81 FR 73177 - Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending Article IV, Section 4.05 of the Ninth Amended and Restated Operating Agreement of the Exchange

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 205 (October 24, 2016)

[Federal Register Volume 81, Number 205 (Monday, October 24, 2016)]
[Notices]
[Pages 73177-73179]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-25576]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79114; File No. SR-NYSEMKT-2016-93]


Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change Amending Article IV, 
Section 4.05 of the Ninth Amended and Restated Operating Agreement of 
the Exchange

October 18, 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 October 6, 2016, NYSE MKT LLC (the ``Exchange'' or ``NYSE 
MKT'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to 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

    The Exchange proposes to amend Article IV, Section 4.05 of the 
Ninth Amended and Restated Operating Agreement of the Exchange 
(``Operating Agreement'') regarding use of regulatory assets, fees, 
fines and penalties, and make additional, non-substantive edits. The 
proposed rule change is available on the Exchange's Web site at 
www.nyse.com, at the principal office of the Exchange, and at the 
Commission's Public Reference Room.

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

    In its filing with the Commission, the 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 those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

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

1. Purpose
    The Exchange proposes to amend Article IV, Section 4.05 (Limitation 
on Distributions) of the Operating Agreement (``Section 4.05''), 
regarding use of regulatory assets, fees, fines and penalties 
(``Regulatory Funds''), and make additional, non-substantive edits.
Proposed Amendment to Section 4.05
    Section 4.05 provides that:

[t]he Company shall not use any regulatory assets or any regulatory 
fees, fines or penalties collected by Exchange regulatory staff for 
commercial purposes or distribute such assets, fees, fines or 
penalties to the Member or any other entity.\4\
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    \4\ See Ninth Amended and Restated Operating Agreement of NYSE 
MKT LLC, Art. IV, Sec. 4.05; see also Securities Exchange Act 
Release No. 77901 (May 25, 2016), 81 FR 35092 (June 1, 2016) (SR-
NYSEMKT-2016-26).

    Although it prohibits the use of Regulatory Funds for ``commercial 
purposes,'' that term is not defined in Section 4.05 or elsewhere in 
the Operating Agreement. Accordingly, to add greater clarity to the 
limits on the use of Regulatory Funds, the Exchange proposes to replace 
the prohibition against using Regulatory Funds for ``commercial 
purposes'' with a statement that Regulatory Funds ``will be applied to 
fund the legal, regulatory and surveillance operations'' of the 
Exchange. The prohibition on using Regulatory Funds for distributions 
to the Member or any other entity would remain.
    In addition, ``Exchange'' is not a defined term in the Operating 
Agreement, which defines the Exchange as the ``Company.'' Accordingly, 
the Exchange proposes to replace ``Exchange regulatory staff'' with 
``Company regulatory staff.''
    The amended Section 4.05 would read as follows:

    Any regulatory assets or any regulatory fees, fines or penalties 
collected by Company regulatory staff will be applied to fund the 
legal, regulatory and surveillance operations of the Company, and 
the Company shall not distribute such assets, fees, fines or 
penalties to the Member or any other entity.

    The Exchange believes that the increased clarity in the scope of 
the limits on use of Regulatory Funds will enhance the protections 
provided by Section 4.05 against the possibility that Regulatory Funds 
may be assessed to respond to the Exchange's budgetary needs rather 
than to serve a disciplinary purpose.\5\
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    \5\ See Securities Exchange Act Release No. 77899 (May 24, 
2016), 81 FR 34393 (May 31, 2016) (SR-NYSE-2016-37).
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    The proposed amendments would have the benefit of bringing Section 
4.05 into greater conformity with the bylaws of the Exchange's 
affiliate NYSE Arca, Inc., which provide that regulatory fees and 
penalties ``will be applied to fund the legal, regulatory and 
surveillance operations of the Exchange.'' \6\
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    \6\ See Bylaws of NYSE Arca, Inc., Art. II, Sec. 2.06 (``Any 
revenues received by the Exchange from regulatory fees or regulatory 
penalties will be applied to fund the legal, regulatory and 
surveillance operations of the Exchange and will not be used to pay 
dividends. For purposes of this Section, regulatory penalties shall 
include restitution and disgorgement of funds intended for 
customers.''). The Exchange's affiliate New York Stock Exchange LLC 
has submitted substantially the same proposed amendment to its 
operating agreement. See SR-NYSE-2016-66.
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    The proposed amendments would make Section 4.05 more consistent 
with the limitations on the use of regulatory income of other self-
regulatory organizations (``SROs''). Most such limitations are 
substantially similar to the proposed revised Section 4.05. For 
example, similar to the proposed Section 4.05, the limited liability 
company agreements of the BOX Options Exchange (``BOX''), International 
Securities Exchange, LLC (``ISE''), and its affiliates ISE Gemini, LLC 
and ISE Mercury, LLC, provide that regulatory funds shall be used to 
fund the relevant SRO's legal, regulatory and surveillance 
operations.\7\ Consistent with the proposed revised Section 4.05, their 
definition of ``regulatory funds'' includes fees, fines or penalties 
derived from its regulatory operations.\8\
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    \7\ Such provisions also limit the relevant SRO from making any 
distribution to its member using regulatory funds. See Box Options 
Exchange Limited Liability Company Agreement, Art. 1, Sec. 1.1 and 
Art. 8, Sec. 8.1; Third Amended and Restated Limited Liability 
Company Agreement of International Securities Exchange, LLC, Art. 
III, Sec. 3.3(ii); Second Amended and Restated Limited Liability 
Company Agreement of ISE Gemini, LLC, Art. III, Sec. 3.3(ii); and 
Limited Liability Company Agreement of ISE Mercury, LLC, Art. III, 
Sec. 3.3(ii).
    \8\ The BOX definition of regulatory funds also states that such 
funds ``shall not include revenues derived from listing fees, market 
data revenues, transaction revenues or any other aspect of the 
commercial operations of the Exchange or a facility of the Exchange, 
even if a portion of such revenues are used to pay costs associated 
with the regulatory operations of the Exchange.'' Box Options 
Exchange Limited Liability Company Agreement, Art. 1, Sec. 1.1. The 
agreements of ISE and its affiliates have substantially similar 
language. See Third Amended and Restated Limited Liability Company 
Agreement of International Securities Exchange, LLC, Art. III, Sec. 
3.3(ii); Second Amended and Restated Limited Liability Company 
Agreement of ISE Gemini, LLC, Art. III, Sec. 3.3(ii); and Limited 
Liability Company Agreement of ISE Mercury, LLC, Art. III, Sec. 
3.3(ii).

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[[Page 73178]]

    Some SROs have provisions that are less restrictive than the 
proposed Section 4.05. More specifically, the governing documents of 
affiliates Bats BZX Exchange, Inc., Bats BYX Exchange, Inc., Bats EDGX 
Exchange, Inc., and Bats EDGA Exchange, Inc. permit such SROs to use 
regulatory funds to fund legal and regulatory operations, including 
surveillance and enforcement activities, but also provide that revenues 
received from fees derived from the regulatory function or regulatory 
penalties may be used to pay restitution and disgorgement of funds 
intended for customers.\9\ The limited liability company agreement of 
Miami International Securities Exchange, LLC, and bylaws of National 
Stock Exchange, Inc., have similar provisions.\10\ By contrast, the 
operating agreement of the NASDAQ Stock Market LLC (``Nasdaq'') simply 
limits Nasdaq from making a distribution to its member using regulatory 
funds, and does not impose other restrictions.\11\
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    \9\ The described revenues may not be used for non-regulatory 
purposes or distributed to the stockholder. See Fourth Amended and 
Restated Bylaws of Bats BZX Exchange, Inc., Art. X, Sec. 4; Fourth 
Amended and Restated Bylaws of Bats BYX Exchange, Inc., Art. X, Sec. 
4; Fifth Amended and Restated Bylaws of Bats EDGX Exchange, Inc., 
Art. X, Sec. 4; and Fifth Amended and Restated Bylaws of Bats EDGA 
Exchange, Inc., Art. X, Sec. 4.
    \10\ See Second Amended and Restated Limited Liability Company 
Agreement of Miami International Securities Exchange, LLC, Art. IX, 
Sec. 9.4 (``Any Regulatory Funds will not be used for non-regulatory 
purposes or distributed to the LLC Member, but rather, shall be 
applied to fund the legal and regulatory operations of the Company 
(including surveillance and enforcement activities), or, as the case 
may be, shall be used to pay restitution and disgorgement of funds 
intended for customers.''); Third Amended and Restated By-laws of 
National Stock Exchange, Inc., Art. X, Sec. 10.4 (``Any revenues 
received by the Exchange from fees derived from its regulatory 
function or regulatory penalties will not be used to pay dividends 
and shall be applied to fund the legal and regulatory operations of 
the Exchange (including surveillance and enforcement activities), 
or, as the case may be, shall be used to pay restitution and 
disgorgement of funds intended for customers.''); see also Amended 
and Restated By-Laws of Miami International Securities Exchange, 
LLC, Art. IX, Sec. 9.4.
    \11\ See Second Amended Limited Liability Company Agreement of 
The NASDAQ Stock Market LLC, Sec. 15. See also by-laws of NASDAQ BX, 
Inc., Art. IX, Sec. 9.8, and Second Amended Limited Liability 
Company Agreement of NASDAQ PHLX LLC, Sec. 14. When the NASDAQ OMX 
Group, Inc. acquired the Boston Stock Exchange (``BSE''), the BSE 
by-laws were amended to include a similar provision that dividends 
could not be paid to the stockholders using regulatory funds. See 
Securities Exchange Act Release No. 58324 (August 7, 2008), 73 FR 
46936 (August 12, 2008) (SR-BSE- 2008-02; SR-BSE-2008-23; SR-BSE-
2008- 25; SR-BSECC-2008-01), at 46942.
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Additional Proposed Amendments
    The Exchange proposes to make a non-substantive amendment to the 
second sentence of Article II, Section 2.03(h)(iii) (Board). Currently, 
the sentence provides that the Committee for Review (``CFR'') will be 
responsible for, among other things, ``reviewing determinations to 
limit or prohibit the continued listing of an issuer's securities on 
the Exchange.'' The Exchange proposes to replace ``Exchange'' with 
``exchange operated by the Company.'' The Exchange proposes to make the 
change because, as noted above, ``Exchange'' is not a defined term in 
the Operating Agreement.
    Finally, the Exchange proposes to make technical and conforming 
changes to the recitals and signature page of the Operating Agreement.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Exchange Act \12\ in general, and Section 
6(b)(1) \13\ in particular, in that it enables the Exchange to be so 
organized as to have the capacity to be able to carry out the purposes 
of the Exchange Act and to comply, and to enforce compliance by its 
exchange members and persons associated with its exchange members, with 
the provisions of the Exchange Act, the rules and regulations 
thereunder, and the rules of the Exchange.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(1).
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    The Exchange believes that replacing the current prohibition 
against using Regulatory Funds for undefined ``commercial purposes'' 
with a requirement that Regulatory Funds ``be applied to fund the 
legal, regulatory and surveillance operations'' of the Exchange would 
enable the Exchange to be so organized as to have the capacity to be 
able to carry out the purposes of the Exchange Act and to comply with 
the provisions of the Exchange Act, the rules and regulations 
thereunder, and the rules of the Exchange, because it would add greater 
clarity to the limits on the use of Regulatory Funds, enhancing the 
protections provided by Section 4.05 against the possibility that 
Regulatory Funds may be assessed to respond to the Exchange's budgetary 
needs rather than to serve a disciplinary purpose.\14\ The proposed 
changes to Section 4.05 would make it more transparent to market 
participants.
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    \14\ See Securities Exchange Act Release No. 77899 (May 24, 
2016), 81 FR 34393 (May 31, 2016) (SR-NYSE-2016-37).
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    Similarly, the Exchange believes that replacing ``Exchange 
regulatory staff'' with ``Company regulatory staff'' in Section 4.05 
and replacing ``Exchange'' with ``exchange operated by the Company'' in 
Article II, Section 2.03(h)(iii) would enable the Exchange to be so 
organized as to have the capacity to be able to carry out the purposes 
of the Exchange Act and to comply with the provisions of the Exchange 
Act, the rules and regulations thereunder, and the rules of the 
Exchange, because it would add greater clarity to the Operating 
Agreement by using the defined term ``Company'' instead of 
``Exchange,'' which is not defined in the Operating Agreement
    For the same reasons, the Exchange believes that the proposed rule 
changes are consistent with Section 6(b)(4),\15\ which requires that 
the rules of the exchange provide for the equitable allocation of 
reasonable dues, fees, and other charges among the exchange's members 
and issuers and other persons using its facilities, and Section 
6(b)(5),\16\ which requires that the rules of the exchange be designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to, and perfect the mechanism of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest. The proposed changes would 
add greater clarity to the limits on the use of Regulatory Funds, 
enhancing the protections provided by Section 4.05, and ensure the use 
of defined terms, thereby making Section 4.05 and Article II, Section 
2.03(h)(iii) more transparent to market participants.
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    \15\ 15 U.S.C. 78f(b)(4).
    \16\ 15 U.S.C. 78f(b)(5).
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    The Exchange notes that the proposed change to Section 4.05 would 
have the additional benefit of bringing the Exchange's restrictions on 
the use of regulatory assets and income into greater conformity with 
those of its affiliate NYSE Arca, Inc. In addition, the proposed 
amendments would make Section 4.05 more consistent with the limitations 
on the use of regulatory income of other SROs. Most such limitations 
are substantially similar to the proposed revised Section 4.05. In 
fact, the proposed Section 4.05 is more restrictive than the provisions 
of some

[[Page 73179]]

other SROs, whose rules allow the use of regulatory funds for 
restitution and disgorgement of funds intended for customers, or simply 
limit the SRO from making a distribution to its member using regulatory 
funds.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Exchange Act. The proposed rule 
change is not intended to address competitive issues but rather is 
concerned solely with the administration and functioning of the 
Exchange.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \17\ and Rule 19b-4(f)(6) thereunder.\18\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
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, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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    \17\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \18\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \19\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b4(f)(6)(iii),\20\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest.
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    \19\ 17 CFR 240.19b-4(f)(6).
    \20\ 17 CFR 240.19b-4(f)(6)(iii).
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    At any time within 60 days of the filing of such 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) \21\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \21\ 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:

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-NYSEMKT-2016-93 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEMKT-2016-93. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEMKT-2016-93 and should 
be submitted on or before November 14, 2016.
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    \22\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-25576 Filed 10-21-16; 8:45 am]
BILLING CODE 8011-01-P