack of price continuity, a
asabaliauskas on DSK3SPTVN1PROD with NOTICES
(2) years in an easily accessible place, and such temporary disparity between the supply of (or
6 See Securities Exchange Act Release No. 75432 brokerage accounts must be reviewed periodically demand for) a particular option contract, or a
(July 13, 2015), 80 FR 42597 (July 17, 2015) (Order by the Participant for the purpose of detecting the temporary distortion of the price relationships
Approving SR–NYSEMKT–2015–23). See also possible misuse of material nonpublic information; between option contracts of the same class, (iv)
Securities Exchange Act Release Nos. 75792 and (iv) any business dealings the Participant may compete with other Market Makers in all options in
(August 31, 2015), 80 FR 53606 (September 4, 2015) have with any corporation whose securities are which the Market Maker is registered to trade, (v)
(SR–ISE–2015–26) and 76687 (December 18, 2015), publicly traded, or any other circumstances that make markets that will be honored for the number
80 FR 80403 (December 24, 2015) (SR–PHLX–2015– may result in the Participant receiving, in the of contracts entered into NOM’s System in all
85). ordinary course of business, material nonpublic options in which the Market Maker is registered to
7 See Chapter I, General Provisions, Section 1, information concerning any such corporation, must trade (vi) update quotations in response to changed
Definitions, subsection (a)(26). be identified and documented. Continued
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For the Commission, by the Division of concerning the purpose of and basis for A Market Maker is an Options
Trading and Markets, pursuant to delegated the proposed rule change and discussed Participant registered with the Exchange
authority.22 any comments it received on the for the purpose of making markets in
Robert W. Errett, proposed rule change. The text of these options contracts traded on the
Deputy Secretary. statements may be examined at the Exchange and that is vested with the
[FR Doc. 2016–07337 Filed 3–31–16; 8:45 am] places specified in Item IV below. The rights and responsibilities specified in
BILLING CODE 8011–01–P Exchange has prepared summaries, set Chapter VII of the BX rules.7
forth in sections A, B, and C below, of Importantly, all Market Makers have
the most significant aspects of such access to the same information in the
SECURITIES AND EXCHANGE statements. Exchange’s order book. Moreover,
COMMISSION Market Makers have no agency
A. Self-Regulatory Organization’s
[Release No. 34–77461; File No. SR–BX– Statement of the Purpose of, and obligations on the Exchange’s order
2016–018) Statutory Basis for, the Proposed Rule book. Notwithstanding that Market
Change Makers have access to the same
Self-Regulatory Organizations; Exchange trading information as all
NASDAQ BX, Inc.; Notice of Filing and 1. Purpose other market participants on the
Immediate Effectiveness of Proposed The Exchange is proposing to adopt a Exchange, the Exchange has specific
Rule Change To Delete From the principles-based approach to prohibit rules governing how Market Makers
Exchange’s Rulebook Section 10, the misuse of material nonpublic may operate.
Limitations on Dealings, of Chapter VII, information by BX Options Market
Market Participants Proposed Rule Change
Makers (‘‘Market Makers’’) by deleting
from the Exchange’s rulebook Section The Exchange believes that the
March 28, 2016.
10, Limitations on Dealings, of Chapter Market Maker Restrictions are no longer
Pursuant to Section 19(b)(1) of the
VII, Market Participants (the ‘‘Market necessary and proposes to delete them.
Securities Exchange Act of 1934
Maker Restrictions’’). In doing so, the The Exchange believes that Chapter III,
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
Exchange would harmonize its rules Section 4 governing the misuse of
notice is hereby given that on March 18,
governing Exchange Options material, non-public information,
2016, NASDAQ BX, Inc. (‘‘Exchange’’)
Participants 5 generally and Exchange provides for an appropriate, principles-
filed with the Securities and Exchange
Market Makers in particular relating to based approach to prevent the market
Commission (‘‘SEC’’ or ‘‘Commission’’)
protecting against the misuse of abuses the Market Maker Restrictions
the proposed rule change as described
material, non-public information. The are designed to address. Specifically,
in Items I and II below, which Items
Exchange believes that the Market Chapter III, Section 4 provides that
have been prepared by the Exchange.
The Exchange has designated this Maker Restrictions are no longer every Options Participant shall
proposal as a ‘‘non-controversial’’ necessary because all Market Makers are establish, maintain and enforce written
proposed rule change pursuant to subject to the Exchange’s general policies and procedures reasonably
Section 19(b)(3)(A) of the Act 3 and Rule principles-based requirements designed, taking into consideration the
19b–4(f)(6)(iii) thereunder,4 which governing the protection against the nature of the Participant’s business, to
renders it effective upon filing with the misuse of material, non-public prevent the misuse of material
Commission. The Commission is information, pursuant to Chapter III, nonpublic information by such
publishing this notice to solicit Business Conduct, Section 4, Prevention Participant or persons associated with
comments on the proposed rule change of the Misuse of Material Nonpublic such Participant in violation of the
from interested persons. Information, discussed below, which federal securities laws or the Rules
obviates the need for separately- thereunder, and the Rules of the
I. Self-Regulatory Organization’s Exchange. Chapter III, Section 4
prescribed requirements for a subset of
Statement of the Terms of Substance of provides that misuse of material
market participants on the Exchange.
the Proposed Rule Change nonpublic information includes, but is
Additionally, there is no separate
The Exchange proposes to delete from regulatory purpose served by having not limited to: (i) Trading in any
the Exchange’s rulebook Section 10, separate rules for Market Makers. The securities issued by a corporation, or in
Limitations on Dealings, of Chapter VII, Exchange notes that this proposed rule any related securities or related options
Market Participants. change will not decrease the protections or other derivative securities, while in
The text of the proposed rule change against the misuse of material, non- possession of material nonpublic
is available on the Exchange’s Web site public information; instead, it is information concerning that
at http://nasdaqomxbx. designed to provide more flexibility to corporation; (ii) trading in an
cchwallstreet.com/, at the principal market participants. This is a underlying security or related options or
office of the Exchange, and at the competitive filing that is based on a other derivative securities, while in
Commission’s Public Reference Room. proposal recently submitted by NYSE possession of material nonpublic
MKT LLC (‘‘NYSE MKT’’) and approved information concerning imminent
II. Self-Regulatory Organization’s
Statement of the Purpose of, and by the Commission.6 transactions in the underlying security
Statutory Basis for, the Proposed Rule or related securities; and (iii) disclosing
5 The term ‘‘Options Participant’’ or ‘‘Participant’’ to another person any material
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Change
means a firm, or organization that is registered with nonpublic information involving a
In its filing with the Commission, the the Exchange pursuant to Chapter II of the BX rules corporation whose shares are publicly
Exchange included statements for purposes of participating in options trading on
BX Options as a ‘‘BX Options Order Entry Firm’’
traded or disclosing an imminent
22 17
or ‘‘BX Options Market Maker.’’
CFR 200.30–3(a)(12). 6 See Securities Exchange Act Release No. 75432 (SR–ISE–2015–26) and 76687 (December 18, 2015),
1 15 U.S.C. 78s(b)(1). (July 13, 2015), 80 FR 42597 (July 17, 2015) (Order 80 FR 80403 (December 24, 2015) (SR–PHLX–2015–
2 17 CFR 240.19b–4.
Approving SR–NYSEMKT–2015–23). See also 85).
3 15 U.S.C. 78s(b)(3)(A).
Securities Exchange Act Release Nos. 75792 7 See Chapter I, General Provisions, Section 1,
4 17 CFR 240.19b–4(f)(6)(iii). (August 31, 2015), 80 FR 53606 (September 4, 2015) Definitions, subsection (a)(9).
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Document Created: 2016-04-06 00:08:06
Document Modified: 2016-04-06 00:08:06
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 81 FR 18902 |
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