81 FR 44366 - Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Provide a Process for an Expedited Suspension Proceeding and Adopt a Rule To Prohibit Disruptive Quoting and Trading Activity
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 81, Issue 130 (July 7, 2016)
Federal Register Volume 81, Issue 130 (July 7, 2016)
| Page Range | 44366-44372 | |
| FR Document | 2016-16035 |
[Federal Register Volume 81, Number 130 (Thursday, July 7, 2016)] [Notices] [Pages 44366-44372] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-16035] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-78208; File No. SR-NASDAQ-2016-092] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Provide a Process for an Expedited Suspension Proceeding and Adopt a Rule To Prohibit Disruptive Quoting and Trading Activity June 30, 2016. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on June 22, 2016, The NASDAQ Stock Market LLC (``NASDAQ'' or ``Exchange'') filed with the Securities and Exchange Commission (``Commission'') the proposed rule change as described in Items I, II and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes a proposal to adopt a new NASDAQ Options Market LLC rule to clearly prohibit disruptive quoting and trading activity on the Exchange, as further described below. 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 the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange is filing this proposal to adopt an options rule to clearly prohibit disruptive quoting and trading activity on the Exchange and to permit the Exchange to take prompt action to suspend Members or their clients that violate such rule pursuant to Rule 9400. Background As a national securities exchange registered pursuant to Section 6 of the Act, the Exchange is required to be organized and to have the capacity to enforce compliance by its members and persons associated with its members, with the Act, the rules and regulations thereunder, and the Exchange's Rules. Further, the Exchange's Rules are required to be ``designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade . . . and, in general, to protect investors and the public interest.'' \3\ In fulfilling these requirements, the Exchange has developed a comprehensive regulatory program that includes automated surveillance of trading activity that is both operated directly by Exchange staff and by staff of the Financial Industry Regulatory Authority (``FINRA'') pursuant to a Regulatory Services Agreement (``RSA''). When disruptive and potentially manipulative or improper quoting and trading activity is identified, the Exchange or FINRA (acting as an agent of the Exchange) conducts an investigation into the activity, requesting additional information from the Member or Members involved. To the extent violations of the Act, the rules and regulations thereunder, or Exchange Rules have been identified and confirmed, the Exchange or FINRA as its agent will commence the enforcement process, which might result in, among other things, a censure, a requirement to take certain remedial actions, one or more restrictions on future business [[Page 44367]] activities, a monetary fine, or even a temporary or permanent ban from the securities industry. --------------------------------------------------------------------------- \3\ 15 U.S.C. 78f(b)(1). --------------------------------------------------------------------------- The process described above, from the identification of disruptive and potentially manipulative or improper quoting and trading activity to a final resolution of the matter, can often take several years. The Exchange believes that this time period is generally necessary and appropriate to afford the subject Member adequate due process, particularly in complex cases. However, as described below, the Exchange believes that there are certain obvious and uncomplicated cases of disruptive and manipulative behavior or cases where the potential harm to investors is so large that the Exchange should have the authority to initiate an expedited suspension proceeding in order to stop the behavior from continuing on the Exchange. In recent years, several cases have been brought and resolved by the Exchange and other SROs that involved allegations of wide-spread market manipulation, much of which was ultimately being conducted by foreign persons and entities using relatively rudimentary technology to access the markets and over which the Exchange and other SROs had no direct jurisdiction. In each case, the conduct involved a pattern of disruptive quoting and trading activity indicative of manipulative layering \4\ or spoofing.\5\ The Exchange and other SROs were able to identify the disruptive quoting and trading activity in real-time or near real-time; nonetheless, in accordance with Exchange Rules and the Act, the Members responsible for such conduct or responsible for their customers' conduct were allowed to continue the disruptive quoting and trading activity on the Exchange and other exchanges during the entirety of the subsequent lengthy investigation and enforcement process. The Exchange believes that it should have the authority to initiate an expedited suspension proceeding in order to stop the behavior from continuing on the Exchange if a Member is engaging in or facilitating disruptive quoting and trading activity and the Member has received sufficient notice with an opportunity to respond, but such activity has not ceased. --------------------------------------------------------------------------- \4\ ``Layering'' is a form of market manipulation in which multiple, non-bona fide limit orders are entered on one side of the market at various price levels in order to create the appearance of a change in the levels of supply and demand, thereby artificially moving the price of the security. An order is then executed on the opposite side of the market at the artificially created price, and the non-bona fide orders are cancelled. \5\ ``Spoofing'' is a form of market manipulation that involves the market manipulator placing non-bona fide orders that are intended to trigger some type of market movement and/or response from other market participants, from which the market manipulator might benefit by trading bona fide orders. --------------------------------------------------------------------------- The following two examples are instructive on the Exchange's rationale for the proposed rule change. In July 2012, Biremis Corp. (formerly Swift Trade Securities USA, Inc.) (the ``Firm'') and its CEO were barred from the industry for, among other things, supervisory violations related to a failure by the Firm to detect and prevent disruptive and allegedly manipulative trading activities, including layering, short sale violations, and anti-money laundering violations.\6\ The Firm's sole business was to provide trade execution services via a proprietary day trading platform and order management system to day traders located in foreign jurisdictions. Thus, the disruptive and allegedly manipulative trading activity introduced by the Firm to U.S. markets originated directly or indirectly from foreign clients of the Firm. The pattern of disruptive and allegedly manipulative quoting and trading activity was widespread across multiple exchanges, and the Exchange, FINRA, and other SROs identified clear patterns of the behavior in 2007 and 2008. Although the Firm and its principals were on notice of the disruptive and allegedly manipulative quoting and trading activity that was occurring, the Firm took little to no action to attempt to supervise or prevent such quoting and trading activity until at least 2009. Even when it put some controls in place, they were deficient and the pattern of disruptive and allegedly manipulative trading activity continued to occur. As noted above, the final resolution of the enforcement action to bar the Firm and its CEO from the industry was not concluded until 2012, four years after the disruptive and allegedly manipulative trading activity was first identified. --------------------------------------------------------------------------- \6\ See Biremis Corp. and Peter Beck, FINRA Letter of Acceptance, Waiver and Consent No. 2010021162202, July 30, 2012. --------------------------------------------------------------------------- In September of 2012, Hold Brothers On-Line Investment Services, Inc. (the ``Firm'') settled a regulatory action in connection with the Firm's provision of a trading platform, trade software and trade execution, support and clearing services for day traders.\7\ Many traders using the Firm's services were located in foreign jurisdictions. The Firm ultimately settled the action with FINRA and several exchanges, including the Exchange, for a total monetary fine of $3.4 million. In a separate action, the Firm settled with the Commission for a monetary fine of $2.5 million.\8\ Among the alleged violations in the case were disruptive and allegedly manipulative quoting and trading activity, including spoofing, layering, wash trading, and pre-arranged trading. Through its conduct and insufficient procedures and controls, the Firm also allegedly committed anti-money laundering violations by failing to detect and report manipulative and suspicious trading activity. The Firm was alleged to have not only provided foreign traders with access to the U.S. markets to engage in such activities, but that its principals also owned and funded foreign subsidiaries that engaged in the disruptive and allegedly manipulative quoting and trading activity. Although the pattern of disruptive and allegedly manipulative quoting and trading activity was identified in 2009, as noted above, the enforcement action was not concluded until 2012. Thus, although disruptive and allegedly manipulative quoting and trading was promptly detected, it continued for several years. --------------------------------------------------------------------------- \7\ See Hold Brothers On-Line Investment Services, LLC, FINRA Letter of Acceptance, Waiver and Consent No. 20100237710001, September 25, 2012. \8\ In the Matter of Hold Brothers On-Line Investment Services, LLC, Exchange Act Release No. 67924, September 25, 2012. --------------------------------------------------------------------------- The Exchange also notes the current criminal proceedings that have commenced against Navinder Singh Sarao. Mr. Sarao's allegedly manipulative trading activity, which included forms of layering and spoofing in the futures markets, has been linked as a contributing factor to the ``Flash Crash'' of 2010, and yet continued through 2015. The Exchange believes that the activities described in the cases above provide justification for the proposed rule change, which is described below. In addition, while the examples provided are related to the equities market, the Exchange believes that this type of conduct should be prohibited for all Exchange members, equities and options. The Exchange believes that these patterns of disruptive and allegedly manipulative quoting and trading activity need to be addressed and the product should not limit the action taken by the Exchange. For this reason, the Exchange now proposes a corresponding options rule. Rule 9400--Expedited Client Suspension Proceeding The Exchange adopted Rule 9400 to set forth procedures for issuing suspension orders, immediately prohibiting a Member from conducting continued disruptive quoting and trading activity on the Exchange. Importantly, these procedures provide [[Page 44368]] the Exchange the authority to order a Member to cease and desist from providing access to the Exchange to a client of the Member that is conducting disruptive quoting and trading activity in violation of Rule 2170. Paragraph (a) of Rule 9400, with the prior written authorization of the Chief Regulatory Officer (``CRO'') or such other senior officers as the CRO may designate, the Office of General Counsel or Regulatory Department of the Exchange (such departments generally referred to as the ``Exchange'' for purposes of Rule 9400) and may initiate an expedited suspension proceeding with respect to alleged violations of Rule 2170. Paragraph (a) also sets forth the requirements for notice and service of such notice pursuant to the Rule, including the required method of service and the content of notice. Paragraph (b) of Rule 9400 governs the appointment of a Hearing Panel as well as potential disqualification or recusal of Hearing Officers. The Exchange's Rules provide for a Hearing Officer to be recused in the event he or she has a conflict of interest or bias or other circumstances exist where his or her fairness might reasonably be questioned in accordance with Rules 9233(a). In addition to recusal initiated by such a Hearing Officer, a party to the proceeding will be permitted to file a motion to disqualify a Hearing Officer. However, due to the compressed schedule pursuant to which the process would operate under Rule 9400, the rule requires such motion to be filed no later than 5 days after the announcement of the Hearing Panel and the Exchange's brief in opposition to such motion would be required to be filed no later than 5 days after service thereof. Pursuant to existing Rule 9233(c), a motion for disqualification of a Hearing Officer shall be decided by the Chief Hearing Officer based on a prompt investigation. The applicable Hearing Officer shall remove himself or herself and request the Chief Executive Officer to reassign the hearing to another Hearing Officer such that the Hearing Panel still meets the compositional requirements described in Rule 9231(b). If the Chief Hearing Officer determines that the Respondent's grounds for disqualification are insufficient, it shall deny the Respondent's motion for disqualification by setting forth the reasons for the denial in writing and the Hearing Panel will proceed with the hearing. Under paragraph (c) of the Rule, the hearing would be held not later than 15 days after service of the notice initiating the suspension proceeding, unless otherwise extended by the Chairman of the Hearing Panel with the consent of the Parties for good cause shown. In the event of a recusal or disqualification of a Hearing Officer, the hearing shall be held not later than five days after a replacement Hearing Officer is appointed. Paragraph (c) also governs how the hearing is conducted, including the authority of Hearing Officers, witnesses, additional information that may be required by the Hearing Panel, the requirement that a transcript of the proceeding be created and details related to such transcript, and details regarding the creation and maintenance of the record of the proceeding. Paragraph (c) also states that if a Respondent fails to appear at a hearing for which it has notice, the allegations in the notice and accompanying declaration may be deemed admitted, and the Hearing Panel may issue a suspension order without further proceedings. Finally, if the Exchange fails to appear at a hearing for which it has notice, the Hearing Panel may order that the suspension proceeding be dismissed. Under paragraph (d) of the Rule, the Hearing Panel would be required to issue a written decision stating whether a suspension order would be imposed. The Hearing Panel would be required to issue the decision not later than 10 days after receipt of the hearing transcript, unless otherwise extended by the Chairman of the Hearing Panel with the consent of the Parties for good cause shown. The Rule states that a suspension order shall be imposed if the Hearing Panel finds by a preponderance of the evidence that the alleged violation specified in the notice has occurred and that the violative conduct or continuation thereof is likely to result in significant market disruption or other significant harm to investors. Paragraph (d) also describes the content, scope and form of a suspension order. A suspension order shall be limited to ordering a Respondent to cease and desist from violating Rule 2170 and/or to ordering a Respondent to cease and desist from providing access to the Exchange to a client of Respondent that is causing violations of Rule 2170. Under the rule, a suspension order shall also set forth the alleged violation and the significant market disruption or other significant harm to investors that is likely to result without the issuance of an order. The order shall describe in reasonable detail the act or acts the Respondent is to take or refrain from taking, and suspend such Respondent unless and until such action is taken or refrained from. Finally, the order shall include the date and hour of its issuance. A suspension order would remain effective and enforceable unless modified, set aside, limited, or revoked pursuant to paragraph (e), as described below. Finally, paragraph (d) requires service of the Hearing Panel's decision and any suspension order consistent with other portions of the rule related to service. Paragraph (e) of Rule 9400 states that at any time after the Hearing Officers served the Respondent with a suspension order, a Party could apply to the Hearing Panel to have the order modified, set aside, limited, or revoked. If any part of a suspension order is modified, set aside, limited, or revoked, paragraph (e) of Rule 9400 provides the Hearing Panel discretion to leave the cease and desist part of the order in place. For example, if a suspension order suspends Respondent unless and until Respondent ceases and desists providing access to the Exchange to a client of Respondent, and after the order is entered the Respondent complies, the Hearing Panel is permitted to modify the order to lift the suspension portion of the order while keeping in place the cease and desist portion of the order. With its broad modification powers, the Hearing Panel also maintains the discretion to impose conditions upon the removal of a suspension--for example, the Hearing Panel could modify an order to lift the suspension portion of the order in the event a Respondent complies with the cease and desist portion of the order but additionally order that the suspension will be re-imposed if Respondent violates the cease and desist provisions of the modified order in the future. The Hearing Panel generally would be required to respond to the request in writing within 10 days after receipt of the request. An application to modify, set aside, limit or revoke a suspension order would not stay the effectiveness of the suspension order. Finally, paragraph (f) provides that sanctions issued under Rule 9400 would constitute final and immediately effective disciplinary sanctions imposed by the Exchange, and that the right to have any action under the Rule reviewed by the Commission would be governed by Section 19 of the Act. The filing of an application for review would not stay the effectiveness of a suspension order unless the Commission otherwise ordered. Rule 2170- Disruptive Quoting and Trading Activity Prohibited The Exchange currently has authority to prohibit and take action against manipulative trading activity, including disruptive quoting and trading activity, pursuant to its general market [[Page 44369]] manipulation rules, including Rules 2110, 2111, 2120, and 2170. The Exchange proposes to adopt a new rule at Chapter III, Section 16, which would more specifically define and prohibit disruptive options quoting and trading activity on the Exchange. As noted above, the Exchange also proposes to apply the proposed suspension rules to Chapter III, Section 16. Proposed Chapter III, Section 16 would prohibit Members from engaging in or facilitating disruptive options quoting and trading activity on the Exchange, as described in proposed Chapter III, Section 16(i) and (ii), including acting in concert with other persons to effect such activity. The Exchange believes that it is necessary to extend the prohibition to situations when persons are acting in concert to avoid a potential loophole where disruptive quoting and trading activity is simply split between several brokers or customers. The Exchange believes, that with respect to persons acting in concert perpetrating an abusive scheme, it is important that the Exchange have authority to act against the parties perpetrating the abusive scheme, whether it is one person or multiple persons. To provide proper context for the situations in which the Exchange proposes to utilize its authority, the Exchange believes it is necessary to describe the types of disruptive options quoting and trading activity that would cause the Exchange to use its authority. Accordingly, the Exchange proposes to adopt Chapter III, Section 16(i) and (ii) providing additional details regarding disruptive options quoting and trading activity. Proposed Chapter III, Section 16(i)(a) describes disruptive options quoting and trading activity containing many of the elements indicative of layering. It would describe disruptive options quoting and trading activity as a frequent pattern in which the following facts are present: (i) A party enters multiple limit orders on one side of the market at various price levels (the ``Displayed Orders''); and (ii) following the entry of the Displayed Orders, the level of supply and demand for the security changes; and (iii) the party enters one or more orders on the opposite side of the market of the Displayed Orders (the ``Contra-Side Orders'') that are subsequently executed; and (iv) following the execution of the Contra- Side Orders, the party cancels the Displayed Orders. Proposed Chapter III, Section 16(i)(b) describes disruptive options quoting and trading activity containing many of the elements indicative of spoofing and would describe disruptive quoting and trading activity as a frequent pattern in which the following facts are present: (i) A party narrows the spread for a security by placing an order inside the national best bid or offer; and (ii) the party then submits an order on the opposite side of the market that executes against another market participant that joined the new inside market established by the order described in proposed (b)(i) that narrowed the spread. The Exchange believes that the proposed descriptions of disruptive quoting and trading activity articulated in the rule are consistent with the activities that have been identified and described in the client access cases described above.\9\ The Exchange further believes that the proposed descriptions will provide Members with clear descriptions of disruptive options quoting and trading activity that will help them to avoid engaging in such activities or allowing their clients to engage in such activities. --------------------------------------------------------------------------- \9\ As previously noted herein, while the examples noted in the Purpose Section of this 19b4 [sic] are related to the equities market, the Exchange believes that this type of conduct should be prohibited for all Exchange members, equities and options. The Exchange believes that these patterns of disruptive and allegedly manipulative quoting and trading activity need to be addressed and the product should not limit the action taken by the Exchange. For this reason, the Exchange now proposes a corresponding options rule. --------------------------------------------------------------------------- The Exchange proposes to make clear in proposed Chapter III, Section 16(ii), unless otherwise indicated, the descriptions of disruptive options quoting and trading activity do not require the facts to occur in a specific order in order for the rule to apply. For instance, with respect to the pattern defined in proposed Chapter III, Section 16(i)(a) it is of no consequence whether a party first enters Displayed Orders and then Contra-side Orders or vice-versa. However, as proposed, supply and demand must change following the entry of the Displayed Orders. The Exchange also proposes to make clear that disruptive options quoting and trading activity includes a pattern or practice in which some portion of the disruptive options quoting and trading activity is conducted on the Exchange and the other portions of the disruptive options quoting and trading activity are conducted on one or more other exchanges. The Exchange believes that this authority is necessary to address market participants who would otherwise seek to avoid the prohibitions of the proposed Rule by spreading their activity amongst various execution venues. In sum, proposed Chapter III, Section 16 coupled with Rule 9400 would provide the Exchange with authority to promptly act to prevent disruptive quoting and trading activity from continuing on the Exchange. Below is an example of how the proposed rule would operate. Assume that through its surveillance program, Exchange staff identifies a pattern of potentially disruptive options quoting and trading activity. After an initial investigation the Exchange would then contact the Member responsible for the orders that caused the activity to request an explanation of the activity as well as any additional relevant information, including the source of the activity. If the Exchange were to continue to see the same pattern from the same Member and the source of the activity is the same or has been previously identified as a frequent source of disruptive options quoting and trading activity then the Exchange could initiate an expedited suspension proceeding by serving notice on the Member that would include details regarding the alleged violations as well as the proposed sanction. In such a case the proposed sanction would likely be to order the Member to cease and desist providing access to the Exchange to the client that is responsible for the disruptive quoting and trading activity and to suspend such Member unless and until such action is taken. The Member would have the opportunity to be heard in front of a Hearing Panel at a hearing to be conducted within 15 days of the notice. If the Hearing Panel determined that the violation alleged in the notice did not occur or that the conduct or its continuation would not have the potential to result in significant market disruption or other significant harm to investors, then the Hearing Panel would dismiss the suspension order proceeding. If the Hearing Panel determined that the violation alleged in the notice did occur and that the conduct or its continuation is likely to result in significant market disruption or other significant harm to investors, then the Hearing Panel would issue the order including the proposed sanction, ordering the Member to cease providing access to the client at issue and suspending such Member unless and until such action is taken. If such Member wished for the suspension to be lifted because the client ultimately responsible for the activity no longer would be provided access to the Exchange, then such Member could apply to the Hearing Panel to have the order modified, set aside, limited or revoked. The Exchange notes that the issuance of a suspension order would not alter the Exchange's ability to further investigate the matter and/or [[Page 44370]] later sanction the Member pursuant to the Exchange's standard disciplinary process for supervisory violations or other violations of Exchange rules or the Act. The Exchange reiterates that it already has broad authority to take action against a Member in the event that such Member is engaging in or facilitating disruptive or manipulative trading activity on the Exchange. For the reasons described above, and in light of recent cases like the client access cases described above, as well as other cases currently under investigation, the Exchange believes that it is equally important for the Exchange to have the authority to promptly initiate expedited suspension proceedings against any Member who has demonstrated a clear pattern or practice of disruptive options quoting and trading activity, as described above, and to take action including ordering such Member to terminate access to the Exchange to one or more of such Member's clients if such clients are responsible for the activity. The Exchange recognizes that its authority to issue a suspension order is a powerful measure that should be used very cautiously. Consequently, the rules have been designed to ensure that the proceedings are used to address only the most clear and serious types of disruptive quoting and trading activity and that the interests of Respondents are protected. For example, to ensure that proceedings are used appropriately and that the decision to initiate a proceeding is made only at the highest staff levels, the rules require the CRO or another senior officer of the Exchange to issue written authorization before the Exchange can institute an expedited suspension proceeding. In addition, the rule by its terms is limited to violations of Chapter III, Section 16, when necessary to protect investors, other Members and the Exchange. The Exchange will initiate disciplinary action for violations of Chapter III, Section 16, pursuant to Rule 9400. Further, the Exchange believes that the expedited suspension provisions described above that provide the opportunity to respond as well as a Hearing Panel determination prior to taking action will ensure that the Exchange would not utilize its authority in the absence of a clear pattern or practice of disruptive options quoting and trading activity. The Exchange also notes that that it may impose temporary restrictions upon the automated entry or updating of orders or quotes/ orders as the Exchange may determine to be necessary to protect the integrity of the Exchange's systems pursuant to Rule 4611(c).\10\ Also, pursuant to Rule 9555(a)(2) \11\ if a member, associated person, or other person cannot continue to have access to services offered by the Exchange or a member thereof with safety to investors, creditors, members, or the Exchange, the Exchange's Regulation Department staff may provide written notice to such member or person limiting or prohibiting access to services offered by the Exchange or a member thereof. This ability to impose a temporary restriction upon Members assists the Exchange in maintaining the integrity of the market and protecting investors and the public interest. --------------------------------------------------------------------------- \10\ For example, such temporary restrictions may be necessary to address a system problem at a particular NOM Market Maker, NOM ECN or Order Entry Firm or at the Exchange, or an unexpected period of extremely high message traffic. \11\ See Rule 9555, entitled ``Failure to Meet the Eligibility or Qualification Standards or Prerequisites for Access to Services.'' --------------------------------------------------------------------------- 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act \12\ in general, and furthers the objectives of Section 6(b)(5) of the Act \13\ in particular, in that the rules of the Exchange are designed to prevent fraudulent and manipulative acts and practices, 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. Pursuant to the proposal, the Exchange will have a mechanism to promptly initiate expedited suspension proceedings in the event the Exchange believes that it has sufficient proof that a violation of Rule 2170 has occurred and is ongoing. --------------------------------------------------------------------------- \12\ 15 U.S.C. 78f(b). \13\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- Further, the Exchange believes that the proposal is consistent with Sections 6(b)(1) and 6(b)(6) of the Act,\14\ which require that the rules of an exchange enforce compliance with, and provide appropriate discipline for, violations of the Commission and Exchange rules. The Exchange also believes that the proposal is consistent with the public interest, the protection of investors, or otherwise in furtherance of the purposes of the Act because the proposal helps to strengthen the Exchange's ability to carry out its oversight and enforcement responsibilities as a self-regulatory organization in cases where awaiting the conclusion of a full disciplinary proceeding is unsuitable in view of the potential harm to other Members and their customers. Also, the Exchange notes that if this type of conduct is allowed to continue on the Exchange, the Exchange's reputation could be harmed because it may appear to the public that the Exchange is not acting to address the behavior. The expedited process would enable the Exchange to address the behavior with greater speed. --------------------------------------------------------------------------- \14\ 15 U.S.C. 78f(b)(1) and 78f(b)(6). --------------------------------------------------------------------------- As explained above, the Exchange notes that it has defined the prohibited disruptive quoting and trading activity by modifying the traditional definitions of layering and spoofing \15\ to eliminate an express intent element that would not be proven on an expedited basis and would instead require a thorough investigation into the activity. As noted throughout this filing, the Exchange believes it is necessary for the protection of investors to make such modifications in order to adopt an expedited process rather than allowing disruptive quoting and trading activity to occur for several years. --------------------------------------------------------------------------- \15\ See supra, notes 4 and 5. --------------------------------------------------------------------------- Through this proposal, the Exchange does not intend to modify the definitions of spoofing and layering that have generally been used by the Exchange and other regulators in connection with actions like those cited above. The Exchange believes that the pattern of disruptive and allegedly manipulative quoting and trading activity was widespread across multiple exchanges, and the Exchange, FINRA, and other SROs identified clear patterns of the behavior in 2007 and 2008 in the equities markets.\16\ The Exchange believes that this proposal will provide the Exchange with the necessary means to enforce against such behavior in an expedited manner while providing Members with the necessary due process. The Exchange believes that its proposal is consistent with the Act because it provides the Exchange with the ability 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 from such ongoing behavior. --------------------------------------------------------------------------- \16\ See Section 3 [sic] herein, the Purpose section, for examples of conduct referred to herein. --------------------------------------------------------------------------- Further, the Exchange believes that adopting a rule applicable to Options Participants is consistent with the Act because the Exchange believes that this type of behavior should be prohibited for all members, not just equities members. The type of product should not be the determining factor, rather the behavior which challenges the market structure is the primary concern for the Exchange. While this behavior may not be as prevalent on the options market [[Page 44371]] today, the Exchange does not believe that the possibility of such behavior in the future would not have the same market impact and thereby warrant an expedited process. The Exchange believes that treating all members, equities and options, in a uniform manner with respect to the type of disciplinary action that would be taken for violations of manipulative quoting and trading activity is consistent with the Act. The Exchange further believes that the proposal is consistent with Section 6(b)(7) of the Act,\17\ which requires that the rules of an exchange ``provide a fair procedure for the disciplining of members and persons associated with members . . . and the prohibition or limitation by the exchange of any person with respect to access to services offered by the exchange or a member thereof.'' Finally, the Exchange also believes the proposal is consistent with Sections 6(d)(1) and 6(d)(2) of the Act,\18\ which require that the rules of an exchange with respect to a disciplinary proceeding or proceeding that would limit or prohibit access to or membership in the exchange require the exchange to: Provide adequate and specific notice of the charges brought against a member or person associated with a member, provide an opportunity to defend against such charges, keep a record, and provide details regarding the findings and applicable sanctions in the event a determination to impose a disciplinary sanction is made. The Exchange believes that each of these requirements is addressed by the notice and due process provisions included within Rule 9400. Importantly, as noted above, the Exchange will use the authority only in clear and egregious cases when necessary to protect investors, other Members and the Exchange, and in such cases, the Respondent will be afforded due process in connection with the suspension proceedings. --------------------------------------------------------------------------- \17\ 15 U.S.C. 78f(b)(7). \18\ U.S.C. 78f(d)(1). --------------------------------------------------------------------------- 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. To the contrary, the Exchange believes that each self-regulatory organization should be empowered to regulate trading occurring on its market consistent with the Act and without regard to competitive issues. The Exchange is requesting authority to take appropriate action if necessary for the protection of investors, other Members and the Exchange. The Exchange also believes that it is important for all exchanges to be able to take similar action to enforce their rules against manipulative conduct thereby leaving no exchange prey to such conduct. The Exchange does not believe that the proposed rule change imposes an undue burden on competition, rather this process will provide the Exchange with the necessary means to enforce against violations of manipulative quoting and trading activity in an expedited manner, while providing Members with the necessary due process. The Exchange believes that adopting a rule applicable to Options Participants does not impose an undue burden on competition because this type of behavior should be prohibited for all members, not just equities members. The Exchange's proposal would treat all members, equities and options, in a uniform manner with respect to the type of disciplinary action that would be taken for violations of manipulative quoting and trading activity. 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 foregoing 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, it has become effective pursuant to Section 19(b)(3)(A)(iii) of the Act \19\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\20\ --------------------------------------------------------------------------- \19\ 15 U.S.C. 78s(b)(3)(a)(iii). \20\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) requires a self-regulatory organization to give the Commission written notice of its intent to file 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. --------------------------------------------------------------------------- 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: (i) Necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) 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 proposal 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 No. SR-NASDAQ-2016-092 on the subject line. Paper Comments Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File No. SR-NASDAQ-2016-092. 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 No. SR-NASDAQ-2016-092, and should be submitted on or before July 28, 2016. [[Page 44372]] For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\21\ --------------------------------------------------------------------------- \21\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Robert W. Errett, Deputy Secretary. [FR Doc. 2016-16035 Filed 7-6-16; 8:45 am] BILLING CODE 8011-01-P
![44366 Federal Register / Vol. 81, No. 130 / Thursday, July 7, 2016 / Notices
or principal dollar amount of debt Officer, Securities and Exchange concerning the purpose of and basis for
securities that the issuer has authorized Commission, c/o Remi Pavlik-Simon, the proposed rule change and discussed
to be outstanding. These mandatory 100 F Street NE., Washington, DC any comments it received on the
requirements ensure accurate 20549, or by sending an email to: PRA_ proposed rule change. The text of these
securityholder records and assist the Mailbox@sec.gov. Comments must be statements may be examined at the
Commission and other regulatory submitted to OMB within 30 days of places specified in Item IV below. The
agencies with monitoring transfer agents this notice. Exchange has prepared summaries, set
and ensuring compliance with the rule. Dated: June 30, 2016. forth in sections A, B, and C below, of
This rule does not involve the collection Robert W. Errett, the most significant aspects of such
of confidential information. statements.
Deputy Secretary.
There are approximately 413
registered transfer agents. We estimate [FR Doc. 2016–16037 Filed 7–6–16; 8:45 am] A. Self-Regulatory Organization’s
that the average number of hours BILLING CODE 8011–01–P Statement of the Purpose of, and the
necessary for each transfer agent to Statutory Basis for, the Proposed Rule
comply with Rule 17Ad–10 is Change
approximately 80 hours per year, which SECURITIES AND EXCHANGE
COMMISSION 1. Purpose
generates an industry-wide annual
burden of 33,040 hours (413 times 80 [Release No. 34–78208; File No. SR–
The Exchange is filing this proposal to
hours). This burden is of a NASDAQ–2016–092] adopt an options rule to clearly prohibit
recordkeeping nature but also includes disruptive quoting and trading activity
a small amount of third party disclosure Self-Regulatory Organizations; The on the Exchange and to permit the
and SEC reporting burdens. At an NASDAQ Stock Market LLC; Notice of Exchange to take prompt action to
average staff cost of $50 per hour, the Filing and Immediate Effectiveness of suspend Members or their clients that
industry-wide internal labor cost of Proposed Rule Change To Provide a violate such rule pursuant to Rule 9400.
compliance (a monetization of the Process for an Expedited Suspension
Background
burden hours) is approximately Proceeding and Adopt a Rule To
$1,652,000 per year (33,040 × $50). Prohibit Disruptive Quoting and As a national securities exchange
In addition, we estimate that each Trading Activity registered pursuant to Section 6 of the
transfer agent will incur an annual Act, the Exchange is required to be
June 30, 2016. organized and to have the capacity to
external cost burden of $18,000 Pursuant to Section 19(b)(1) of the
resulting from the collection of enforce compliance by its members and
Securities Exchange Act of 1934 (the persons associated with its members,
information. Therefore, the total annual ‘‘Act’’),1 and Rule 19b–4 thereunder,2
external cost on the entire transfer agent with the Act, the rules and regulations
notice is hereby given that on June 22, thereunder, and the Exchange’s Rules.
industry is approximately $7,434,000 2016, The NASDAQ Stock Market LLC
($18,000 times 413). This cost primarily Further, the Exchange’s Rules are
(‘‘NASDAQ’’ or ‘‘Exchange’’) filed with required to be ‘‘designed to prevent
reflects ongoing computer operations the Securities and Exchange
and maintenance associated with fraudulent and manipulative acts and
Commission (‘‘Commission’’) the practices, to promote just and equitable
generating, maintaining, and disclosing proposed rule change as described in
or providing certain information principles of trade . . . and, in general,
Items I, II and III below, which Items to protect investors and the public
required by the rule. have been prepared by the Exchange.
The amount of time any particular interest.’’ 3 In fulfilling these
The Commission is publishing this requirements, the Exchange has
transfer agent will devote to Rule 17Ad–
notice to solicit comments on the developed a comprehensive regulatory
10 compliance will vary according to
proposed rule change from interested program that includes automated
the size and scope of the transfer agent’s
persons. surveillance of trading activity that is
business activity. We note, however,
that at least some of the records, I. Self-Regulatory Organization’s both operated directly by Exchange staff
processes, and communications Statement of the Terms of Substance of and by staff of the Financial Industry
required by Rule 17Ad–10 would likely the Proposed Rule Change Regulatory Authority (‘‘FINRA’’)
be maintained, generated, and used for The Exchange proposes a proposal to pursuant to a Regulatory Services
transfer agent business purposes even adopt a new NASDAQ Options Market Agreement (‘‘RSA’’). When disruptive
without the rule. LLC rule to clearly prohibit disruptive and potentially manipulative or
An agency may not conduct or quoting and trading activity on the improper quoting and trading activity is
sponsor, and a person is not required to Exchange, as further described below. identified, the Exchange or FINRA
respond to, a collection of information The text of the proposed rule change (acting as an agent of the Exchange)
under the PRA unless it displays a is available on the Exchange’s Web site conducts an investigation into the
currently valid OMB control number. at http://nasdaq.cchwallstreet.com, at activity, requesting additional
The public may view background the principal office of the Exchange, and information from the Member or
documentation for this information at the Commission’s Public Reference Members involved. To the extent
collection at the following Web site: Room. violations of the Act, the rules and
www.reginfo.gov. Comments should be regulations thereunder, or Exchange
directed to: (i) Desk Officer for the II. Self-Regulatory Organization’s Rules have been identified and
Securities and Exchange Commission, Statement of the Purpose of, and
srobinson on DSK5SPTVN1PROD with NOTICES
confirmed, the Exchange or FINRA as its
Office of Information and Regulatory Statutory Basis for, the Proposed Rule agent will commence the enforcement
Affairs, Office of Management and Change process, which might result in, among
Budget, Room 10102, New Executive In its filing with the Commission, the other things, a censure, a requirement to
Office Building, Washington, DC 20503, Exchange included statements take certain remedial actions, one or
or by sending an email to: Shagufta_ more restrictions on future business
Ahmed@omb.eop.gov; and (ii) Pamela 1 15 U.S.C. 78s(b)(1).
Dyson, Director/Chief Information 2 17 CFR 240.19b–4. 3 15 U.S.C. 78f(b)(1).
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![Federal Register / Vol. 81, No. 130 / Thursday, July 7, 2016 / Notices 44369
manipulation rules, including Rules trading activity as a frequent pattern in disruptive quoting and trading activity
2110, 2111, 2120, and 2170. The which the following facts are present: (i) from continuing on the Exchange.
Exchange proposes to adopt a new rule A party narrows the spread for a Below is an example of how the
at Chapter III, Section 16, which would security by placing an order inside the proposed rule would operate.
more specifically define and prohibit national best bid or offer; and (ii) the Assume that through its surveillance
disruptive options quoting and trading party then submits an order on the program, Exchange staff identifies a
activity on the Exchange. As noted opposite side of the market that pattern of potentially disruptive options
above, the Exchange also proposes to executes against another market quoting and trading activity. After an
apply the proposed suspension rules to participant that joined the new inside initial investigation the Exchange would
Chapter III, Section 16. market established by the order then contact the Member responsible for
Proposed Chapter III, Section 16 described in proposed (b)(i) that the orders that caused the activity to
would prohibit Members from engaging narrowed the spread. The Exchange request an explanation of the activity as
in or facilitating disruptive options believes that the proposed descriptions well as any additional relevant
quoting and trading activity on the of disruptive quoting and trading information, including the source of the
Exchange, as described in proposed activity articulated in the rule are activity. If the Exchange were to
Chapter III, Section 16(i) and (ii), consistent with the activities that have continue to see the same pattern from
including acting in concert with other been identified and described in the the same Member and the source of the
persons to effect such activity. The client access cases described above.9 activity is the same or has been
Exchange believes that it is necessary to The Exchange further believes that the previously identified as a frequent
extend the prohibition to situations proposed descriptions will provide source of disruptive options quoting and
when persons are acting in concert to Members with clear descriptions of trading activity then the Exchange could
avoid a potential loophole where disruptive options quoting and trading initiate an expedited suspension
disruptive quoting and trading activity activity that will help them to avoid proceeding by serving notice on the
is simply split between several brokers engaging in such activities or allowing Member that would include details
or customers. The Exchange believes, their clients to engage in such activities. regarding the alleged violations as well
that with respect to persons acting in The Exchange proposes to make clear as the proposed sanction. In such a case
concert perpetrating an abusive scheme, in proposed Chapter III, Section 16(ii), the proposed sanction would likely be
it is important that the Exchange have unless otherwise indicated, the to order the Member to cease and desist
authority to act against the parties descriptions of disruptive options providing access to the Exchange to the
perpetrating the abusive scheme, quoting and trading activity do not client that is responsible for the
whether it is one person or multiple require the facts to occur in a specific disruptive quoting and trading activity
persons. order in order for the rule to apply. For and to suspend such Member unless
To provide proper context for the instance, with respect to the pattern and until such action is taken.
situations in which the Exchange defined in proposed Chapter III, Section The Member would have the
proposes to utilize its authority, the 16(i)(a) it is of no consequence whether opportunity to be heard in front of a
Exchange believes it is necessary to a party first enters Displayed Orders and Hearing Panel at a hearing to be
describe the types of disruptive options then Contra-side Orders or vice-versa. conducted within 15 days of the notice.
quoting and trading activity that would However, as proposed, supply and If the Hearing Panel determined that the
cause the Exchange to use its authority. demand must change following the violation alleged in the notice did not
Accordingly, the Exchange proposes to entry of the Displayed Orders. The occur or that the conduct or its
adopt Chapter III, Section 16(i) and (ii) Exchange also proposes to make clear continuation would not have the
providing additional details regarding that disruptive options quoting and potential to result in significant market
disruptive options quoting and trading trading activity includes a pattern or disruption or other significant harm to
activity. Proposed Chapter III, Section practice in which some portion of the investors, then the Hearing Panel would
16(i)(a) describes disruptive options disruptive options quoting and trading dismiss the suspension order
quoting and trading activity containing activity is conducted on the Exchange proceeding.
many of the elements indicative of and the other portions of the disruptive If the Hearing Panel determined that
layering. It would describe disruptive options quoting and trading activity are the violation alleged in the notice did
options quoting and trading activity as conducted on one or more other occur and that the conduct or its
a frequent pattern in which the exchanges. The Exchange believes that continuation is likely to result in
following facts are present: (i) A party this authority is necessary to address significant market disruption or other
enters multiple limit orders on one side market participants who would significant harm to investors, then the
of the market at various price levels (the otherwise seek to avoid the prohibitions Hearing Panel would issue the order
‘‘Displayed Orders’’); and (ii) following of the proposed Rule by spreading their including the proposed sanction,
the entry of the Displayed Orders, the activity amongst various execution ordering the Member to cease providing
level of supply and demand for the venues. In sum, proposed Chapter III, access to the client at issue and
security changes; and (iii) the party Section 16 coupled with Rule 9400 suspending such Member unless and
enters one or more orders on the would provide the Exchange with until such action is taken. If such
opposite side of the market of the authority to promptly act to prevent Member wished for the suspension to be
Displayed Orders (the ‘‘Contra-Side lifted because the client ultimately
Orders’’) that are subsequently 9 As previously noted herein, while the examples responsible for the activity no longer
executed; and (iv) following the noted in the Purpose Section of this 19b4 [sic] are would be provided access to the
srobinson on DSK5SPTVN1PROD with NOTICES
related to the equities market, the Exchange Exchange, then such Member could
execution of the Contra-Side Orders, the believes that this type of conduct should be
party cancels the Displayed Orders. prohibited for all Exchange members, equities and apply to the Hearing Panel to have the
Proposed Chapter III, Section 16(i)(b) options. The Exchange believes that these patterns order modified, set aside, limited or
describes disruptive options quoting of disruptive and allegedly manipulative quoting revoked. The Exchange notes that the
and trading activity need to be addressed and the
and trading activity containing many of product should not limit the action taken by the
issuance of a suspension order would
the elements indicative of spoofing and Exchange. For this reason, the Exchange now not alter the Exchange’s ability to
would describe disruptive quoting and proposes a corresponding options rule. further investigate the matter and/or
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![44370 Federal Register / Vol. 81, No. 130 / Thursday, July 7, 2016 / Notices
later sanction the Member pursuant to systems pursuant to Rule 4611(c).10 their customers. Also, the Exchange
the Exchange’s standard disciplinary Also, pursuant to Rule 9555(a)(2) 11 if a notes that if this type of conduct is
process for supervisory violations or member, associated person, or other allowed to continue on the Exchange,
other violations of Exchange rules or the person cannot continue to have access the Exchange’s reputation could be
Act. to services offered by the Exchange or a harmed because it may appear to the
The Exchange reiterates that it already member thereof with safety to investors, public that the Exchange is not acting to
has broad authority to take action creditors, members, or the Exchange, the address the behavior. The expedited
against a Member in the event that such Exchange’s Regulation Department staff process would enable the Exchange to
Member is engaging in or facilitating may provide written notice to such address the behavior with greater speed.
disruptive or manipulative trading member or person limiting or As explained above, the Exchange
activity on the Exchange. For the prohibiting access to services offered by notes that it has defined the prohibited
reasons described above, and in light of the Exchange or a member thereof. This disruptive quoting and trading activity
recent cases like the client access cases ability to impose a temporary restriction by modifying the traditional definitions
described above, as well as other cases upon Members assists the Exchange in of layering and spoofing 15 to eliminate
currently under investigation, the maintaining the integrity of the market an express intent element that would
Exchange believes that it is equally and protecting investors and the public not be proven on an expedited basis and
important for the Exchange to have the interest. would instead require a thorough
authority to promptly initiate expedited investigation into the activity. As noted
2. Statutory Basis throughout this filing, the Exchange
suspension proceedings against any
Member who has demonstrated a clear The Exchange believes that its believes it is necessary for the
pattern or practice of disruptive options proposal is consistent with Section 6(b) protection of investors to make such
quoting and trading activity, as of the Act 12 in general, and furthers the modifications in order to adopt an
described above, and to take action objectives of Section 6(b)(5) of the Act 13 expedited process rather than allowing
including ordering such Member to in particular, in that the rules of the disruptive quoting and trading activity
terminate access to the Exchange to one Exchange are designed to prevent to occur for several years.
or more of such Member’s clients if such fraudulent and manipulative acts and Through this proposal, the Exchange
clients are responsible for the activity. practices, it is designed to promote just does not intend to modify the
The Exchange recognizes that its and equitable principles of trade, to definitions of spoofing and layering that
authority to issue a suspension order is remove impediments to and perfect the have generally been used by the
a powerful measure that should be used mechanism of a free and open market Exchange and other regulators in
very cautiously. Consequently, the rules and a national market system, and, in connection with actions like those cited
have been designed to ensure that the general to protect investors and the above. The Exchange believes that the
proceedings are used to address only the public interest. Pursuant to the pattern of disruptive and allegedly
most clear and serious types of proposal, the Exchange will have a manipulative quoting and trading
disruptive quoting and trading activity mechanism to promptly initiate activity was widespread across multiple
and that the interests of Respondents are expedited suspension proceedings in exchanges, and the Exchange, FINRA,
protected. For example, to ensure that the event the Exchange believes that it and other SROs identified clear patterns
proceedings are used appropriately and has sufficient proof that a violation of of the behavior in 2007 and 2008 in the
that the decision to initiate a proceeding Rule 2170 has occurred and is ongoing. equities markets.16 The Exchange
is made only at the highest staff levels, Further, the Exchange believes that believes that this proposal will provide
the rules require the CRO or another the proposal is consistent with Sections the Exchange with the necessary means
senior officer of the Exchange to issue 6(b)(1) and 6(b)(6) of the Act,14 which to enforce against such behavior in an
written authorization before the require that the rules of an exchange expedited manner while providing
Exchange can institute an expedited enforce compliance with, and provide Members with the necessary due
suspension proceeding. In addition, the appropriate discipline for, violations of process. The Exchange believes that its
rule by its terms is limited to violations the Commission and Exchange rules. proposal is consistent with the Act
of Chapter III, Section 16, when The Exchange also believes that the because it provides the Exchange with
necessary to protect investors, other proposal is consistent with the public the ability to remove impediments to
Members and the Exchange. The interest, the protection of investors, or and perfect the mechanism of a free and
Exchange will initiate disciplinary otherwise in furtherance of the purposes open market and a national market
action for violations of Chapter III, of the Act because the proposal helps to system, and, in general to protect
Section 16, pursuant to Rule 9400. strengthen the Exchange’s ability to investors and the public interest from
Further, the Exchange believes that the carry out its oversight and enforcement such ongoing behavior.
expedited suspension provisions responsibilities as a self-regulatory Further, the Exchange believes that
described above that provide the organization in cases where awaiting the adopting a rule applicable to Options
opportunity to respond as well as a conclusion of a full disciplinary Participants is consistent with the Act
Hearing Panel determination prior to proceeding is unsuitable in view of the because the Exchange believes that this
taking action will ensure that the potential harm to other Members and type of behavior should be prohibited
Exchange would not utilize its authority for all members, not just equities
in the absence of a clear pattern or 10 For example, such temporary restrictions may members. The type of product should
practice of disruptive options quoting be necessary to address a system problem at a not be the determining factor, rather the
srobinson on DSK5SPTVN1PROD with NOTICES
particular NOM Market Maker, NOM ECN or Order behavior which challenges the market
and trading activity. Entry Firm or at the Exchange, or an unexpected
The Exchange also notes that that it period of extremely high message traffic.
structure is the primary concern for the
may impose temporary restrictions upon 11 See Rule 9555, entitled ‘‘Failure to Meet the Exchange. While this behavior may not
the automated entry or updating of Eligibility or Qualification Standards or be as prevalent on the options market
Prerequisites for Access to Services.’’
orders or quotes/orders as the Exchange 12 15 U.S.C. 78f(b). 15 Seesupra, notes 4 and 5.
may determine to be necessary to 13 15 U.S.C. 78f(b)(5). 16 SeeSection 3 [sic] herein, the Purpose section,
protect the integrity of the Exchange’s 14 15 U.S.C. 78f(b)(1) and 78f(b)(6). for examples of conduct referred to herein.
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![44372 Federal Register / Vol. 81, No. 130 / Thursday, July 7, 2016 / Notices
For the Commission, by the Division of 23, 2016, the Commission published in with unregistered securities
Trading and Markets, pursuant to delegated the Federal Register an order to solicit transactions. As revised by Partial
authority.21 comments on the proposed rule change Amendment No. 2, a CAB would be
Robert W. Errett, and to institute proceedings pursuant to permitted to engage in:
Deputy Secretary. Section 19(b)(2)(B) of the Securities qualifying, identifying, soliciting, or acting as
[FR Doc. 2016–16035 Filed 7–6–16; 8:45 am] Exchange Act of 1934 (the ‘‘Exchange a placement agent or finder (i) on behalf of
BILLING CODE 8011–01–P Act’’) 3 to determine whether to approve an issuer in connection with a sale of newly-
or disapprove the proposed rule issued, unregistered securities to institutional
change.4 The Commission received one investors or (ii) on behalf of an issuer or a
SECURITIES AND EXCHANGE comment in response to the Order control person in connection with a change
COMMISSION Instituting Proceedings.5 of control of a privately-held company. For
In response to comments on the purposes of this subparagraph a ‘‘control
[Release No. 34–78220; File No. SR–FINRA– person’’ is a person who has the power to
2015–054] Notice of Filing, on March 29, 2016,
direct the management or policies of a
FINRA filed Partial Amendment No. 1, company through ownership of securities, by
Self-Regulatory Organizations; which amended proposed CAB Rule contract, or otherwise. Control will be
Financial Industry Regulatory 016(c)(2) to clarify that the definition of presumed to exist if, before the transaction,
Authority, Inc.; Notice of Filing of ‘‘capital acquisition broker’’ does not the person has the right to vote or the power
Partial Amendment No. 2 to Proposed include any broker or dealer that effects to sell or direct the sale of 25% or more of
Rule Change To Adopt FINRA Capital securities transactions that would a class of voting securities or in the case of
Acquisition Broker Rules require the broker or dealer to report the a partnership or limited liability company
transaction under the FINRA Rules 6300 has the right to receive upon dissolution or
July 1, 2016. has contributed 25% or more of the capital.
Series, 6400 Series, 6500 Series, 6600
For purposes of this subparagraph a
I. Introduction Series, 6600 Series, 6700 Series, 7300 ‘‘privately-held company’’ is a company that
Series or 7400 Series. The Commission does not have any class of securities
On December 4, 2015, Financial published Partial Amendment No. 1 for
Industry Regulatory Authority, Inc. registered, or required to be registered, with
comment in the Federal Register on the Securities and Exchange Commission
(‘‘FINRA’’) filed with the Securities and April 15, 2016.6 The Commission under Section 12 of the Exchange Act or with
Exchange Commission (the ‘‘SEC’’ or received one comment in response to respect to which the company files, or is
‘‘Commission’’) proposed rule change the Partial Amendment No. 1.7 required to file, periodic information,
SR–FINRA–2015–054, pursuant to On June 28, 2016, FINRA filed Partial documents, or reports under Section 15(d) of
which FINRA proposed to adopt a rule Amendment No. 2 to its proposed rule the Exchange Act.
set that would apply exclusively to change in response to comments on the The purpose of this proposed rule
firms that meet the definition of ‘‘capital Notice of Filing. Partial Amendment No. change is to provide a rule set for
acquisition broker’’ (‘‘CAB’’) and that 2 is described in Item II below, which member firms that advise companies on
elect to be governed under this rule set has been prepared by FINRA. The mergers and acquisitions, advise issuers
(collectively, the ‘‘CAB Rules’’). Commission is publishing this notice to on raising debt and equity capital in
The Commission published the private placements with institutional
solicit comments on Partial Amendment
proposed rule change for public investors, or provide advisory services
No. 2 from interested persons.
comment in the Federal Register on on a consulting basis to companies that
December 23, 2015.1 The Commission II. Self-Regulatory Organization’s
need assistance analyzing their strategic
received 17 comments in response to Statement of the Terms of Substance of
and financial alternatives. Consistent
the proposed rule change.2 On March the Proposed Amendment
with this purpose, this amendment
In response to comments on the would narrow the range of activities that
21 17 CFR 200.30–3(a)(12).
1 Securities
Notice of Filing, the Order Instituting a CAB would be permitted to engage in
Exchange Act Release No. 76675
(December 17, 2015), 80 FR 79969 (December 23, Proceedings, and Partial Amendment with regard to securities transactions
2015) (Notice of Filing File No. SR–FINRA–2015– No. 1, FINRA filed this Partial involving institutional investors.
054). Amendment No. 2 to amend proposed Previously proposed CAB Rule
2 Letters from Roger W. Mehle, Chairman and
CAB Rule 016(c)(1)(F) regarding a CAB’s 016(c)(1)(F) would have permitted a
CEO, Archates Capital Advisors LLC, dated
December 29, 2015; Daniel H. Kolber, President/
authority to engage in qualifying, CAB to engage in qualifying,
CEO, Intellivest Securities, Inc., dated December 30, identifying, soliciting, or acting as a identifying, soliciting, or acting as a
2016; Arne Rovell, Coronado Investments, LLC, placement agent or finder in connection placement agent or finder with respect
dated January 6, 2016; Donna DiMaria, Chairman of to institutional investors in connection
the Board of Directors, and Lisa Roth, Board of Myott, Chief Compliance Officer, Thomas Capital
Directors, Third Party Marketers Association, dated with purchases or sales of unregistered
Group, Inc., dated January 13, 2016; Judith M.
January 12, 2016; Frank P. L. Minard, Managing Shaw, President, North American Securities
securities. This authority would have
Partner, XT Capital Partners, LLC, dated January 12, Administrators Association, Inc., dated January 15, been limited by proposed CAB Rule
2016; Timothy Cahill, President, Compass 2016; and Peter W. LaVigne, Esq., Chair, Securities 016(c)(2), which would have prohibited
Securities Corporation, dated January 13, 2016; Regulation Committee, Business Law Section, New
Mark Fairbanks, President, Foreside Distributors, CABs from effecting securities
York State Bar Association, dated January 22, 2016.
dated January 13, 2016; Dan Glusker, Perkins Fund 3 15 U.S.C. 78s(b)(2)(B).
transactions that would require the
Marketing, LLC, dated January 13, 2016; Steven 4 Securities Exchange Act Release No. 77391 broker or dealer to report the transaction
Jafarzadeh, CAIA, Managing Director, CCO Partner, under the FINRA trade reporting rules.8
Stonehaven, dated January 13, 2016; Richard A. (March 17, 2016), 81 FR 15588 (March 23, 2016)
Murphy, Manager, North Bridge Capital LLC, dated (Order Instituting Proceedings on File No. SR– As amended, a CAB would be
srobinson on DSK5SPTVN1PROD with NOTICES
January 13, 2016; Ron Oldenkamp, President, FINRA–2015–054). permitted to engage in qualifying,
5 Letter from Howard Spindel, Senior Managing
Genesis Marketing Group, dated January 13, 2016; identifying, soliciting, or acting as a
Michael S. Quinn, Member and CCO, Q Advisors Director, and Cassondra E. Joseph, Managing
Director, Integrated Solutions, dated April 8, 2016. placement agent or finder (i) on behalf
LLC, dated January 13, 2016; Lisa Roth, President,
Monahan & Roth, LLC, dated January 13, 2016; 6 Securities Exchange Act Release No. 77581 of an issuer in connection with a sale of
Howard Spindel, Senior Managing Director, and (April 11, 2016), 81 FR 22333 (April 15, 2016)
Cassondra E. Joseph, Managing Director, Integrated (Notice of Filing of Partial Amendment No. 1 to File 8 FINRA Rules 6300 Series, 6400 Series, 6500
Management Solutions USA LLC, dated January 13, No. SR–FINRA–2015–054). Series, 6600 Series, 6700 Series, 7300 Series and
2016; Sajan K. Thomas, President, and Stephen J. 7 Letter from Anonymous dated May 3, 2016. 7400 Series.
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Document Created: 2018-02-08 07:54:35
Document Modified: 2018-02-08 07:54:35
| 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 44366 |
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