81 FR 54897 - Self-Regulatory Organizations: Investors Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Conform to Rules of the Financial Industry Regulatory Authority

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 159 (August 17, 2016)

[Federal Register Volume 81, Number 159 (Wednesday, August 17, 2016)]
[Notices]
[Pages 54897-54901]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-19585]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78555; File No. SR-IEX-2016-12]


Self-Regulatory Organizations: Investors Exchange LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Conform 
to Rules of the Financial Industry Regulatory Authority

August 11, 2016.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on August 9, 2016, the Investors Exchange LLC (``IEX'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I 
and II below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to

[[Page 54898]]

solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Pursuant to the provisions of Section 19(b)(1) under the Securities 
Exchange Act of 1934 (``Act''),\4\ and Rule 19b-4 thereunder,\5\ 
Investors Exchange LLC (``IEX'' or ``Exchange'') is filing with the 
Securities and Exchange Commission (``Commission'') a proposed rule 
change to conform Rule 3.260(d) and 5.110(e) to corresponding rules of 
the Financial Industry Regulatory Authority (``FINRA''). The Exchange 
has designated this proposal as ``non-controversial'' and provided the 
Commission with the notice required by Rule 19b-4(f)(6)(iii) under the 
Act.\6\
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    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CRF 240.19b-4.
    \6\ 17 CFR 240.19b-4(f)(6)(iii).
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    The text of the proposed rule change is available at the Exchange's 
Web site at www.iextrading.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statement may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

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

1. Purpose
    Pursuant to Rule 17d-2 under the Act,\7\ and subject to Commission 
approval, the Exchange and FINRA has entered into an agreement to 
allocate regulatory responsibility for common rules (the ``17d-2 
Agreement'').\8\ The 17d-2 Agreement covers common members of the 
Exchange and FINRA and allocates to FINRA regulatory responsibility, 
with respect to common members, for the following: (1) Examination of 
common members of the Exchange and FINRA for compliance with certain 
federal securities laws, rules and regulations and rules of the 
Exchange that the Exchange certifies are identical or substantially 
similar to FINRA rules; (2) investigation of common members of the 
Exchange and FINRA for violations of certain federal securities laws, 
rules and regulations, or Exchange rules that the Exchange certifies as 
identical or substantially identical to a FINRA rule; and (3) 
enforcement of compliance by common members with certain federal 
securities laws, rules and regulations, and the rules of the Exchange 
that the Exchange certifies as identical or substantially similar to 
FINRA rules.
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    \7\ 17 CFR 240.17d-2.
    \8\ See Securities Exchange Act Release No. 78434 (July 28, 
2016) (File No. 4-700).
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    The 17d-2 Agreement will include a certification by the Exchange 
that states that the requirements contained in certain Exchange rules 
are identical to, or substantially similar to, certain FINRA rules that 
have been identified as comparable. To conform to comparable FINRA 
rules for the purposes of the 17d-2 Agreement, as well as to make 
changes that IEX believes are appropriate, the Exchange proposes to 
amend Exchange Rules 3.260(d) and 5.110(e) to harmonize with FINRA 
Rules as described below.
IEX Rule 3.260
    IEX Rule 3.260 governs discretionary accounts and contains certain 
prohibitions and requirements as follows:

    (a) Excessive Transactions--The rule prohibits a Member from 
effecting purchase or sale transactions in a customer's account, 
with respect to which such member (or its agent or employee) has 
discretion, which are excessive in size or frequency in view of the 
financial resources and character of such account.
    (b) Authorization and Acceptance of Account--The rule provides 
that no Member or Registered Representative shall exercise any 
discretionary power in a customer's account unless such customer has 
given prior written authorization to a stated individual or 
individuals and the account has been accepted by the Member, as 
evidenced in writing by the Member or the partner, officer or 
manager, duly designated by the Member, in accordance with IEX Rule 
5.110.
    (c) Approval and Review of Transactions--The rule provides that 
the Member or the person duly designated shall approve promptly in 
writing each discretionary order entered and shall review all 
discretionary accounts at frequent intervals in order to detect and 
prevent transactions which are excessive in size or frequency in 
view of the financial resources and character of the account.
    (d) Exceptions--The rule provides an exception for discretion as 
to the price at which or the time when an order given by a customer 
for the purchase or sale of a definite amount of a specified 
security shall be executed, except that the authority to exercise 
time and price discretion will be considered to be in effect only 
until the end of the business day on which the customer granted such 
discretion, absent a specific, written contrary indication signed 
and dated by the customer. This limitation shall not apply to time 
and price discretion exercised in an institutional account, as 
defined in IEX Rule 5.110 pursuant to valid Good-Till-Canceled 
instructions issued on a ``not-held'' basis. Any exercise of time 
and price discretion must be reflected on the order ticket.

    IEX Rule 3.260 is identical to NASD Rule 2510 (which is a FINRA 
rule) except that paragraph (d) of the IEX rule does not contain an 
exception contained in NASD Rule 2510(d) for bulk exchanges at net 
asset value of money market mutual funds utilizing negative response 
letters provided the bulk exchange is limited to situations involving 
mergers and acquisitions of funds, changes of clearing members and 
exchange of funds used in sweep accounts, the negative response letter 
contains a tabular comparison of the nature and amount of the fees 
charged by each fund, the negative response letter contains a 
comparative description of the investment objectives of each fund and a 
prospectus of the fund to be purchased, and the negative response 
feature will not be activated until at least 30 days after the date on 
which the letter was mailed.
    To harmonize IEX Rule 3.260 with NASD Rule 2510, the Exchange 
proposes to adopt an identical exception for bulk transfers as is 
contained in NASD Rule 2510(d) so that it may be incorporated into the 
17d-2 Agreement in its entirety. The exception was added to NASD rules 
in 1992 in order to eliminate an obstacle to the efficient and timely 
execution of bulk exchanges of money market mutual funds in the 
situations set forth in NASD Rule 2510. In Notice to Members 93-1 
announcing the rule change,\9\ the NASD explained the reason for 
adoption of the exception as follows:
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    \9\ See http://finra.complinet.com/en/display/display.html?rbid=2403&element_id=1638.

    The NASD recognized that it is often necessary to notify 
hundreds and, sometimes, several thousand money market mutual fund 
share-owners of an impending fund exchange. It may be an extremely 
difficult, if not impossible, administrative task to contact each 
non-replier and solicit approval of the fund exchange. At best, 
contacting individuals for approval results in considerable delays 
and added cost. The NASD determined that, by eliminating an obstacle 
to the efficient and timely execution of such bulk exchanges, where 
customers are at little or no risk, customers and NASD members would 
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benefit.


[[Page 54899]]


    Although such bulk transfers cannot be effected on the Exchange, 
IEX believes it is appropriate to include the exception provided in 
NASD Rule 2510(d) to eliminate the obstacles and provide the benefits 
identified by the NASD in adopting the exception, as well as to enable 
incorporation of IEX Rule 3.260 into the 17d-2 Agreement in its 
entirety. Incorporating the exception into IEX Rule 3.260 would provide 
appropriate flexibility to allow IEX Members to perform bulk exchanges 
in the limited situations specified in the rule in an efficient manner 
that is designed to protect investors and the public interest. Absent 
the exception, IEX Members would technically be prohibited from 
effecting bulk transfers in the manner permitted by FINRA rules.\10\
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    \10\ Each IEX Member subject to IEX Rule 3.260 is required to be 
a FINRA member, pursuant to Section 15(b)(8) of the Act, since the 
rule relates to customer accounts and the Member would thus be 
ineligible for the exemption provided in Rule 15b9-1 under the Act.
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IEX Rule 5.110(e)
    IEX Rule 5.110(e) governs the responsibility of an IEX Member to 
investigate applicants for registration, including that ``. . . each 
member shall establish and implement written procedures reasonably 
designed to verify the accuracy and completeness of the information 
contained in an applicant's Form U4 \11\ no later than 30 calendar days 
after the form is filed with IEX.'' The rule is substantially identical 
to FINRA Rule 3110(e) except that in the sentence quoted above, FINRA 
Rule 3110(e) specifies that the verification requirement applies only 
to an applicant's initial or transfer Form U4.\12\ The Exchange 
inadvertently omitted the ``initial or transfer'' language in Rule 
5.110(e). The Exchange proposes to harmonize IEX Rule 5.110(e) with 
FINRA Rule 3110(e) by adding the omitted language contained in the 
FINRA rule in order to clarify the requirement, avoid confusion to IEX 
Members in applying the relevant provision, and enable Rule 5.110 to be 
incorporated into the 17d-2 Agreement in its entirety. Adding the 
omitted language will make clear to IEX Members that the verification 
requirement does not apply to updates or amendments to a registered 
person's Form U4 \13\ if such filing is not an initial or transfer Form 
U4. IEX believes that in determining to require verification for 
initial and transfer Forms U4, FINRA imposes an appropriate requirement 
consistent with public interest and investor protection concerns in 
that FINRA requires verification at key times in a registered person's 
employment. In this regard, IEX notes that FINRA has substantial 
expertise administering the CRD system and overseeing its members (and 
those of its client national securities exchanges) Form U4 reporting 
obligations. Accordingly, IEX believes that it is appropriate to 
harmonize with FINRA's approach on what triggers should be required for 
Members to verify the accuracy and completeness of Form U4 information 
for their registered personnel, and that the triggers are consistent 
with investor protection and the public interest. Moreover, for IEX 
Members that are also FINRA members, the proposed change will align IEX 
rules with FINRA rules thereby alleviating potential confusion.
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    \11\ Form U4 is the Uniform Application for Securities Industry 
Registration or Transfer which must be used by representatives of 
broker-dealers, among other entities, to become registered in the 
appropriate jurisdictions and/or SROs. Both FINRA and IEX, as well 
as all other national securities exchanges, require representatives 
of broker-dealer members to register on Form U4.
    \12\ In its proposed rule filing to adopt FINRA Rule 3110 in its 
current form, FINRA stated that the term ``initial Form U4'' refers 
to the Form U4 filing required when an individual is registering 
with a FINRA member for the first time, including in the context of 
dual registration, or is registering with a FINRA member after more 
than two years have passed since the individual was last registered 
with a FINRA member. The term ``transfer Form U4'' refers to the 
Form U4 filing required when a registered person transfers from one 
FINRA member to another FINRA member. (See, SR-FINRA-2014-038). 
Since FINRA administers the Form U4 filing process in its CRD 
system, in part on behalf of IEX, the Exchange would apply the same 
meanings in the application of Rule 5.110(e).
    \13\ The instructions to the Form U4, state that the 
``individual is under a continuing obligation to amend and update 
information required by Form U4 as changes occur.'' See, Form U4 
Uniform Application for Securities Industry Registration or 
Transfer, available at http://www.finra.org/sites/default/files/AppSupportDoc/p015111.pdf.
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2. Statutory Basis
    IEX believes that the proposed rule change is consistent with the 
provisions of Section 6 of the Act,\14\ in general and furthers the 
objectives of Sections 6(b)(5) of the Act,\15\ in particular, in that 
it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market and a national market system 
and, in general, to protect investors and the public interest.
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    \14\ 15 U.S.C. 78f.
    \15\ 15 U.S.C. 78f(b)(5).
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    With respect to the proposed change to add an exception to Rule 
3.260 to permit bulk transfers under the specified circumstances, the 
Exchange believes that the exception is consistent with Section 6(b)(5) 
of the Act \16\ because the exception is narrowly drawn and includes 
protections designed to help prevent fraudulent and manipulative acts 
and protect investors and the public interest. The exception is limited 
to situations involving mergers and acquisitions of funds, changes of 
clearing members and exchange of funds used in sweep accounts. The 
Exchange does not believe that these situations raise concerns 
regarding abuse of discretion in customer accounts by the Member, but 
rather are more administrative in nature. In addition, and as described 
above, the exception to permit negative response letters in lieu of 
prior written authorization from customers for bulk exchanges includes 
four requirements that are designed to protect customers--the negative 
response letter must contain a tabular comparison of the nature and 
amount of the fees charged by each fund, the negative response letter 
must contain a comparative description of the investment objectives of 
each fund, a prospectus of the fund to be purchased must be included 
with the negative response letter, and the negative response feature 
may not be activated until at least 30 days after the date on which the 
letter was mailed. These protections provide relevant disclosures to 
customers regarding the bulk exchange and 30 days to potentially 
contact the Member to object to the exchange. Based on these 
considerations, IEX believes it is appropriate to include the exception 
provided in NASD Rule 2510(d) to eliminate the obstacles and provide 
the benefits identified by the NASD in adopting the exception. 
Incorporating the exception into IEX Rule 3.260 would provide 
appropriate flexibility to allow IEX Members to perform bulk exchanges 
in the limited situations specified in the rule in an efficient manner 
that is designed to protect investors and the public interest, as well 
as to remove impediments to and perfect the mechanism of a free and 
open market and a national market system.
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    \16\ 15 U.S.C. 78f(b)(5).
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    Further, as noted above, each IEX Member subject to Rule 3.260 must 
also be a FINRA member. In this regard, the Exchange believes that the 
proposed rule change will further the objectives of Section 6(b)(5) of 
the Act \17\ by providing greater harmonization between IEX and FINRA 
rules of similar purpose, enable IEX to incorporate IEX Rule 3.260 in 
its entirety into the pending 17d-2

[[Page 54900]]

Agreement between the Exchange and FINRA (subject to SEC approval), 
resulting in less burdensome and more efficient regulatory compliance. 
As such, the proposed rule change would foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities and would remove impediments to and perfect the mechanism of 
a free and open market and a national market system in accordance with 
Section 6(b)(5) of the Act.\18\
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    \17\ 15 U.S.C. 78f(b)(5).
    \18\ 15 U.S.C. 78f(b)(5).
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    IEX believes that the proposed change to Rule 5.110(e) is 
consistent with Section 6(b)(5) of the Act \19\ because it will serve 
to correct an inadvertent omission in the rule thereby clarifying the 
applicable verification requirement for IEX Members. As discussed above 
in the Purpose section, IEX believes that the FINRA Form U4 
verification requirements are designed to protect investors and the 
public interest by requiring verification at key times in a registered 
person's employment. In addition, and as noted above, FINRA has 
substantial expertise administering the CRD system and overseeing its 
members (and those of its client national securities exchanges) Form U4 
reporting obligations through SEC approved rules.\20\ Accordingly, IEX 
believes that the proposed rule change would further the objectives of 
Section 6(b)(5) of the Act \21\ by imposing appropriately balanced Form 
U4 verification requirements that are designed to prevent fraudulent 
and manipulative acts and practices and to promote just and equitable 
principles of trade. Further, the Exchange believes that providing 
greater harmonization between IEX and FINRA rules of similar purpose 
will result in less burdensome and more efficient regulatory compliance 
for IEX Members that are also FINRA members, and facilitate FINRA's 
performance of its regulatory performance under the pending 17d-2 
Agreement (subject to SEC approval), thereby removing impediments to 
and perfecting the mechanism of a free and open market and a national 
market system, consistent with the objectives of Section 6(b)(5). In 
addition, alignment of IEX rules with FINRA rules will alleviate any 
confusion among market participants regarding the applicable 
verification requirements, including for IEX Members that are not FINRA 
members.
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    \19\ 15 U.S.C. 78f(b)(5).
    \20\ See Release No. 34-73966, File No. SR-FINRA-2014-038 
(December 30, 2014); 80 FR 546 (January 6, 2015).
    \21\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    IEX does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended. The proposed rule 
change is not designed to address any competitive issues but rather to 
provide greater harmonization among Exchange and FINRA rules of similar 
purpose, resulting in less burdensome and more efficient regulatory 
compliance for common members and facilitating FINRA's performance of 
its regulatory performance on the pending 17d-2 Agreement (subject to 
SEC approval). Moreover, harmonization of the specified IEX's rules 
with FINRA rules will promote competition by removing disparate 
requirements between IEX Members and FINRA members.

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

    Written comments were neither solicited nor received.

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

    The Exchange has designated this rule filing as non-controversial 
under Section 19(b)(3)(A) \22\ of the Act and Rule 19b-4(f)(6) \23\ 
thereunder. Because the foregoing rule does not (i) significantly 
affect the protection of investors or the public interest; (ii) impose 
any significant burden on competition; and (iii) become operative for 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate if consistent with the protection of 
investors and the public interest, provided that the self-regulatory 
organization has given the Commission written notice of its intent to 
file the proposed rule change at least five business days prior to the 
date of filing of the proposed rule change or such shorter time as 
designated by the Commission,\24\ the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \25\ and Rule 19b-
4(f)(6) thereunder.\26\
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    \22\ 15 U.S.C. 78s(b)(3)(A).
    \23\ 17 CFR 240.19b-4(f)(6).
    \24\ The Exchange has fulfilled this requirement.
    \25\ 15 U.S.C. 78s(b)(3)(A).
    \26\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \27\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\28\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the Exchange 
may harmonize its rules with FINRA to coincide with IEX's launch of 
exchange operations during a security-by-security phase-in period 
scheduled to begin on August 19, 2016. The Exchange represents that the 
proposed changes do not present any new or novel issues as IEX is 
harmonizing these two rules to the comparable rules of FINRA. The 
Exchange also represents that further harmonizing them now will allow 
them to coincide with the recently effective bilateral 17d-2 plan, 
which should reduce burdens on members while the increased coordination 
should promote investor protection. Because IEX's proposal does not 
raise any new or novel issues and seeks only to harmonize two IEX rules 
to the corresponding rules of FINRA that are covered by the FINRA-IEX 
bilateral 17d-2 plan, the Commission believes that waiver of the 
operative delay is consistent with the protection of investors and the 
public interest because it will allow IEX to update those two rules to 
coincide with the operation of the bilateral 17d-2 plan, which the 
Commission recently declared effective, as IEX begins operations as an 
exchange.\29\
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    \27\ 17 CFR 240.19b-4(f)(6).
    \28\ 17 CFR 240.19b-4(f)(6)(iii).
    \29\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \30\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \30\ 15 U.S.C. 78s(b)(2)(B).
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IV. Solicitation of Comments

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

[[Page 54901]]

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-IEX-2016-12 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-IEX-2016-12. This file 
number should be included in the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing will also be available 
for inspection and copying at the IEX's principal office and on its 
Internet Web site at www.iextrading.com. All comments received will be 
posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-IEX-2016-12 and should be submitted on 
or before September 7, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-19585 Filed 8-16-16; 8:45 am]
 BILLING CODE 8011-01-P