81_FR_47323 81 FR 47184 - Self-Regulatory Organizations; New York Stock Exchange LLC; Order Approving Proposed Rule Change Removing From Its Rules Certain Internal Procedures Regarding the Use of Fine Income

81 FR 47184 - Self-Regulatory Organizations; New York Stock Exchange LLC; Order Approving Proposed Rule Change Removing From Its Rules Certain Internal Procedures Regarding the Use of Fine Income

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 139 (July 20, 2016)

Page Range47184-47187
FR Document2016-17096

Federal Register, Volume 81 Issue 139 (Wednesday, July 20, 2016)
[Federal Register Volume 81, Number 139 (Wednesday, July 20, 2016)]
[Notices]
[Pages 47184-47187]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-17096]


=======================================================================
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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78326; File No. SR-NYSE-2016-37]


Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Approving Proposed Rule Change Removing From Its Rules Certain Internal 
Procedures Regarding the Use of Fine Income

July 14, 2016.

I. Introduction

    On May 13, 2016, New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities 
Exchange Act of 1934 (``Act''),\2\ and Rule 19b-4 thereunder,\3\ a 
proposed rule change to remove internal procedures regarding the use of 
fine income, as described below. The proposed rule change was published 
for comment in the Federal Register on May 31, 2016.\4\ The Commission 
received one comment letter on the proposed rule change \5\ and a 
response to the comment letter from the Exchange.\6\ This order 
approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ See Securities Exchange Act Release No. 77899 (May 24, 
2016), 81 FR 34393 (``Notice'').
    \5\ See letter from Michael Walsh, Attorney, received by the 
Commission on June 7, 2016 (``Walsh Letter'').
    \6\ See letter from Martha Redding, Associate General Counsel 
and Assistant Secretary, NYSE, to Brent J. Fields, Secretary, 
Commission, dated June 16, 2016 (``NYSE Response Letter'').
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II. Description of the Proposal

    NYSE proposes to remove as Exchange rules internal procedures 
regarding the use of fine income, which were approved by the Commission 
in 2007 (``Fine Income Procedures'' or ``Procedures'') \7\ in 
connection with the 2006 merger between New York Stock Exchange, Inc. 
and Archipelago Holdings, Inc. (``Archipelago Merger'').\8\ The 
Exchange explains that, at that time, it had delegated certain of its 
regulatory functions to its then subsidiary, NYSE Regulation, Inc. 
(``NYSE Regulation'') \9\ pursuant to a delegation agreement 
(``Delegation Agreement'').\10\ As a result, as originally approved, 
the Fine Income Procedures referred to actions to be taken by NYSE 
Regulation and NYSE Regulation's board of directors (``NYSE Regulation 
Board''). However, following termination of the Delegation Agreement, 
the Regulatory Oversight Committee (``ROC'') of the Exchange's board of 
directors (``Board'') assumed responsibility for providing independent 
oversight of the regulatory function of the Exchange.\11\ The Exchange 
explains that, in addition to the restrictions in the Fine Income 
Procedures, Section 4.05 of the Exchange's Operating Agreement 
(``Section 4.05'') contains limitations on the use of regulatory assets 
and income, including fine income.\12\ Specifically, Section 4.05 
prohibits the Exchange from: (i) Using any regulatory assets or any 
regulatory fees, fines or penalties collected by its regulatory staff 
for commercial purposes; or (ii) distributing such assets, fees, fines 
or penalties to NYSE Group, Inc. (``NYSE Group''), i.e., the member of 
New York Stock Exchange LLC, or any other entity.\13\
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    \7\ See Securities Exchange Act Release No. 55216 (January 31, 
2007), 72 FR 5779 (February 7, 2007) (``Order Approving the Fine 
Income Procedures'').
    \8\ The Exchange states that the Archipelago Merger had the 
effect of ``demutualizing'' New York Stock Exchange, Inc. by 
separating equity ownership from trading privileges, and converting 
it to a for-profit entity. See Notice, supra note 4, at 34394 n.5 
(citing Securities Exchange Act Release No. 53382 (February 27, 
2006), 71 FR 11251, 11254 (March 6, 2006) (``Merger Approval 
Order'')).
    \9\ See Notice, supra note 4, at 34394. The Exchange states 
that, as approved, the Fine Income Procedures provide that fines 
would play no role in the annual NYSE Regulation budget process and 
that the use of fine income by NYSE Regulation would be subject to 
specific review and approval by the NYSE Regulation Board. See id.; 
see also Securities Exchange Act Release No. 55003 (December 22, 
2006), 71 FR 78497, 78498 (December 29, 2006) (``Fine Income 
Procedures Proposing Release''). The Exchange notes that, in 
approving the Fine Income Procedures, the Commission expressed that 
the Fine Income Procedures would ``guard against the possibility 
that fines may be assessed to respond to budgetary needs rather than 
to serve a disciplinary purpose.'' See Order Approving the Fine 
Income Procedures, supra note 7, at 5780.
    \10\ The Delegation Agreement terminated as of February 16, 
2016. See Notice, supra note 4, at 34394; see also Securities 
Exchange Act Release No. 75991 (September 28, 2015), 80 FR 59837, 
59839 (October 2, 2015) (``NYSE Approval Order'').
    \11\ See Notice, supra note 4, at 34394.
    \12\ See id.; see also Ninth Amended and Restated Operating 
Agreement of New York Stock Exchange LLC (``Operating Agreement''), 
Art. IV, Sec. 4.05; NYSE Approval Order, supra note 10, at 59839.
    \13\ See Operating Agreement, Art. IV, Sec. 4.05; see also NYSE 
Approval Order, supra note 10, at 59839.
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    The Exchange proposes to delete the Fine Income Procedures, noting 
that the Exchange would continue to remain subject to the restrictions 
of Section 4.05, which, coupled with the Operating Agreement provisions 
governing the ROC,\14\ the Exchange believes are sufficient to address 
concerns about its power to fine member organizations and the proper 
use of such funds.\15\ The

[[Page 47185]]

Exchange also believes that limitations on the use of such funds are 
not the most effective way to assure the proper exercise by Exchange 
regulatory staff of the Exchange's power to fine member organizations; 
in fact, the Exchange states that ``usage limitations on fine income do 
not provide oversight of regulatory performance.'' \16\ Rather, the 
Exchange believes that the responsibility to assure proper exercise by 
its regulatory staff of the Exchange's power to fine member 
organizations more properly lies with the ROC, which is responsible for 
overseeing the Exchange's regulatory and self-regulatory organization 
responsibilities and assessing its regulatory performance.\17\
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    \14\ The Exchange explains that ``the ROC is specifically 
charged with reviewing the regulatory budget of the Exchange and 
inquiring into the adequacy of resources available in the budget for 
regulatory activities.'' See Notice, supra note 4, at 34395 (citing 
Operating Agreement, Art. II, Sec. 2.03(h)(ii)).
    \15\ See Notice, supra note 4, at 34395.
    \16\ Id.
    \17\ Id. (citing the Operating Agreement, Art. II, Sec. 
2.03(h)(ii)).
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    Moreover, the Exchange believes that its disciplinary procedures, 
and specifically the appellate process contained therein, serve as ``a 
powerful check on the improper exercise by Exchange regulatory staff of 
the power to fine members and member organizations.''\18\ The Exchange 
notes that in the event of an adverse hearing panel determination, 
members first have the opportunity to appeal the decision to a Board 
committee comprised of independent directors and individuals associated 
with member organizations of the Exchange (``Committee for Review'' or 
``CFR''), which recommends a disposition to the Board, and then can 
appeal the decision to the Commission, whose decision in turn can be 
challenged in federal court.\19\
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    \18\ See id. at 34395.
    \19\ Id.
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    In support of its position that the protections in Section 4.05 are 
sufficient to ensure the proper use by the Exchange of fine income, the 
Exchange states that Section 4.05 is in fact ``wider in scope than the 
Fine Income Procedures,'' explaining that ``because Section 4.05 
encompasses all regulatory assets and income, not just fines, it 
ensures the proper use by the Exchange of a broader range of regulatory 
funds, by prohibiting their use for commercial purposes or 
distributions.'' \20\ The Exchange adds that Section 4.05 also guards 
against the possibility that other regulatory income, such as 
examination, access, registration, qualification, arbitration, dispute 
resolution and regulatory fees, or regulatory assets could be used or 
assessed to respond to the Exchange's budgetary needs.\21\
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    \20\ Id.
    \21\ Id.
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    The Exchange also believes that the circumstances that led to the 
creation of the Fine Income Procedures no longer exist.\22\ The 
Exchange states that when the Fine Income Procedures were adopted, a 
predecessor to Section 4.05 was in effect that directly bound the 
Exchange but not the entity--NYSE Regulation--actually performing the 
Exchange's regulatory functions at the time.\23\ Following NYSE's 
reintegration of its regulatory functions and the corresponding 
termination of the Delegation Agreement, the Exchange itself is the 
entity that fines member organizations and is directly subject to the 
limits of Section 4.05.\24\ Accordingly, the Exchange believes that 
removing the Fine Income Procedures and relying on Section 4.05, as 
well as the provisions governing the ROC,\25\ would provide adequate 
protections against the use of regulatory assets, or assessment of 
regulatory income, to respond to budgetary needs.\26\
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    \22\ Id.
    \23\ Id. The Exchange notes that the Commission, when approving 
the Archipelago Merger, stated in the approval order that while 
``NYSE Regulation had the obligation under the Delegation Agreement 
to assure compliance with the rules of the Exchange, . . . the Fine 
Income Procedures provided a more direct commitment by NYSE 
Regulation to ensure the proper exercise of NYSE Regulation's power 
to fine member organizations and the proper use by NYSE Regulation 
of fines collected.'' Id. (citing the Merger Approval Order).
    \24\ See Notice, supra note 4, at 34394; see also NYSE Approval 
Order, supra note 10.
    \25\ See Operating Agreement, Art. II, Sec. 2.03(h)(ii).
    \26\ See Notice, supra note 4, at 34395.
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    Furthermore, NYSE explains that the proposed change would have the 
benefit of bringing the Exchange's restrictions on the use of 
regulatory assets and income into greater conformity with those of its 
affiliates, NYSE MKT LLC and NYSE Arca, Inc., and would be consistent 
with limitations on the use of regulatory assets and income of other 
self-regulatory organizations (``SROs'').\27\ The Exchange surveyed the 
rules of other SROs and found that no other SRO limits the use of fine 
income to extra-budgetary use or subjects the use of fine income to 
specific review and approval by a regulatory oversight committee or any 
other body. \28\ Rather, the Exchange found that other SROs' 
limitations on the use of regulatory funds are largely similar to 
Section 4.05, by generally limiting the use of regulatory funds to the 
funding of an SRO's legal, regulatory and (in some cases) surveillance 
operations, and prohibiting the SRO from making a distribution to its 
member or stockholder, as applicable.\29\ In support of its position, 
the Exchange references the limitations on the use of regulatory funds 
by NYSE MKT LLC; NYSE Arca, Inc.; BOX Options Exchange LLC; 
International Securities Exchange, LLC; ISE Gemini, LLC; ISE Mercury, 
LLC; BATS BZX Exchange, Inc.; BATS BYX Exchange, Inc.; BATS EDGX 
Exchange, Inc.; EDGA Exchange, Inc.; Miami International Securities 
Exchange, LLC; National Stock Exchange, Inc.; NASDAQ Stock Market LLC; 
and Boston Stock Exchange, Inc. (n/k/a NASDAQ BX, Inc.).\30\
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    \27\ See id. at 34395-96.
    \28\ See id. at 34396.
    \29\ See id.
    \30\ See id. at 34395-96 nn.18-26 and accompanying text.
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    As noted above, the Commission received one comment letter on the 
proposed rule change.\31\ The commenter objects to the proposed rule 
change, citing both substantive and procedural bases.\32\ The commenter 
enumerates the following specific concerns with the proposal: (1) The 
Exchange's proposal is deficient because it does not include a 
``redline'' of the rule text to allow interested persons to review the 
proposed changes; \33\ (2) the Exchange's argument that the proposed 
rule change would bring it closer in line with other SROs' rules is 
objectionable because NYSE, as an industry leader, should be held to a 
higher standard and ``leading the way for other exchanges;'' \34\ (3) 
the Exchange, as an SRO, is both a market participant and a regulator, 
and the Fine Income Procedures ``are important because they provide an 
objectively justifiable arms-length limitation to separate business 
from regulation;'' \35\ (4) the Exchange's argument that its 
disciplinary process, including, in particular, the appellate process, 
provides safeguards is insufficient and does not provide the same 
``checks and balances'' as the Fine Income Procedures do;\36\ (5) the 
rule of statutory construction that the ``specific provision prevails 
over the general'' makes ``the Fine Income Procedures superior to 
Section 4.05;'' \37\ and (6) the Exchange's argument that the 
circumstances that led to the Fine Income Procedures no longer exist 
fails to explain what circumstances changed and what prevents their 
reoccurrence.\38\
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    \31\ See Walsh Letter, supra note 5.
    \32\ See id. at 1.
    \33\ See id.
    \34\ See id. at 1-2.
    \35\ See id. at 2-4.
    \36\ See id. at 4-5.
    \37\ See id. at 5.
    \38\ See id.
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    The Exchange submitted a letter responding to the issues raised by 
the

[[Page 47186]]

commenter.\39\ With respect to the commenter's assertion that the 
proposal was insufficient because the Exchange's proposal omitted a 
redline of the rule text, the Exchange explains that the Fine Income 
Procedures are internal rules that are not included in its published 
rulebook or governing documents, but the content of the rules are set 
forth in its proposal.\40\
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    \39\ See NYSE Response Letter, supra note 6.
    \40\ See id. at 3-4. The Commission notes that the Fine Income 
Procedures were reproduced in the Notice. See Notice, supra note 4, 
at 34394.
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    With respect to the commenter's claim that the Exchange should be 
held to a higher standard than other SROs and should not be permitted 
to delete the Fine Income Procedures simply because it would bring NYSE 
closer in line with the limitations of other SROs, the Exchange 
explains that it cited to other SROs' provisions relating to use of 
fine income to demonstrate that there are mechanisms other than the 
Fine Income Procedures that the Commission has found appropriate for 
ensuring that an SRO uses its regulatory funds properly.\41\ The 
Exchange contends that ``[j]ust as the Commission found that the 
provisions in these other SROs' governing documents were consistent 
with the Act, the Exchange believes that the Commission should conclude 
that Section 4.05, as an alternative to the Fine Income Procedures, is 
consistent with the Act.'' \42\ The Exchange further states that it 
would be inappropriate to hold NYSE to a higher standard than other 
SROs (as the commenter has urged) because ``[a]s a national securities 
exchange, the Exchange is subject to the same obligations and 
requirements under the Act as other national securities exchanges.'' 
\43\ Moreover, the Exchange maintains that to ``hold individual 
exchanges to different standards based on their size, economic worth, 
leadership or any of the other factors that the comment letter cites 
would be contrary to just and equitable principles of trade, would 
create impediments to a free and open market and national market 
system, and would impede the protection of investors and the public 
interest.'' \44\
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    \41\ See id. at 5.
    \42\ Id.
    \43\ Id.
    \44\ Id.
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    Regarding the commenter's statement that the Fine Income Procedures 
are a means to ensure the separation of the Exchange's business from 
its regulation, the Exchange states that it does not rely on the Fine 
Income Procedures to ensure the independence of its self-regulatory 
responsibilities and regulatory performance from its business 
interests, and instead notes how its corporate structure, including the 
required compositions of the Board, ROC, and CFR help to ensure the 
independence of its regulatory obligations.\45\ The Exchange also notes 
that the Fine Income Procedures are in fact limited in scope and thus 
the ROC and Section 4.05 in combination are more effective means in 
providing adequate protections against the use of regulatory assets, or 
the assessment of regulatory income, to respond to the budgetary needs 
of the Exchange.\46\
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    \45\ See id. at 6.
    \46\ See id. at 6-7.
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    With respect to the commenter's statement that the disciplinary 
process, and the appellate process in particular, alone does not 
provide sufficient safeguards against potential conflicts of interest, 
the Exchange disagrees with the commenter's assertion that the Fine 
Income Procedures provide a greater check on regulatory misbehavior 
than the appellate process.\47\ The Exchange reiterates its view that 
the Fine Income Procedures do not provide oversight of regulatory 
performance and simply monitor how the resulting fine income is 
spent.\48\ In addition, the Exchange describes how its appellate 
process provides an independent check on the disciplinary process and 
the possibility of improper exercise by Exchange regulatory staff of 
the power to fine members and member organizations in light of the 
CFR's composition, which requires the inclusion of both independent 
directors as well as representatives of Exchange members.\49\
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    \47\ See id. at 7-8.
    \48\ See id.
    \49\ See id. at 8.
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    The Exchange also addresses the commenter's statutory construction 
argument that deletion of the ``more specific provision'' (i.e., Fine 
Income Procedures) could imply that the conduct prohibited by the Fine 
Income Procedures is no longer prohibited. In response, the Exchange 
notes that both the Fine Income Procedures and Section 4.05 apply to 
the use of fine income. The Exchange notes that, if the Fine Income 
Procedures are deleted, Section 4.05 would still apply to the use of 
the Exchange's fine income and other regulatory assets.\50\
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    \50\ See id.
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    Finally, the Exchange takes issue with the commenter's assertion 
that it did not address ``what circumstances occurred that will not 
occur again.'' The Exchange states that the Fine Income Procedures 
provided a more direct commitment by NYSE Regulation to ensure the 
proper exercise of NYSE Regulation's power to fine member organizations 
and the proper use by NYSE Regulation of fines collected.\51\ The 
Exchange notes that because the Delegation Agreement is no longer in 
effect, it is the Exchange itself that fines member organizations, and 
the Exchange is subject to the limitations of Section 4.05.
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    \51\ See id. at 8-9.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\52\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(1) of the Act, which requires an exchange 
to be so organized and have the capacity to carry out the purposes of 
the Act and to comply, and to enforce compliance by its members and 
persons associated with its members, with the Act, the rules and 
regulations thereunder, and the rules of the exchange.\53\ In addition, 
the Commission finds that the proposal is consistent with Section 
6(b)(5) of the Act, which requires that the rules of the exchange be 
designed, among other things, to prevent fraudulent and manipulative 
acts and practices, 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.\54\
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    \52\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \53\ 15 U.S.C. 78f(b)(1).
    \54\ 15 U.S.C. 78f(b)(5).
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    As the Exchange notes, it implemented the Fine Income Procedures in 
connection with the Archipelago Merger, which had the effect of 
demutualizing New York Stock Exchange, Inc. (the predecessor to New 
York Stock Exchange LLC) by separating NYSE's equity ownership from 
trading privileges and converting it to a for-profit entity.\55\ 
According to the Exchange, at that time it had delegated certain of its 
regulatory functions to its then subsidiary, NYSE Regulation, pursuant 
to the Delegation Agreement. In September 2015, the Commission approved 
the Exchange's proposal to revise its regulatory structure by amending 
various Exchange rules and the Operating Agreement, including to 
establish as a committee of the Board a ROC, to be composed of at least 
three

[[Page 47187]]

members who satisfy the Exchange's independence requirements.\56\ The 
Delegation Agreement recently was terminated in connection with the 
Exchange's reorganization of its regulatory structure that had resulted 
in the creation of the ROC. Because the Fine Income Procedures were 
instituted in connection with the delegation of certain of the 
Exchange's regulatory functions to NYSE Regulation, the Commission 
believes that it is appropriate for the Exchange to remove the 
Procedures because NYSE Regulation no longer performs any regulatory 
services on behalf of the Exchange. Further, given that the Exchange 
has reintegrated its regulatory functions under the oversight of the 
ROC, the Commission believes that Section 4.05 should continue to help 
ensure that the Exchange does not inappropriately use its regulatory 
assets, fees, fines or penalties for commercial purposes or to 
distribute such assets, fees, fines or penalties to its direct parent, 
NYSE Group, Inc., or to any other entity. Finally, the Commission 
believes that creation of the ROC, along with its responsibilities 
under Section 2.03(h)(ii) of the Operating Agreement, should help to 
ensure the proper oversight of the Exchange's regulatory program, 
including the exercise by the Exchange's regulatory staff of its power 
to fine member organizations, and the use of regulatory assets, fees, 
fines and penalties collected by the Exchange's regulatory staff.
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    \55\ See supra note 8.
    \56\ See NYSE Approval Order, supra note 10.
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    As noted above, the commenter raises several concerns regarding the 
Exchange's proposal, including by asserting that the proposal was 
insufficient because it did not include rule text indicating the 
deletion of the Procedures. The Exchange responds that the Procedures 
are available in the Exchange's filing and on the Exchange's Web site. 
The Commission believes that, because the Fine Income Procedures were 
internal procedures of the Exchange and were not part of the Exchange's 
rulebook or governing documents, it was appropriate for the Exchange to 
include the Procedures in its Form 19b-4 describing the proposed rule 
change, which were published by the Commission as part of the 
Notice.\57\
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    \57\ See Notice, supra note 4, at 34394.
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    The commenter remarks that the NYSE should be ``held to a higher 
standard'' than other exchanges. In response, the Exchange states that, 
as a national securities exchange, treating it differently than any 
other national securities exchange based on its size, prominence or any 
of the other factors noted in the comment letter, among other things, 
would be contrary to just and equitable principles of trade.\58\ The 
Commission previously found that Section 4.05 is consistent with the 
Act \59\ and continues to believe that it is consistent with the Act, 
and that it is substantially similar to requirements relating to the 
use of regulatory assets, fees, fines and penalties that were approved 
by the Commission with respect to other exchanges, including the 
Exchange's affiliates--NYSE MKT LLC and NYSE Arca, Inc.\60\
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    \58\ See NYSE Response Letter, supra note 6, at 5.
    \59\ See NYSE Approval Order, supra note 10, at 59842-43.
    \60\ See Notice, supra note 4, at 34395-96 nn.18-26 and 
accompanying text.
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    The commenter also expresses the view that deleting the Fine Income 
Procedures would remove rules that serve to separate the Exchange's 
business function from its regulatory obligations, and that the 
Exchange's disciplinary process did not provide an adequate safeguard 
against ``regulator misbehavior.'' The Commission believes that the 
Exchange has adopted several measures to ensure the independence of its 
regulatory functions including, among other things, creating a ROC, 
which is composed entirely of directors of the Exchange who satisfy the 
Exchange's independence requirements, and the CFR, which is composed of 
Exchange members and directors who satisfy the Exchange's independence 
requirements.\61\
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    \61\ See NYSE Approval Order, supra note 10, at 59838-41.
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    The commenter further expresses concern that deleting the Fine 
Income Procedures may imply that the conduct banned by the Procedures 
no longer is prohibited. The Commission believes, however, that even 
with the deletion of the Fine Income Procedures, given the scope of 
Section 4.05, the Exchange would continue to be prohibited from using 
regulatory assets, fees, fines or penalties for other than regulatory 
purposes.
    Finally, the commenter states that Exchange did not adequately 
describe why the circumstances that existed at the time the Fine Income 
Procedures were adopted no longer exist. The Commission notes that the 
Exchange's proposal states that NYSE Regulation no longer performs 
regulatory services on behalf of the Exchange.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-NYSE-2016-37) is approved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\62\
Jill M. Peterson,
Assistant Secretary.
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    \62\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2016-17096 Filed 7-19-16; 8:45 am]
 BILLING CODE 8011-01-P



                                                  47184                                   Federal Register / Vol. 81, No. 139 / Wednesday, July 20, 2016 / Notices

                                                                                                                         ESTIMATE OF ANNUAL RESPONDENT BURDEN
                                                                                                                                                                                                         Annual              Time                 Burden
                                                                                                                   Form No.                                                                            responses           (minutes)              (hours)

                                                  AA–1 (without assistance) ...........................................................................................................                         100                       62             103
                                                  AA–1cert (with assistance) ..........................................................................................................                       4,620                       30           2,310
                                                  AA–1sum (with assistance) .........................................................................................................                         8,000                       29           3,867
                                                  AA–1d (with assistance) ..............................................................................................................                      2,600                       60           2,600
                                                  AA–1d (without assistance) .........................................................................................................                            5                       85               7
                                                  G–204 ..........................................................................................................................................               20                       15               5

                                                        Total ......................................................................................................................................         15,345    ........................        8,892



                                                    Additional Information or Comments:                                       The Commission received one comment                                      approved, the Fine Income Procedures
                                                  To request more information or to                                           letter on the proposed rule change 5 and                                 referred to actions to be taken by NYSE
                                                  obtain a copy of the information                                            a response to the comment letter from                                    Regulation and NYSE Regulation’s
                                                  collection justification, forms, and/or                                     the Exchange.6 This order approves the                                   board of directors (‘‘NYSE Regulation
                                                  supporting material, contact Dana                                           proposed rule change.                                                    Board’’). However, following
                                                  Hickman at (312) 751–4981 or                                                                                                                         termination of the Delegation
                                                                                                                              II. Description of the Proposal
                                                  Dana.Hickman@RRB.GOV. Comments                                                                                                                       Agreement, the Regulatory Oversight
                                                  regarding the information collection                                           NYSE proposes to remove as                                            Committee (‘‘ROC’’) of the Exchange’s
                                                  should be addressed to Charles                                              Exchange rules internal procedures                                       board of directors (‘‘Board’’) assumed
                                                  Mierzwa, Railroad Retirement Board,                                         regarding the use of fine income, which                                  responsibility for providing
                                                  844 North Rush Street, Chicago, Illinois                                    were approved by the Commission in                                       independent oversight of the regulatory
                                                  60611–2092 or emailed to                                                    2007 (‘‘Fine Income Procedures’’ or                                      function of the Exchange.11 The
                                                  Charles.Mierzwa@RRB.GOV. Written                                            ‘‘Procedures’’) 7 in connection with the                                 Exchange explains that, in addition to
                                                  comments should be received within 60                                       2006 merger between New York Stock                                       the restrictions in the Fine Income
                                                  days of this notice.                                                        Exchange, Inc. and Archipelago                                           Procedures, Section 4.05 of the
                                                                                                                              Holdings, Inc. (‘‘Archipelago Merger’’).8                                Exchange’s Operating Agreement
                                                  Charles Mierzwa,                                                            The Exchange explains that, at that                                      (‘‘Section 4.05’’) contains limitations on
                                                  Chief of Information Resources Management.                                  time, it had delegated certain of its                                    the use of regulatory assets and income,
                                                  [FR Doc. 2016–17249 Filed 7–19–16; 8:45 am]                                 regulatory functions to its then                                         including fine income.12 Specifically,
                                                  BILLING CODE 7905–01–P                                                      subsidiary, NYSE Regulation, Inc.                                        Section 4.05 prohibits the Exchange
                                                                                                                              (‘‘NYSE Regulation’’) 9 pursuant to a                                    from: (i) Using any regulatory assets or
                                                                                                                              delegation agreement (‘‘Delegation                                       any regulatory fees, fines or penalties
                                                  SECURITIES AND EXCHANGE                                                     Agreement’’).10 As a result, as originally                               collected by its regulatory staff for
                                                  COMMISSION                                                                                                                                           commercial purposes; or (ii) distributing
                                                                                                                                 5 See letter from Michael Walsh, Attorney,
                                                                                                                                                                                                       such assets, fees, fines or penalties to
                                                  [Release No. 34–78326; File No. SR–NYSE–                                    received by the Commission on June 7, 2016
                                                                                                                              (‘‘Walsh Letter’’).
                                                                                                                                                                                                       NYSE Group, Inc. (‘‘NYSE Group’’), i.e.,
                                                  2016–37]                                                                                                                                             the member of New York Stock
                                                                                                                                 6 See letter from Martha Redding, Associate

                                                                                                                              General Counsel and Assistant Secretary, NYSE, to                        Exchange LLC, or any other entity.13
                                                  Self-Regulatory Organizations; New                                          Brent J. Fields, Secretary, Commission, dated June                          The Exchange proposes to delete the
                                                  York Stock Exchange LLC; Order                                              16, 2016 (‘‘NYSE Response Letter’’).                                     Fine Income Procedures, noting that the
                                                  Approving Proposed Rule Change                                                 7 See Securities Exchange Act Release No. 55216
                                                                                                                                                                                                       Exchange would continue to remain
                                                  Removing From Its Rules Certain                                             (January 31, 2007), 72 FR 5779 (February 7, 2007)
                                                                                                                              (‘‘Order Approving the Fine Income Procedures’’).                        subject to the restrictions of Section
                                                  Internal Procedures Regarding the Use                                          8 The Exchange states that the Archipelago                            4.05, which, coupled with the Operating
                                                  of Fine Income                                                              Merger had the effect of ‘‘demutualizing’’ New York                      Agreement provisions governing the
                                                                                                                              Stock Exchange, Inc. by separating equity
                                                  July 14, 2016.                                                              ownership from trading privileges, and converting
                                                                                                                                                                                                       ROC,14 the Exchange believes are
                                                                                                                              it to a for-profit entity. See Notice, supra note 4, at                  sufficient to address concerns about its
                                                  I. Introduction                                                             34394 n.5 (citing Securities Exchange Act Release                        power to fine member organizations and
                                                                                                                              No. 53382 (February 27, 2006), 71 FR 11251, 11254                        the proper use of such funds.15 The
                                                     On May 13, 2016, New York Stock                                          (March 6, 2006) (‘‘Merger Approval Order’’)).
                                                  Exchange LLC (‘‘NYSE’’ or ‘‘Exchange’’)                                        9 See Notice, supra note 4, at 34394. The
                                                  filed with the Securities and Exchange                                      Exchange states that, as approved, the Fine Income                       34394; see also Securities Exchange Act Release No.
                                                                                                                                                                                                       75991 (September 28, 2015), 80 FR 59837, 59839
                                                  Commission (‘‘Commission’’), pursuant                                       Procedures provide that fines would play no role
                                                                                                                                                                                                       (October 2, 2015) (‘‘NYSE Approval Order’’).
                                                  to Section 19(b)(1) 1 of the Securities                                     in the annual NYSE Regulation budget process and
                                                                                                                                                                                                         11 See Notice, supra note 4, at 34394.
                                                                                                                              that the use of fine income by NYSE Regulation
                                                  Exchange Act of 1934 (‘‘Act’’),2 and                                        would be subject to specific review and approval                           12 See id.; see also Ninth Amended and Restated

                                                  Rule 19b–4 thereunder,3 a proposed rule                                     by the NYSE Regulation Board. See id.; see also                          Operating Agreement of New York Stock Exchange
                                                  change to remove internal procedures                                        Securities Exchange Act Release No. 55003                                LLC (‘‘Operating Agreement’’), Art. IV, Sec. 4.05;
                                                                                                                              (December 22, 2006), 71 FR 78497, 78498                                  NYSE Approval Order, supra note 10, at 59839.
                                                  regarding the use of fine income, as                                        (December 29, 2006) (‘‘Fine Income Procedures                              13 See Operating Agreement, Art. IV, Sec. 4.05;
                                                  described below. The proposed rule                                          Proposing Release’’). The Exchange notes that, in                        see also NYSE Approval Order, supra note 10, at
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                                                  change was published for comment in                                         approving the Fine Income Procedures, the                                59839.
                                                                                                                              Commission expressed that the Fine Income                                  14 The Exchange explains that ‘‘the ROC is
                                                  the Federal Register on May 31, 2016.4
                                                                                                                              Procedures would ‘‘guard against the possibility                         specifically charged with reviewing the regulatory
                                                                                                                              that fines may be assessed to respond to budgetary                       budget of the Exchange and inquiring into the
                                                    1 15 U.S.C. 78s(b)(1).                                                    needs rather than to serve a disciplinary purpose.’’                     adequacy of resources available in the budget for
                                                    2 15 U.S.C. 78a.                                                          See Order Approving the Fine Income Procedures,                          regulatory activities.’’ See Notice, supra note 4, at
                                                    3 17 CFR 240.19b–4.                                                       supra note 7, at 5780.                                                   34395 (citing Operating Agreement, Art. II, Sec.
                                                    4 See Securities Exchange Act Release No. 77899                              10 The Delegation Agreement terminated as of                          2.03(h)(ii)).
                                                  (May 24, 2016), 81 FR 34393 (‘‘Notice’’).                                   February 16, 2016. See Notice, supra note 4, at                            15 See Notice, supra note 4, at 34395.




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                                                                                Federal Register / Vol. 81, No. 139 / Wednesday, July 20, 2016 / Notices                                                    47185

                                                  Exchange also believes that limitations                      The Exchange also believes that the                  stockholder, as applicable.29 In support
                                                  on the use of such funds are not the                      circumstances that led to the creation of               of its position, the Exchange references
                                                  most effective way to assure the proper                   the Fine Income Procedures no longer                    the limitations on the use of regulatory
                                                  exercise by Exchange regulatory staff of                  exist.22 The Exchange states that when                  funds by NYSE MKT LLC; NYSE Arca,
                                                  the Exchange’s power to fine member                       the Fine Income Procedures were                         Inc.; BOX Options Exchange LLC;
                                                  organizations; in fact, the Exchange                      adopted, a predecessor to Section 4.05                  International Securities Exchange, LLC;
                                                  states that ‘‘usage limitations on fine                   was in effect that directly bound the                   ISE Gemini, LLC; ISE Mercury, LLC;
                                                  income do not provide oversight of                        Exchange but not the entity—NYSE                        BATS BZX Exchange, Inc.; BATS BYX
                                                  regulatory performance.’’ 16 Rather, the                  Regulation—actually performing the                      Exchange, Inc.; BATS EDGX Exchange,
                                                  Exchange believes that the                                Exchange’s regulatory functions at the                  Inc.; EDGA Exchange, Inc.; Miami
                                                  responsibility to assure proper exercise                  time.23 Following NYSE’s reintegration                  International Securities Exchange, LLC;
                                                  by its regulatory staff of the Exchange’s                 of its regulatory functions and the                     National Stock Exchange, Inc.;
                                                  power to fine member organizations                        corresponding termination of the                        NASDAQ Stock Market LLC; and Boston
                                                  more properly lies with the ROC, which                    Delegation Agreement, the Exchange                      Stock Exchange, Inc. (n/k/a NASDAQ
                                                  is responsible for overseeing the                         itself is the entity that fines member                  BX, Inc.).30
                                                  Exchange’s regulatory and self-                           organizations and is directly subject to                   As noted above, the Commission
                                                  regulatory organization responsibilities                  the limits of Section 4.05.24                           received one comment letter on the
                                                  and assessing its regulatory                              Accordingly, the Exchange believes that                 proposed rule change.31 The commenter
                                                  performance.17                                            removing the Fine Income Procedures                     objects to the proposed rule change,
                                                                                                            and relying on Section 4.05, as well as                 citing both substantive and procedural
                                                     Moreover, the Exchange believes that
                                                                                                            the provisions governing the ROC,25                     bases.32 The commenter enumerates the
                                                  its disciplinary procedures, and
                                                                                                            would provide adequate protections                      following specific concerns with the
                                                  specifically the appellate process
                                                                                                            against the use of regulatory assets, or                proposal: (1) The Exchange’s proposal is
                                                  contained therein, serve as ‘‘a powerful
                                                                                                            assessment of regulatory income, to                     deficient because it does not include a
                                                  check on the improper exercise by
                                                                                                            respond to budgetary needs.26                           ‘‘redline’’ of the rule text to allow
                                                  Exchange regulatory staff of the power
                                                  to fine members and member                                   Furthermore, NYSE explains that the                  interested persons to review the
                                                  organizations.’’18 The Exchange notes                     proposed change would have the benefit                  proposed changes; 33 (2) the Exchange’s
                                                  that in the event of an adverse hearing                   of bringing the Exchange’s restrictions                 argument that the proposed rule change
                                                  panel determination, members first have                   on the use of regulatory assets and                     would bring it closer in line with other
                                                  the opportunity to appeal the decision                    income into greater conformity with                     SROs’ rules is objectionable because
                                                  to a Board committee comprised of                         those of its affiliates, NYSE MKT LLC                   NYSE, as an industry leader, should be
                                                  independent directors and individuals                     and NYSE Arca, Inc., and would be                       held to a higher standard and ‘‘leading
                                                  associated with member organizations                      consistent with limitations on the use of               the way for other exchanges;’’ 34 (3) the
                                                  of the Exchange (‘‘Committee for                          regulatory assets and income of other                   Exchange, as an SRO, is both a market
                                                  Review’’ or ‘‘CFR’’), which recommends                    self-regulatory organizations                           participant and a regulator, and the Fine
                                                  a disposition to the Board, and then can                  (‘‘SROs’’).27 The Exchange surveyed the                 Income Procedures ‘‘are important
                                                  appeal the decision to the Commission,                    rules of other SROs and found that no                   because they provide an objectively
                                                  whose decision in turn can be                             other SRO limits the use of fine income                 justifiable arms-length limitation to
                                                  challenged in federal court.19                            to extra-budgetary use or subjects the                  separate business from regulation;’’ 35
                                                                                                            use of fine income to specific review                   (4) the Exchange’s argument that its
                                                     In support of its position that the                    and approval by a regulatory oversight                  disciplinary process, including, in
                                                  protections in Section 4.05 are sufficient                committee or any other body. 28 Rather,                 particular, the appellate process,
                                                  to ensure the proper use by the                           the Exchange found that other SROs’                     provides safeguards is insufficient and
                                                  Exchange of fine income, the Exchange                     limitations on the use of regulatory                    does not provide the same ‘‘checks and
                                                  states that Section 4.05 is in fact ‘‘wider               funds are largely similar to Section 4.05,              balances’’ as the Fine Income
                                                  in scope than the Fine Income                             by generally limiting the use of                        Procedures do;36 (5) the rule of statutory
                                                  Procedures,’’ explaining that ‘‘because                   regulatory funds to the funding of an                   construction that the ‘‘specific provision
                                                  Section 4.05 encompasses all regulatory                   SRO’s legal, regulatory and (in some                    prevails over the general’’ makes ‘‘the
                                                  assets and income, not just fines, it                     cases) surveillance operations, and                     Fine Income Procedures superior to
                                                  ensures the proper use by the Exchange                    prohibiting the SRO from making a                       Section 4.05;’’ 37 and (6) the Exchange’s
                                                  of a broader range of regulatory funds,                   distribution to its member or                           argument that the circumstances that
                                                  by prohibiting their use for commercial                                                                           led to the Fine Income Procedures no
                                                  purposes or distributions.’’ 20 The                            22 Id.                                             longer exist fails to explain what
                                                  Exchange adds that Section 4.05 also                        23 Id. The Exchange notes that the Commission,        circumstances changed and what
                                                  guards against the possibility that other                 when approving the Archipelago Merger, stated in        prevents their reoccurrence.38
                                                  regulatory income, such as examination,                   the approval order that while ‘‘NYSE Regulation
                                                                                                                                                                       The Exchange submitted a letter
                                                  access, registration, qualification,                      had the obligation under the Delegation Agreement
                                                                                                            to assure compliance with the rules of the              responding to the issues raised by the
                                                  arbitration, dispute resolution and                       Exchange, . . . the Fine Income Procedures
                                                  regulatory fees, or regulatory assets                     provided a more direct commitment by NYSE                 29 See id.
                                                  could be used or assessed to respond to                   Regulation to ensure the proper exercise of NYSE          30 See id. at 34395–96 nn.18–26 and
                                                  the Exchange’s budgetary needs.21                         Regulation’s power to fine member organizations
                                                                                                                                                                    accompanying text.
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                                                                                                            and the proper use by NYSE Regulation of fines
                                                                                                                                                                      31 See Walsh Letter, supra note 5.
                                                                                                            collected.’’ Id. (citing the Merger Approval Order).
                                                    16 Id.                                                    24 See Notice, supra note 4, at 34394; see also         32 See id. at 1.

                                                    17 Id. (citing the Operating Agreement, Art. II, Sec.                                                             33 See id.
                                                                                                            NYSE Approval Order, supra note 10.
                                                  2.03(h)(ii)).                                               25 See Operating Agreement, Art. II, Sec.               34 See id. at 1–2.
                                                    18 See id. at 34395.                                    2.03(h)(ii).                                              35 See id. at 2–4.
                                                    19 Id.                                                    26 See Notice, supra note 4, at 34395.                  36 See id. at 4–5.
                                                    20 Id.                                                    27 See id. at 34395–96.                                 37 See id. at 5.
                                                    21 Id.                                                    28 See id. at 34396.                                    38 See id.




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                                                  47186                        Federal Register / Vol. 81, No. 139 / Wednesday, July 20, 2016 / Notices

                                                  commenter.39 With respect to the                         business interests, and instead notes                    Regulation’s power to fine member
                                                  commenter’s assertion that the proposal                  how its corporate structure, including                   organizations and the proper use by
                                                  was insufficient because the Exchange’s                  the required compositions of the Board,                  NYSE Regulation of fines collected.51
                                                  proposal omitted a redline of the rule                   ROC, and CFR help to ensure the                          The Exchange notes that because the
                                                  text, the Exchange explains that the Fine                independence of its regulatory                           Delegation Agreement is no longer in
                                                  Income Procedures are internal rules                     obligations.45 The Exchange also notes                   effect, it is the Exchange itself that fines
                                                  that are not included in its published                   that the Fine Income Procedures are in                   member organizations, and the
                                                  rulebook or governing documents, but                     fact limited in scope and thus the ROC                   Exchange is subject to the limitations of
                                                  the content of the rules are set forth in                and Section 4.05 in combination are                      Section 4.05.
                                                  its proposal.40                                          more effective means in providing
                                                     With respect to the commenter’s                                                                                III. Discussion and Commission
                                                                                                           adequate protections against the use of                  Findings
                                                  claim that the Exchange should be held                   regulatory assets, or the assessment of
                                                  to a higher standard than other SROs                     regulatory income, to respond to the                        After careful review, the Commission
                                                  and should not be permitted to delete                    budgetary needs of the Exchange.46                       finds that the proposed rule change is
                                                  the Fine Income Procedures simply                           With respect to the commenter’s                       consistent with the Act and the rules
                                                  because it would bring NYSE closer in                    statement that the disciplinary process,                 and regulations thereunder applicable to
                                                  line with the limitations of other SROs,                 and the appellate process in particular,                 a national securities exchange.52 In
                                                  the Exchange explains that it cited to                   alone does not provide sufficient                        particular, the Commission finds that
                                                  other SROs’ provisions relating to use of                safeguards against potential conflicts of                the proposed rule change is consistent
                                                  fine income to demonstrate that there                    interest, the Exchange disagrees with                    with Section 6(b)(1) of the Act, which
                                                  are mechanisms other than the Fine                       the commenter’s assertion that the Fine                  requires an exchange to be so organized
                                                  Income Procedures that the Commission                    Income Procedures provide a greater                      and have the capacity to carry out the
                                                  has found appropriate for ensuring that                  check on regulatory misbehavior than                     purposes of the Act and to comply, and
                                                  an SRO uses its regulatory funds                         the appellate process.47 The Exchange                    to enforce compliance by its members
                                                  properly.41 The Exchange contends that                   reiterates its view that the Fine Income                 and persons associated with its
                                                  ‘‘[j]ust as the Commission found that the                Procedures do not provide oversight of                   members, with the Act, the rules and
                                                  provisions in these other SROs’                          regulatory performance and simply                        regulations thereunder, and the rules of
                                                  governing documents were consistent                      monitor how the resulting fine income                    the exchange.53 In addition, the
                                                  with the Act, the Exchange believes that                 is spent.48 In addition, the Exchange                    Commission finds that the proposal is
                                                  the Commission should conclude that                      describes how its appellate process                      consistent with Section 6(b)(5) of the
                                                  Section 4.05, as an alternative to the                   provides an independent check on the                     Act, which requires that the rules of the
                                                  Fine Income Procedures, is consistent                    disciplinary process and the possibility                 exchange be designed, among other
                                                  with the Act.’’ 42 The Exchange further                  of improper exercise by Exchange                         things, to prevent fraudulent and
                                                  states that it would be inappropriate to                 regulatory staff of the power to fine                    manipulative acts and practices, to
                                                  hold NYSE to a higher standard than                      members and member organizations in                      promote just and equitable principles of
                                                  other SROs (as the commenter has                         light of the CFR’s composition, which                    trade, to remove impediments to and
                                                  urged) because ‘‘[a]s a national                         requires the inclusion of both                           perfect the mechanism of a free and
                                                  securities exchange, the Exchange is                     independent directors as well as                         open market and a national market
                                                  subject to the same obligations and                                                                               system, and, in general, to protect
                                                                                                           representatives of Exchange members.49
                                                  requirements under the Act as other                         The Exchange also addresses the                       investors and the public interest.54
                                                  national securities exchanges.’’ 43                                                                                  As the Exchange notes, it
                                                                                                           commenter’s statutory construction
                                                  Moreover, the Exchange maintains that                                                                             implemented the Fine Income
                                                                                                           argument that deletion of the ‘‘more
                                                  to ‘‘hold individual exchanges to                                                                                 Procedures in connection with the
                                                                                                           specific provision’’ (i.e., Fine Income
                                                  different standards based on their size,                                                                          Archipelago Merger, which had the
                                                                                                           Procedures) could imply that the
                                                  economic worth, leadership or any of                                                                              effect of demutualizing New York Stock
                                                                                                           conduct prohibited by the Fine Income
                                                  the other factors that the comment letter                                                                         Exchange, Inc. (the predecessor to New
                                                                                                           Procedures is no longer prohibited. In
                                                  cites would be contrary to just and                                                                               York Stock Exchange LLC) by separating
                                                                                                           response, the Exchange notes that both
                                                  equitable principles of trade, would                                                                              NYSE’s equity ownership from trading
                                                                                                           the Fine Income Procedures and Section
                                                  create impediments to a free and open                                                                             privileges and converting it to a for-
                                                                                                           4.05 apply to the use of fine income.                    profit entity.55 According to the
                                                  market and national market system, and                   The Exchange notes that, if the Fine
                                                  would impede the protection of                                                                                    Exchange, at that time it had delegated
                                                                                                           Income Procedures are deleted, Section                   certain of its regulatory functions to its
                                                  investors and the public interest.’’ 44                  4.05 would still apply to the use of the
                                                     Regarding the commenter’s statement                                                                            then subsidiary, NYSE Regulation,
                                                                                                           Exchange’s fine income and other                         pursuant to the Delegation Agreement.
                                                  that the Fine Income Procedures are a
                                                                                                           regulatory assets.50                                     In September 2015, the Commission
                                                  means to ensure the separation of the                       Finally, the Exchange takes issue with
                                                  Exchange’s business from its regulation,                                                                          approved the Exchange’s proposal to
                                                                                                           the commenter’s assertion that it did not
                                                  the Exchange states that it does not rely                                                                         revise its regulatory structure by
                                                                                                           address ‘‘what circumstances occurred
                                                  on the Fine Income Procedures to                                                                                  amending various Exchange rules and
                                                                                                           that will not occur again.’’ The
                                                  ensure the independence of its self-                                                                              the Operating Agreement, including to
                                                                                                           Exchange states that the Fine Income
                                                  regulatory responsibilities and                                                                                   establish as a committee of the Board a
                                                                                                           Procedures provided a more direct
                                                  regulatory performance from its                                                                                   ROC, to be composed of at least three
                                                                                                           commitment by NYSE Regulation to
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                                                    39 See
                                                                                                           ensure the proper exercise of NYSE                         51 See id. at 8–9.
                                                           NYSE Response Letter, supra note 6.
                                                    40 See id. at 3–4. The Commission notes that the                                                                  52 Inapproving this proposed rule change, the
                                                                                                                45 See id. at 6.
                                                  Fine Income Procedures were reproduced in the                                                                     Commission notes that it has considered the
                                                                                                                46 See id. at 6–7.
                                                  Notice. See Notice, supra note 4, at 34394.                                                                       proposed rule’s impact on efficiency, competition,
                                                    41 See id. at 5.                                            47 See id. at 7–8.                                  and capital formation. See 15 U.S.C. 78c(f).
                                                    42 Id.                                                      48 See id.                                            53 15 U.S.C. 78f(b)(1).

                                                    43 Id.                                                      49 See id. at 8.                                      54 15 U.S.C. 78f(b)(5).
                                                    44 Id.                                                      50 See id.                                            55 See supra note 8.




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                                                                                 Federal Register / Vol. 81, No. 139 / Wednesday, July 20, 2016 / Notices                                                         47187

                                                  members who satisfy the Exchange’s                         noted in the comment letter, among                         For the Commission, by the Division of
                                                  independence requirements.56 The                           other things, would be contrary to just                 Trading and Markets, pursuant to delegated
                                                  Delegation Agreement recently was                          and equitable principles of trade.58 The                authority.62
                                                  terminated in connection with the                          Commission previously found that                        Jill M. Peterson,
                                                  Exchange’s reorganization of its                           Section 4.05 is consistent with the Act 59              Assistant Secretary.
                                                  regulatory structure that had resulted in                  and continues to believe that it is                     [FR Doc. 2016–17096 Filed 7–19–16; 8:45 am]
                                                  the creation of the ROC. Because the                       consistent with the Act, and that it is                 BILLING CODE 8011–01–P
                                                  Fine Income Procedures were instituted                     substantially similar to requirements
                                                  in connection with the delegation of                       relating to the use of regulatory assets,
                                                  certain of the Exchange’s regulatory                       fees, fines and penalties that were                     SECURITIES AND EXCHANGE
                                                  functions to NYSE Regulation, the                          approved by the Commission with                         COMMISSION
                                                  Commission believes that it is                             respect to other exchanges, including                   [Release No. 34–78334; File No. SR–
                                                  appropriate for the Exchange to remove                     the Exchange’s affiliates—NYSE MKT                      BatsBZX–2016–29]
                                                  the Procedures because NYSE                                LLC and NYSE Arca, Inc.60
                                                  Regulation no longer performs any                             The commenter also expresses the                     Self-Regulatory Organizations; Bats
                                                  regulatory services on behalf of the                       view that deleting the Fine Income                      BZX Exchange, Inc.; Notice of Filing of
                                                  Exchange. Further, given that the                          Procedures would remove rules that                      a Proposed Rule Change To Adopt
                                                  Exchange has reintegrated its regulatory                   serve to separate the Exchange’s                        Paragraph (c) to Exchange Rule 11.27
                                                  functions under the oversight of the                       business function from its regulatory                   To Describe Changes to System
                                                  ROC, the Commission believes that                          obligations, and that the Exchange’s                    Functionality Necessary To Implement
                                                  Section 4.05 should continue to help                       disciplinary process did not provide an                 the Regulation NMS Plan To Implement
                                                  ensure that the Exchange does not                          adequate safeguard against ‘‘regulator                  a Tick Size Pilot Program
                                                  inappropriately use its regulatory assets,                 misbehavior.’’ The Commission believes
                                                  fees, fines or penalties for commercial                                                                            July 14, 2016.
                                                                                                             that the Exchange has adopted several                      Pursuant to Section 19(b)(1) of the
                                                  purposes or to distribute such assets,                     measures to ensure the independence of
                                                  fees, fines or penalties to its direct                                                                             Securities Exchange Act of 1934 (the
                                                                                                             its regulatory functions including,                     ‘‘Act’’),1 and Rule 19b–4 thereunder,2
                                                  parent, NYSE Group, Inc., or to any                        among other things, creating a ROC,
                                                  other entity. Finally, the Commission                                                                              notice is hereby given that on June 29,
                                                                                                             which is composed entirely of directors                 2016, Bats BZX Exchange, Inc. (the
                                                  believes that creation of the ROC, along                   of the Exchange who satisfy the
                                                  with its responsibilities under Section                                                                            ‘‘Exchange’’ or ‘‘BZX’’) filed with the
                                                                                                             Exchange’s independence requirements,                   Securities and Exchange Commission
                                                  2.03(h)(ii) of the Operating Agreement,                    and the CFR, which is composed of
                                                  should help to ensure the proper                                                                                   (‘‘Commission’’) the proposed rule
                                                                                                             Exchange members and directors who                      change as described in Items I and II
                                                  oversight of the Exchange’s regulatory                     satisfy the Exchange’s independence
                                                  program, including the exercise by the                                                                             below, which Items have been prepared
                                                                                                             requirements.61                                         by the Exchange. The Commission is
                                                  Exchange’s regulatory staff of its power                      The commenter further expresses
                                                  to fine member organizations, and the                                                                              publishing this notice to solicit
                                                                                                             concern that deleting the Fine Income                   comments on the proposed rule change
                                                  use of regulatory assets, fees, fines and                  Procedures may imply that the conduct
                                                  penalties collected by the Exchange’s                                                                              from interested persons.
                                                                                                             banned by the Procedures no longer is
                                                  regulatory staff.                                          prohibited. The Commission believes,                    I. Self-Regulatory Organization’s
                                                     As noted above, the commenter raises                                                                            Statement of the Terms of Substance of
                                                                                                             however, that even with the deletion of
                                                  several concerns regarding the                                                                                     the Proposed Rule Change
                                                                                                             the Fine Income Procedures, given the
                                                  Exchange’s proposal, including by
                                                                                                             scope of Section 4.05, the Exchange                        The Exchange filed a proposal to
                                                  asserting that the proposal was
                                                  insufficient because it did not include                    would continue to be prohibited from                    adopt paragraph (c) to Exchange Rule
                                                  rule text indicating the deletion of the                   using regulatory assets, fees, fines or                 11.27 to describe changes to System 3
                                                  Procedures. The Exchange responds that                     penalties for other than regulatory                     functionality necessary to implement
                                                  the Procedures are available in the                        purposes.                                               the Regulation NMS Plan to Implement
                                                  Exchange’s filing and on the Exchange’s                       Finally, the commenter states that                   a Tick Size Pilot Program (‘‘Plan’’ or
                                                  Web site. The Commission believes that,                    Exchange did not adequately describe                    ‘‘Pilot’’).4 In determining the scope of
                                                  because the Fine Income Procedures                         why the circumstances that existed at                   the proposed changes to implement the
                                                  were internal procedures of the                            the time the Fine Income Procedures                     Pilot,5 the Exchange carefully weighed
                                                  Exchange and were not part of the                          were adopted no longer exist. The                       the impact on the Pilot, System
                                                  Exchange’s rulebook or governing                           Commission notes that the Exchange’s                    complexity, and the usage of such order
                                                                                                             proposal states that NYSE Regulation no                 types in Pilot Securities.
                                                  documents, it was appropriate for the
                                                                                                             longer performs regulatory services on                     The text of the proposed rule change
                                                  Exchange to include the Procedures in
                                                                                                             behalf of the Exchange.                                 is available at the Exchange’s Web site
                                                  its Form 19b–4 describing the proposed
                                                  rule change, which were published by                       IV. Conclusion                                            62 17  CFR 200.30–3(a)(12).
                                                  the Commission as part of the Notice.57                                                                              1 15  U.S.C. 78s(b)(1).
                                                     The commenter remarks that the                            It is therefore ordered, pursuant to                     2 17 CFR 240.19b–4.

                                                  NYSE should be ‘‘held to a higher                          Section 19(b)(2) of the Act, that the                      3 The term ‘‘System’’ is defined as the ‘‘electronic

                                                  standard’’ than other exchanges. In                        proposed rule change (SR–NYSE–2016–                     communications and trading facility designated by
                                                                                                             37) is approved.                                        the Board through which securities orders of Users
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                                                  response, the Exchange states that, as a                                                                           are consolidated for ranking, execution and, when
                                                  national securities exchange, treating it                                                                          applicable, routing away.’’ See Exchange Rule
                                                                                                                  58 See
                                                                                                                      NYSE Response Letter, supra note 6, at 5.
                                                  differently than any other national                                                                                1.5(aa).
                                                                                                                  59 See
                                                                                                                      NYSE Approval Order, supra note 10, at            4 See Securities Exchange Act Release No. 74892
                                                  securities exchange based on its size,                     59842–43.                                               (May 6, 2015), 80 FR 27513 (May 13, 2015)
                                                  prominence or any of the other factors                       60 See Notice, supra note 4, at 34395–96 nn.18–
                                                                                                                                                                     (‘‘Approval Order’’).
                                                                                                             26 and accompanying text.                                  5 Unless otherwise specified, capitalized terms
                                                    56 See   NYSE Approval Order, supra note 10.               61 See NYSE Approval Order, supra note 10, at         used in this rule filing are defined as set forth in
                                                    57 See   Notice, supra note 4, at 34394.                 59838–41.                                               the Plan.



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Document Created: 2018-02-08 07:56:55
Document Modified: 2018-02-08 07:56:55
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
FR Citation81 FR 47184 

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