81 FR 92901 - In the Matter of the Application of MIAX PEARL, LLC for Registration as a National Securities Exchange; Findings, Opinion, and Order of the Commission
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 81, Issue 244 (December 20, 2016)
Federal Register Volume 81, Issue 244 (December 20, 2016)
| Page Range | 92901-92916 | |
| FR Document | 2016-30538 |
[Federal Register Volume 81, Number 244 (Tuesday, December 20, 2016)] [Notices] [Pages 92901-92916] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-30538] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-79543; File No. 10-227] In the Matter of the Application of MIAX PEARL, LLC for Registration as a National Securities Exchange; Findings, Opinion, and Order of the Commission December 13, 2016. I. Introduction On August 12, 2016, MIAX PEARL, LLC (``MIAX PEARL'' or ``Exchange'') submitted to the Securities and Exchange Commission (``Commission'') an application for Registration as a National Securities Exchange (``Form 1 Application'') under Section 6 of the Securities Exchange Act of 1934 (``Exchange Act''), seeking registration as a national securities exchange under Section 6 of the Exchange Act.\1\ Notice of the Form 1 Application was published for comment in the Federal Register on September 14, 2016,\2\ and the Commission received no comments. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78f. \2\ See Securities Exchange Act Release No. 78793 (September 8, 2016), 81 FR 63238 (``Notice''). --------------------------------------------------------------------------- [[Page 92902]] II. Statutory Standards Under Sections 6(b) and 19(a) of the Act,\3\ the Commission shall by order grant an application for registration as a national securities exchange if the Commission finds, among other things, that the proposed exchange is so organized and has 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 provisions of the Act, the rules and regulations thereunder, and the rules of the exchange. --------------------------------------------------------------------------- \3\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(a), respectively. --------------------------------------------------------------------------- As discussed in greater detail below, the Commission finds that MIAX PEARL's application for exchange registration meets the requirements of the Act and the rules and regulations thereunder. Further, the Commission finds that the proposed rules of MIAX PEARL are consistent with Section 6 of the Act in that, among other things, they assure a fair representation of the Exchange's members in the selection of its directors and administration of its affairs and provide that one or more directors will be representative of issuers and investors and not be associated with a member of the exchange, or with a broker or dealer; \4\ and that they are designed to prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, and remove impediments to and perfect the mechanisms of a free and open market and a national market system and, in general, protect investors and the public interest and are not designed to permit unfair discrimination between customers, issuers, or broker-dealers.\5\ Finally, the Commission finds that MIAX PEARL's proposed rules do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act.\6\ --------------------------------------------------------------------------- \4\ See 15 U.S.C. 78f(b)(3). \5\ See 15 U.S.C. 78f(b)(5). \6\ See 15 U.S.C. 78f(b)(8). --------------------------------------------------------------------------- III. Discussion A. Governance of MIAX PEARL 1. MIAX PEARL Board of Directors The board of directors of MIAX PEARL (``Exchange Board'' or ``MIAX PEARL Board'') will be its governing body and will possess all of the powers necessary for the management of its business and affairs, including governance of MIAX PEARL as a self-regulatory organization (``SRO'').\7\ --------------------------------------------------------------------------- \7\ See MIAX PEARL By-Laws, Section 2.1. See also MIAX PEARL LLC Agreement, Section 8(b). --------------------------------------------------------------------------- Under the By-Laws of MIAX PEARL (``MIAX PEARL By-Laws''): \8\ --------------------------------------------------------------------------- \8\ The MIAX PEARL By-Laws are included in the Amended and Restated Limited Liability Company Agreement of MIAX PEARL (``MIAX PEARL LLC Agreement''). ---------------------------------------------------------------------------The Exchange Board will be composed of not less than ten directors; \9\ --------------------------------------------------------------------------- \9\ See MIAX PEARL By-Laws, Article II, Section 2.2(a). --------------------------------------------------------------------------- One director will be the Chief Executive Officer of MIAX PEARL; \10\ --------------------------------------------------------------------------- \10\ See MIAX PEARL By-Laws, Article II, Section 2.2(b). --------------------------------------------------------------------------- The number of Non-Industry Directors,\11\ including at least one Independent Director,\12\ will equal or exceed the sum of the number of Industry Directors \13\ and Member Representative Directors; \14\ and --------------------------------------------------------------------------- \11\ ``Non-Industry Director'' means a Director who is an Independent Director or any other individual who would not be an Industry Director. See MIAX PEARL By-Laws, Article I(aa). \12\ ``Independent Director'' means a ``Director who has no material relationship with [MIAX PEARL] or any affiliate of [MIAX PEARL], or any [MIAX PEARL member] or any affiliate of any such [MIAX PEARL member]; provided, however, that an individual who otherwise qualifies as an Independent Director shall not be disqualified from serving in such capacity solely because such Director is a Director of [MIAX PEARL] or [Miami Holdings].'' See MIAX PEARL By-Laws, Article I(p). \13\ An ``Industry Director'' is, among other things, a Director that is or has served within the prior three years as an officer, director, employee, or owner of a broker or dealer, as well as any Director who has, or has had, a consulting or employment relationship with MIAX PEARL or any affiliate of MIAX PEARL within the prior three years. See MIAX PEARL By-Laws, Article I(r). This definition is consistent with what the Commission has approved for other exchanges. See Securities Exchange Act Release Nos. 68341 (December 3, 2012), 77 FR 73065 (December 7, 2012) (File No. 10-207) (order granting the registration of MIAX Exchange) (``MIAX Order''); 58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (File No. 10- 182) (order granting the registration of BATS Exchange, Inc.) (``BATS Order''); and 66871 (April 27, 2012), 77 FR 26323 (May 3, 2012) (File No. 10-206) (order granting the registration of BOX Options Exchange LLC) (``BOX Order''). \14\ See MIAX PEARL By-Laws, Article II, Section 2.2 (b)(i). ``Member Representative Director'' means a Director who has been appointed by Miami International Holdings, Inc. as an initial Director pursuant to Section 2.5 of the MIAX PEARL By-Laws to serve until the first annual meeting or who ``has been elected by the Miami International Holdings, Inc. after having been nominated by the Member Nominating Committee or by an Exchange Member pursuant to [the] By-Laws and confirmed as the nominee of Exchange Members after majority vote of Exchange Members, if applicable. A Member Representative Director may, but is not required to be, an officer, director, employee, or agent of an Exchange Member.'' See MIAX PEARL By-Laws, Article I(x). See also MIAX PEARL By-Laws Article II, Section 2.5. --------------------------------------------------------------------------- At least 20% of the directors on the Exchange Board will be Member Representative Directors.\15\ --------------------------------------------------------------------------- \15\ See MIAX PEARL By-Laws, Article II, Section 2.2(b)(ii). --------------------------------------------------------------------------- For the interim board (discussed below), and subsequently at the first annual meeting and each annual meeting thereafter, Miami International Holdings, Inc. (``Miami Holdings''), as the sole LLC Member of MIAX PEARL, will elect the MIAX PEARL Board pursuant to the MIAX PEARL By-Laws.\16\ In addition, Miami Holdings will appoint the initial Nominating Committee \17\ and Member Nominating Committee,\18\ consistent with each committee's compositional requirements,\19\ to nominate candidates for election to the Exchange Board. Each of the Nominating Committee and Member Nominating Committee, after completion of its respective duties for nominating directors for election to the Board for that year, shall nominate candidates to serve on the succeeding year's Nominating Committee or Member Nominating Committee, as applicable. Additional candidates for the Member Nominating Committee may be nominated and elected by MIAX PEARL members pursuant to a petition process.\20\ --------------------------------------------------------------------------- \16\ See MIAX PEARL By-Laws, Article II, Section 2.4. See also MIAX PEARL LLC Agreement, Section 9(a). \17\ The Nominating Committee will be comprised of at least three directors, and the number of Non-Industry members on the Nominating Committee must equal or exceed the number of Industry members. See MIAX PEARL By-Laws, Article V, Section 5.2. See also MIAX PEARL By-Laws, Article IV, Section 4.2(a). \18\ The Member Nominating Committee will be comprised of at least three directors, and each member of the Member Nominating Committee shall be a Member Representative member and shall not be required to be a Director of the Exchange. See MIAX PEARL By-Laws, Article V, Section 5.3. See also MIAX PEARL By-Laws, Article IV, Section 4.2(a). Pursuant to MIAX PEARL By-Laws, Article I(y), a ``Member Representative member'' is a member of any committee or hearing panel appointed by the Exchange Board who has been elected or appointed after having been nominated by the Member Nominating Committee pursuant to the By-Laws and who is an officer, director, employee, or agent of an Exchange Member. \19\ See MIAX PEARL By-Laws, Article V, Section 5.1. \20\ See id. --------------------------------------------------------------------------- The Nominating Committee will nominate candidates for each director position, and Miami Holdings, as the sole LLC Member, will elect those directors. For Member Representative Director positions, the Nominating Committee will nominate those candidates submitted to it, and approved, by the Member Nominating Committee.\21\ Additional candidates, [[Page 92903]] however, may be nominated for the Member Representative Director positions by MIAX PEARL members pursuant to a petition process.\22\ If no candidates are nominated pursuant to a petition process, then the initial nominees submitted by the Member Nominating Committee will be nominated as Member Representative Directors by the Nominating Committee. If a petition process produces additional candidates, then the candidates nominated pursuant to the petition process, together with those nominated by the Member Nominating Committee, will be presented to MIAX PEARL members for a run-off election to determine the final slate of candidates for the vacant Member Representative Director positions.\23\ In the event of a contested run-off election, the candidates who receive the most votes will be nominated as the final slate of Member Representative Director candidates by the Nominating Committee.\24\ Miami Holdings, as the sole LLC Member, is obligated to elect the final slate of the Member Representative Director candidates that are nominated by the Nominating Committee.\25\ --------------------------------------------------------------------------- \21\ The Member Nominating Committee will solicit comments from MIAX PEARL members for the purpose of approving and submitting names of candidates for election to the position of Member Representative Director. See MIAX PEARL By-Laws, Article II, Section 2.4(b). \22\ See MIAX PEARL By-Laws, Article II, Section 2.4(c). The petition must be signed by executive representatives of 10% or more of the MIAX PEARL members. No MIAX PEARL member, together with its affiliates, may account for more than 50% of the signatures endorsing a particular candidate. See id. \23\ See MIAX PEARL By-Laws, Article II, Sections 2.4(e) and (f). Each MIAX PEARL Member shall have the right to cast one vote for each available Member Representative Director nomination, provided that any such vote must be cast for a person on the List of Candidates and that no MIAX PEARL member, together with its affiliates, may account for more than 20% of the votes cast for a candidate. See MIAX PEARL By-Laws, Article II, Section 2.4(f). \24\ See MIAX PEARL By-Laws, Article II, Section 2.4(f). \25\ See id. --------------------------------------------------------------------------- The Commission believes that the requirement in the MIAX PEARL By- Laws that 20% of the directors be Member Representative Directors and the means by which they will be chosen by MIAX PEARL members provide for the fair representation of members in the selection of directors and the administration of MIAX PEARL and therefore is consistent with Section 6(b)(3) of the Act.\26\ The Commission notes that this requirement helps to ensure that members have a voice in the use of self-regulatory authority by MIAX PEARL.\27\ --------------------------------------------------------------------------- \26\ 15 U.S.C. 78f(b)(3). \27\ See, e.g., MIAX Order, supra note 13, at 73067; Securities Exchange Act Release Nos. 76998 (January 29, 2016), 81 FR 6066, 6068 (February 4, 2016) (File No. 10-221) (order granting exchange registration of ISE Mercury, LLC) (``ISE Mercury Order''); 70050 (July 26, 2013), 78 FR 46622, 46624 (August 1, 2013) (File No. 10- 209) (order granting the exchange registration of ISE Gemini, LLC) (``ISE Gemini Order''); 53128 (January 13, 2006), 71 FR 3550, 3553 (January 23, 2006) (granting the exchange registration of Nasdaq Stock Market, Inc.) (``Nasdaq Order''); and BATS Order, supra note 13. --------------------------------------------------------------------------- In addition, with respect to the requirement that the number of Non-Industry Directors, including at least one Independent Director, will equal or exceed the sum of the number of Industry Directors and Member Representative Directors, the Commission believes that the proposed composition of the Exchange Board satisfies the requirements in Section 6(b)(3) of the Act,\28\ which requires in part that one or more directors be representative of issuers and investors and not be associated with a member of the exchange, or with a broker or dealer. The Commission notes that the inclusion of public, non-industry representatives on exchange oversight bodies is an important mechanism to support an exchange's ability to protect the public interest.\29\ Further, the presence of public, non-industry representatives can help to ensure that no single group of market participants has the ability to systematically disadvantage other market participants through the exchange governance process. The Commission believes that public, non- industry directors can provide unique, unbiased perspectives, which are designed to enhance the ability of the Exchange Board to address issues in a non-discriminatory fashion and foster the integrity of the Exchange.\30\ --------------------------------------------------------------------------- \28\ 15 U.S.C. 78f(b)(3). \29\ See, e.g., Regulation of Exchanges and Alternative Trading Systems, Securities Exchange Act Release No. 40760 (December 8, 1998), 63 FR 70844, 70882 (December 22, 1998) (``Regulation ATS Release''). \30\ See MIAX Order, supra note 13, at 73067; BATS Order, supra note 13, at 49501; and Nasdaq Order, supra note 27, at 3553. --------------------------------------------------------------------------- 2. Interim Exchange Board Prior to commencing operations, Miami Holdings will appoint an interim Exchange board of directors (``Interim Exchange Board''), which will include interim Member Representative Directors.\31\ With respect to the selection of the interim Member Representative Directors for the Interim Exchange Board, prior to the commencement of operations as an exchange, Miami Holdings will submit the names of its nominees for the interim Member Representative Directors positions to persons that have begun the process of becoming members in the new Exchange.\32\ Such persons and firms will be allowed 14 days to submit the names of alternative candidates.\33\ Voting will occur no sooner than 5 days after the interim election notice is delivered to confirm the final slate of candidates to become an interim Member Representative Director.\34\ All other interim directors, except for the interim Member Representative Directors, will be appointed and elected by Miami Holdings, and must meet the MIAX PEARL board composition requirements as set forth in the MIAX PEARL By-Laws.\35\ Once these interim Member Representative Directors are seated on the Interim Exchange Board, then the Interim Exchange Board will meet the board composition requirements set forth in the governing documents of MIAX PEARL. --------------------------------------------------------------------------- \31\ See MIAX PEARL By-Laws, Section 2.5. \32\ See MIAX PEARL By-Laws, Section 2.5(b). Specifically, Miami Holdings will submit the names of its nominees for the interim Member Representative Director positions to persons who have submitted the initial documents for membership in the Exchange who would meet the qualifications for membership. See MIAX PEARL By- Laws, Section 2.5(b). MIAX PEARL additionally represents that the initial members of MIAX PEARL will consist substantially of the current group of persons and firms that have begun the membership application process with MIAX PEARL. See MIAX PEARL Form 1 Application, Exhibit J. \33\ See MIAX PEARL By-Laws, Section 2.5(b). \34\ See MIAX PEARL By-Laws, Section 2.5(d). \35\ See MIAX PEARL By-Laws, Section 2.5(a). --------------------------------------------------------------------------- The Interim Exchange Board will serve until the first initial Exchange Board is elected pursuant to the full nomination, petition, and voting process set forth in the MIAX PEARL By-Laws.\36\ MIAX PEARL will complete such process within 90 days after its application for registration as a national securities exchange is granted by the Commission.\37\ --------------------------------------------------------------------------- \36\ See MIAX PEARL By-Laws, Sections 2.2(e) and 2.5(a). \37\ See MIAX PEARL By-Laws, Sections 2.5(a). The 90-day period is consistent with what the Commission recently approved for ISE Mercury, LLC. See ISE Mercury Order, supra note 27, at 6068 (allowing ISE Mercury, LLC to appoint an initial interim board to enable it to commence operations as a registered exchange). See also MIAX Order, supra note 13, at 73067; and BOX Order, supra note 13, at 26325. --------------------------------------------------------------------------- The Commission believes that the process for electing the Interim Exchange Board, as proposed, is consistent with the requirements of the Act, including that the rules of the exchange assure fair representation of the exchange's members in the selection of its directors and administration of its affairs.\38\ As noted above, MIAX PEARL represents that the initial members of MIAX PEARL will consist substantially of the current group of persons and firms that have begun the membership [[Page 92904]] application process with MIAX PEARL.\39\ MIAX PEARL will engage these persons and firms in the interim board election process by, prior to the commencement of operations as an exchange, providing each of them with the opportunity to participate in the selection of interim Member Representative Directors consistent with the MIAX PEARL By-Laws. Further, MIAX PEARL represents that it will complete the full nomination, petition, and voting process as set forth in the MIAX PEARL By-Laws, which will provide persons that are approved as members after the effective date of this Order with the opportunity to participate in the selection of the Member Representative Directors, within 90 days of when MIAX PEARL's application for registration as a national securities exchange is granted.\40\ Therefore, the Commission believes that MIAX PEARL's initial interim board process is consistent with the Act, including Section 6(b)(3), in that it is designed to provide representation among the persons and firms likely to become members when MIAX PEARL commences operations and is sufficient to allow MIAX PEARL to commence operations for an interim period prior to going through the process to elect a new Exchange Board pursuant to the full nomination, petition, and voting process set forth in the MIAX PEARL By-Laws. --------------------------------------------------------------------------- \38\ See 15 U.S.C. 78f(b)(3). \39\ See supra note 32. \40\ MIAX PEARL's proposed timeline for the interim board process follows a process identical to what the Commission recently approved for ISE Mercury, LLC. See ISE Mercury Order, supra note 27, at 6068. --------------------------------------------------------------------------- 3. Exchange Committees In the MIAX PEARL By-Laws, the Exchange proposed to establish several standing committees, which would be divided into two categories: Committees of the Board (composed of MIAX PEARL directors) and Committees of the Exchange (composed of a mixture of MIAX PEARL directors and persons that are not MIAX PEARL directors).\41\ The standing Committees of the Board would be the Audit, Compensation, Appeals, and Regulatory Oversight Committees.\42\ In addition, the Exchange Chairman, with approval of the Exchange Board, may appoint an Executive Committee and a Finance Committee, which also would be Committees of the Board.\43\ --------------------------------------------------------------------------- \41\ See MIAX PEARL By-Laws, Section 4.1. \42\ See MIAX PEARL By-Laws, Section 4.1(a). \43\ See MIAX PEARL By-Laws, Section 4.5(e) and (f), respectively. --------------------------------------------------------------------------- The Audit Committee will consist of three or more directors, a majority of which will be Non-Industry Directors.\44\ Each of the Compensation and Regulatory Oversight Committees will consist of three or more directors, all of which will be required to be Non-Industry Directors.\45\ The Appeals Committee will consist of one Independent Director, one Industry Director, and one Member Representative Director.\46\ If established, the Finance Committee will consist of at least three persons (who may, but are not required to, be directors) a majority of whom will be Non-Industry Directors.\47\ The Executive Committee, if established, will consist of at least three directors. Because the Executive Committee will have the powers and authority of the Exchange Board in the management of the business and affairs of the Exchange between meetings of the Exchange Board, its composition must reflect that of the Exchange Board. Accordingly, the number of Non- Industry Directors on the Executive Committee must equal or exceed the number of Industry Directors and the percentages of Independent Directors and Member Representative Directors must be at least as great as the corresponding percentages on the Exchange Board as a whole.\48\ --------------------------------------------------------------------------- \44\ See MIAX PEARL By-Laws, Section 4.5(b). A Non-Industry Director shall serve as Chairman of the Committee. See id. See also MIAX PEARL By-Laws, Section 4.2(a) (requiring that each committee be comprised of at least three people). \45\ See MIAX PEARL By-Laws, Section 4.5(a) and 4.5(c). \46\ See MIAX PEARL By-Laws, Section 4.5(d). \47\ See MIAX PEARL By-Laws, Section 4.5(f). See also MIAX PEARL By-Laws, Section 4.2(a) (providing that except as otherwise provided in the MIAX PEARL By-Laws, committees may include persons who are not members of the Board). \48\ See MIAX PEARL By-Laws, Section 4.5(e). --------------------------------------------------------------------------- With respect to Committees of MIAX PEARL, the Exchange has proposed to establish a Nominating Committee \49\ and a Member Nominating Committee.\50\ As discussed above, these committees will have responsibility for, among other things, nominating candidates for election to the Exchange Board. On an annual basis, the members of these committees will nominate candidates for the succeeding year's respective committees to be elected by Miami Holdings, as the sole LLC Member.\51\ In addition, MIAX PEARL has proposed to establish a Quality of Markets Committee,\52\ which will provide advice and guidance to the Exchange Board on issues related to the fairness, integrity, efficiency and competiveness of the information, order handling and execution mechanisms of the Exchange from the perspective of individual and institutional investors, retail and market making firms, and other market participants. The Quality of Markets Committee will include a broad representation of participants in the Exchange. Additionally, at least 20% of the members of the committee will be Member Representative members, and the number of Non-Industry members must equal or exceed the total number of Industry and Member Representative members. MIAX PEARL also has proposed to establish a Business Conduct Committee, which shall be appointed by the Chairman of the Exchange Board.\53\ Specifically, the Business Conduct Committee, which will not be a Board committee, will have a minimum of three members and will be composed of a number of individuals as determined by the Exchange Chairman, none of whom shall be Directors of MIAX PEARL. In addition, at least one member of the Business Conduct Committee and any panel thereof must be an officer, director or employee of a MIAX PEARL member. --------------------------------------------------------------------------- \49\ See MIAX PEARL By-Laws, Article V, Section 5.2, and supra note 17. \50\ See MIAX PEARL By-Laws, Article V, Section 5.3, and supra note 18. \51\ See MIAX PEARL By-Laws, Article V, Section 5.1, and supra note 20. Additional candidates for the Member Nominating Committee may be nominated and elected by MIAX PEARL members pursuant to a petition process. See supra note 22 and accompanying text. \52\ See MIAX PEARL By-Laws, Article IV, Section 4.6. \53\ See MIAX PEARL By-Laws, Article IV, Section 4.7. --------------------------------------------------------------------------- The Commission believes that MIAX PEARL's proposed committees, which are similar to the committees maintained by other exchanges,\54\ are designed to help enable MIAX PEARL to carry out its responsibilities under the Act and are consistent with the Act, including Section 6(b)(1), which requires, in part, an exchange to be so organized and have the capacity to carry out the purposes of the Act.\55\ --------------------------------------------------------------------------- \54\ See, e.g., MIAX Order and BATS Order, supra note 13, and ISE Mercury Order, ISE Gemini Order, Nasdaq Order, supra note 27. \55\ 15 U.S.C. 78f(b)(1). --------------------------------------------------------------------------- B. Regulation of MIAX PEARL When MIAX PEARL commences operations as a national securities exchange, the Exchange will have all the attendant regulatory obligations under the Act. In particular, MIAX PEARL will be responsible for the operation and regulation of its trading system and the regulation of its members. Certain provisions in the MIAX PEARL and Miami Holdings governance documents are designed to facilitate the ability of MIAX PEARL and the Commission to fulfill their regulatory obligations. The [[Page 92905]] discussion below summarizes some of these key provisions. 1. Ownership Structure: Ownership and Voting Limitations MIAX PEARL will be structured as a Delaware limited liability company, which will be wholly owned by the sole member of the LLC, Miami Holdings. The Miami Holdings' proposed Amended and Restated Certificate of Incorporation (``Miami Holdings Certificate'') includes restrictions on the ability to own and vote shares of capital stock of Miami Holdings.\56\ These limitations are designed to prevent any Miami Holdings shareholder from exercising undue control over the operation of MIAX PEARL and to assure that MIAX PEARL and the Commission are able to carry out their regulatory obligations under the Act. --------------------------------------------------------------------------- \56\ These provisions are consistent with ownership and voting limits approved by the Commission for other SROs. See, e.g., ISE Mercury Order and ISE Gemini Order, supra note 27; MIAX Order and BATS Order, supra note 13. See also Securities Exchange Act Release Nos. 62158 (May 24, 2010), 75 FR 30082 (May 28, 2010) (CBOE-2008-88) (``CBOE Demutualization Approval Order''); 53963 (June 8, 2006), 71 FR 34660 (June 15, 2006) (SR-NSX-2006-03) (``NSX Demutualization Order''); 51149 (February 8, 2005), 70 FR 7531 (February 14, 2005) (SR-CHX-2004-26) (``CHX Demutualization Order''); and 49098 (January 16, 2004), 69 FR 3974 (January 27, 2004) (SR-Phlx-2003-73) (``Phlx Demutualization Order''). --------------------------------------------------------------------------- In particular, for so long as Miami Holdings (directly or indirectly) controls MIAX PEARL, no person, either alone or together with its related persons,\57\ may beneficially own more than 40% of any class of capital stock of Miami Holdings.\58\ There would be a more conservative restriction for MIAX PEARL members, wherein MIAX PEARL members, either alone or together with their related persons, are prohibited from beneficially owning more than 20% of shares of any class of capital stock of Miami Holdings.\59\ If any stockholder violates these ownership limits, Miami Holdings would redeem the shares in excess of the applicable ownership limit at their par value.\60\ In addition, no person, alone or together with its related persons, may vote or cause the voting of more than 20% of the voting power of the then issued and outstanding capital stock of Miami Holdings.\61\ If any stockholder purports to vote, or cause the voting of, shares that would violate this voting limit, Miami Holdings would not honor such vote in excess of the voting limit.\62\ --------------------------------------------------------------------------- \57\ See Miami Holdings Certificate, Article NINTH (a)(ii) (defining ``related persons''). \58\ See Miami Holdings Certificate, Article NINTH (b)(i)(A). \59\ See Miami Holdings Certificate, Article NINTH (b)(i)(B). \60\ See Miami Holdings Certificate, Article NINTH (e). Any shares which have been called for redemption shall not be deemed outstanding shares for the purpose of voting or determining the total number of shares entitled to vote. Once redeemed by Miami Holdings, such shares shall become treasury shares and shall no longer be deemed to be outstanding. See id. Furthermore, if any redemption results in another stockholder owning shares in violation of the ownership limits described above, Miami Holdings shall redeem such shares. See id. \61\ See Miami Holdings Certificate, Article NINTH (b)(i)(C). \62\ See Miami Holdings Certificate, Article NINTH (d). The Miami Holdings Certificate also prohibits the payment of any stock dividends and conversions that would violate the ownership and voting limitations. See Miami Holdings Certificate, Article FOURTH A.(b) and (e), and D.7. --------------------------------------------------------------------------- Any person that proposes to own shares of capital stock in excess of the 40% ownership limitation, or vote or grant proxies or consents with respect to shares of capital stock in excess of the 20% voting limitation, must deliver written notice to the Miami Holdings board to notify the Board of its intention.\63\ The notice must be delivered to the Board not less than 45 days before the proposed ownership of such shares or proposed exercise of such voting rights or the granting of such proxies or consents.\64\ The Miami Holdings board may waive the 40% ownership limitation and the 20% voting limitation, pursuant to a resolution duly adopted by the Board of Directors, if it makes certain findings,\65\ except that the Miami Holdings board cannot waive the voting and ownership limits above 20% for MIAX PEARL members and their related persons.\66\ Any such waiver would not be effective unless and until approved by the Commission pursuant to Section 19 of the Act.\67\ --------------------------------------------------------------------------- \63\ See Miami Holdings Certificate, Article NINTH (b)(iv). \64\ See id. \65\ See Miami Holdings Certificate, Article NINTH (b)(ii)(B). The required findings include determinations that (A) such waiver will not impair the ability of MIAX PEARL to carry out its functions and responsibilities under the Act and the rules and regulations promulgated thereunder, (B) such waiver is otherwise in the best interests of MIAX PEARL and Miami Holdings, (C) such waiver will not impair the ability of the Commission to enforce the Act and (D) the transferee in such transfer and its related persons are not subject to any applicable ``statutory disqualification'' (within the meaning of Section 3(a)(39) of the Act). See Miami Holdings Certificate, Article NINTH (b)(ii)(B) and (b)(iii). The Commission has previously approved the rules of other exchanges that provide for the ability of the exchange to waive the ownership and voting limitations discussed above for non-members of the exchange. See, e.g., ISE Mercury Order and ISE Gemini Order, supra note 27; MIAX Order, supra note 13; and Securities Exchange Act Release No. 61698 (March 12, 2010), 75 FR 13151 (March 18, 2010) (order approving DirectEdge exchanges) (``DirectEdge Exchanges Order''). \66\ See Miami Holdings Certificate, Article NINTH (b)(ii)(B). These provisions are generally consistent with waiver of ownership and voting limits approved by the Commission for other SROs. See, e.g., ISE Mercury Order, supra note 27; MIAX Order, supra note 13; BATS Order, supra note 13; NSX Demutualization Order, supra note 56; CHX Demutualization Order, supra note 56; and Securities Exchange Act Release No. 49718 (May 17, 2004), 69 FR 29611 (May 24, 2004) (SR-PCX-2004-08). \67\ See Miami Holdings Certificate, Article NINTH (b)(ii)(B). --------------------------------------------------------------------------- The Miami Holdings Certificate also contains provisions that are designed to further safeguard the ownership and voting limitation described above, or are otherwise related to direct and indirect changes in control. Specifically, any person that, either alone or together with its related persons owns, directly or indirectly, of record or beneficially, 5% or more of the capital stock of Miami Holdings will be required to immediately notify Miami Holdings in writing upon acquiring knowledge of such ownership.\68\ Thereafter, such persons will be required to update Miami Holdings of any increase or decrease of 1% or more in their previously reported ownership percentage.\69\ --------------------------------------------------------------------------- \68\ See Miami Holdings Certificate, Article NINTH(c)(i). The notice will require the person's full legal name; the person's title or status; the person's approximate ownership interest in Miami Holdings; and whether the person has power, directly or indirectly, to direct the management or policies of Miami Holdings. See id. \69\ See Miami Holdings Certificate, Article NINTH(c)(ii). Changes of less than 1% must also be reported to Miami Holdings if they result in such person crossing a 20% or 40% ownership threshold. See id. In addition, the MIAX PEARL rules also impose limits on affiliation between MIAX PEARL and a member of MIAX PEARL. See MIAX PEARL Rule 201(g) (``Without prior Commission approval, the Exchange or any entity with which it is affiliated shall not directly or indirectly through one or more intermediaries acquire or maintain an ownership interest in an Exchange Member. In addition, without prior Commission approval, no Member shall be or become affiliated with (1) the Exchange; or (2) any affiliate of the Exchange. Nothing herein shall prohibit a Member from acquiring or holding an equity interest in (i) Miami International Holdings, Inc. that is permitted by the Certificate of Incorporation of Miami International Holdings, Inc. or (ii) Miami International Securities Exchange, LLC that is permitted by the Amended and Restated Limited Liability Company Agreement of Miami International Securities Exchange, LLC.''). --------------------------------------------------------------------------- The MIAX PEARL LLC Agreement does not include change of control provisions that are similar to those in the Miami Holdings Certificate; however the MIAX PEARL LLC Agreement explicitly provides that Miami Holdings is the sole LLC Member of MIAX PEARL.\70\ Thus, if Miami Holdings ever proposes to no longer be the sole LLC Member of MIAX PEARL (and therefore no longer its sole owner), MIAX PEARL would be required to amend the MIAX PEARL LLC Agreement and the MIAX [[Page 92906]] PEARL By-Laws. Any changes to the MIAX PEARL LLC Agreement or the MIAX PEARL By-Laws, including any change in the provisions that identify Miami Holdings as the sole owner of MIAX PEARL, must be filed with, or filed with and approved by, the Commission pursuant to Section 19 of the Act, as the case may be.\71\ Further, pursuant to the MIAX PEARL By-Laws, Miami Holdings may not transfer or assign, in whole or in part, its ownership interest in MIAX PEARL, unless such transfer is filed with and approved by the Commission pursuant to Section 19 of the Act.\72\ --------------------------------------------------------------------------- \70\ See MIAX PEARL LLC Agreement and MIAX PEARL By-Laws, Article I(v) (both of which define ``LLC Member'' to mean Miami Holdings, as the sole member of MIAX PEARL). \71\ See 15 U.S.C. 78s. See also MIAX PEARL LLC Agreement, Section 28(b). \72\ See MIAX PEARL By-Laws, Article III, Section 3.4. --------------------------------------------------------------------------- As described above, the provisions applicable to direct and indirect changes in control of Miami Holdings and MIAX PEARL, as well as the voting limitation imposed on owners of Miami Holdings who also are MIAX PEARL members, are designed to help prevent any owner of Miami Holdings from exercising undue influence or control over the operation of MIAX PEARL. In addition, these limitations are designed to address the conflicts of interests that might result from a member of a national securities exchange owning interests in the exchange. A member's interest in an exchange, including an entity that controls an exchange, could become so large as to cast doubts on whether the exchange may fairly and objectively exercise its self-regulatory responsibilities with respect to such member.\73\ A member that is a controlling shareholder of an exchange could seek to exercise that controlling influence by directing the exchange to refrain from, or the exchange may hesitate to, diligently monitor and conduct surveillance of the member's conduct or diligently enforce the exchange's rules and the federal securities laws with respect to conduct by the member that violates such provisions. As such, the Commission believes that these voting and ownership limitations are designed to minimize the potential that a person or entity can improperly interfere with or restrict the ability of MIAX PEARL to effectively carry out its regulatory oversight responsibilities under the Act. --------------------------------------------------------------------------- \73\ See, e.g., ISE Mercury Order, supra note 27; MIAX Order, supra note 13; BATS Order, supra note 13; and DirectEdge Exchanges Order, supra note 65. --------------------------------------------------------------------------- The Commission believes that MIAX PEARL's and Miami Holding's proposed governance provisions are consistent with the Act, including Section 6(b)(1), which requires, in part, an exchange to be so organized and have the capacity to carry out the purposes of the Act.\74\ In particular, these requirements are designed to minimize the potential that a person could improperly interfere with or restrict the ability of the Commission or MIAX PEARL to effectively carry out their regulatory oversight responsibilities under the Act. --------------------------------------------------------------------------- \74\ 15 U.S.C. 78f(b)(1). See also ISE Mercury Order, supra note 27; MIAX Order, supra note 13; and BOX Order, supra note 13. --------------------------------------------------------------------------- 2. Regulatory Independence and Oversight Although Miami Holdings will not itself carry out regulatory functions, its activities with respect to the operation of MIAX PEARL must be consistent with, and must not interfere with, MIAX PEARL's self-regulatory obligations. In this regard, MIAX PEARL and Miami Holdings propose to adopt certain provisions in their respective governing documents that are designed to help maintain the independence of the regulatory functions of MIAX PEARL. These proposed provisions are substantially similar to those included in the governing documents of other exchanges that recently have been granted registration.\75\ Specifically: --------------------------------------------------------------------------- \75\ See, e.g., DirectEdge Exchanges Order, supra note 65, and BATS Order, supra note 13. See also Securities Exchange Act Release No. 61152 (December 10, 2009), 74 FR 66699 (December 16, 2009) (``C2 Order''). --------------------------------------------------------------------------- The directors, officers, employees, and agents of Miami Holdings must give due regard to the preservation of the independence of the self-regulatory function of MIAX PEARL and must not take actions that would interfere with the effectuation of decisions by the MIAX PEARL Board relating to its regulatory functions or that would interfere with MIAX PEARL's ability to carry out its responsibilities under the Act.\76\ --------------------------------------------------------------------------- \76\ See Amended and Restated By-Laws of Miami Holdings (``Miami Holdings By-Laws''), Article VII, Section 1. Similarly, Article II, Section 2.1(d) of the MIAX PEARL By-Laws requires the MIAX PEARL Board to, when managing the business and affairs of MIAX PEARL and evaluating any proposal, consider the requirements of Section 6(b) of the Act. Section 2.1(e) also requires the MIAX PEARL Board, when evaluating any proposal to take into account (among other things and to the extent relevant), the potential impact on the integrity, continuity and stability of the national securities exchange operated by MIAX PEARL and the other operations of MIAX PEARL, on the ability to prevent fraudulent and manipulative acts and practices and on investors and the public, and whether such would promote just and equitable principles of trade, foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to and facilitating transactions in securities or assist in the removal of impediments to or perfection of the mechanisms for a free and open market and a national market system. See, e.g., Fourth Amended and Restated By-Laws of BATS, Article III, Section 1. --------------------------------------------------------------------------- Miami Holdings must comply with federal securities laws and the rules and regulations promulgated thereunder, and agrees to cooperate with the Commission and MIAX PEARL pursuant to, and to the extent of, their respective regulatory authority. In addition, Miami Holdings' officers, directors, employees, and agents must comply with federal securities laws and the rules and regulations promulgated thereunder and agree to cooperate with the Commission and MIAX PEARL in respect of the Commission's oversight responsibilities regarding MIAX PEARL and the self-regulatory functions and responsibilities of MIAX PEARL.\77\ --------------------------------------------------------------------------- \77\ See Miami Holdings By-Laws, Article VII, Section 4. --------------------------------------------------------------------------- Miami Holdings, and its officers, directors, employees, and agents are deemed to irrevocably submit to the jurisdiction of the U.S. federal courts, the Commission, and MIAX PEARL, for purposes of any action, suit, or proceeding pursuant to U.S. federal securities laws, and the rules and regulations thereunder, arising out of, or relating to, MIAX PEARL activities.\78\ --------------------------------------------------------------------------- \78\ See Miami Holdings By-Laws, Article VII, Section 5. --------------------------------------------------------------------------- All books and records of MIAX PEARL reflecting confidential information pertaining to the self-regulatory function of MIAX PEARL (including but not limited to disciplinary matters, trading data, trading practices, and audit information) shall be retained in confidence by MIAX PEARL and its personnel and will not be used by MIAX PEARL for any non-regulatory purpose and shall not be made available to persons (including, without limitation, any MIAX PEARL member) other than to personnel of the Commission, and those personnel of MIAX PEARL, members of committees of MIAX PEARL, members of the MIAX PEARL Board, or hearing officers and other agents of MIAX PEARL, to the extent necessary or appropriate to properly discharge the self-regulatory function of MIAX PEARL.\79\ --------------------------------------------------------------------------- \79\ See MIAX PEARL By-Laws Article X, Section 10.4. The Commission notes that the Miami Holdings By-Laws also provide that all books and records of MIAX PEARL reflecting confidential information pertaining to the self-regulatory function of MIAX PEARL will be subject to confidentiality restrictions. See Miami Holdings By-Laws Article VII, Section 2. The requirement to keep such information confidential shall not limit the Commission's ability to access and examine such information or limit the ability of officers, directors, employees, or agent of Miami Holdings to disclose such information to the Commission. See id. --------------------------------------------------------------------------- The books and records of MIAX PEARL and Miami Holdings must be [[Page 92907]] maintained in the United States \80\ and, to the extent they are related to the operation or administration of MIAX PEARL, Miami Holdings books and records will be subject at all times to inspection and copying by the Commission.\81\ --------------------------------------------------------------------------- \80\ See MIAX PEARL By-Laws, Article X, Section 10.4; and Miami Holdings By-Laws, Article VII, Section 3. \81\ See Miami Holdings By-Laws, Article VII, Section 3. --------------------------------------------------------------------------- Furthermore, to the extent they relate to the activities of MIAX PEARL, the books, records, premises, officers, directors, employees, and agents of Miami Holdings will be deemed to be the books, records, premises, officers, directors, employees, and agents of MIAX PEARL, for purposes of, and subject to oversight pursuant to, the Act.\82\ --------------------------------------------------------------------------- \82\ See Miami Holdings By-Laws, Article VII, Section 3. --------------------------------------------------------------------------- Miami Holdings will take necessary steps to cause its officers, directors, employees, and agents, prior to accepting a position as an officer, director, employee or agent (as applicable) to consent in writing to the applicability of provisions regarding books and records, confidentiality, jurisdiction, and regulatory obligations, with respect to their activities related to MIAX PEARL.\83\ --------------------------------------------------------------------------- \83\ See Miami Holdings By-Laws, Article VII, Section 6. --------------------------------------------------------------------------- Miami Holdings Certificate and By-Laws require that, so long as Miami Holdings controls MIAX PEARL, any changes to those documents be submitted to the MIAX PEARL Board, and, if such change is required to be filed with the Commission pursuant to Section 19(b) of the Act and the rules and regulations thereunder, such change shall not be effective until filed with, or filed with and approved by, the Commission.\84\ --------------------------------------------------------------------------- \84\ See Miami Holdings Certificate, Article VIII; and Miami Holdings By-Laws, Article XII, Section 1. --------------------------------------------------------------------------- The Commission believes that the provisions discussed in this section, which are designed to help maintain the independence of MIAX PEARL's regulatory function and help facilitate the ability of MIAX PEARL to carry out its regulatory responsibilities and operate in a manner consistent with the Act, are appropriate and consistent with the requirements of the Act, particularly with Section 6(b)(1), which requires, in part, an exchange to be so organized and have the capacity to carry out the purposes of the Act.\85\ Whether MIAX PEARL operates in compliance with the Act, however, depends on how it and Miami Holdings in practice implement the governance and other provisions that are the subject of this Order. --------------------------------------------------------------------------- \85\ 15 U.S.C. 78f(b)(1). --------------------------------------------------------------------------- Further, Section 19(h)(1) of the Act \86\ provides the Commission with the authority ``to suspend for a period not exceeding twelve months or revoke the registration of [an SRO], or to censure or impose limitations upon the activities, functions, and operations of [an SRO], if [the Commission] finds, on the record after notice and opportunity for hearing, that [the SRO] has violated or is unable to comply with any provision of the Act, the rules or regulations thereunder, or its own rules or without reasonable justification or excuse has failed to enforce compliance'' with any such provision by its members (including associated persons thereof).\87\ If Commission staff were to find, or become aware of, through staff review and inspection or otherwise, facts indicating any violations of the Act, including without limitation Sections 6(b)(1) and 19(g)(1), these matters could provide the basis for a disciplinary proceeding under Section 19(h)(1) of the Act. --------------------------------------------------------------------------- \86\ See 15 U.S.C. 78s(h)(1). \87\ See id. --------------------------------------------------------------------------- The Commission also notes that, even in the absence of the governance provisions described above, under Section 20(a) of the Act, any person with a controlling interest in MIAX PEARL would be jointly and severally liable with and to the same extent that MIAX PEARL is liable under any provision of the Act, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.\88\ In addition, Section 20(e) of the Act creates aiding and abetting liability for any person who knowingly provides substantial assistance to another person in violation of any provision of the Act or rule thereunder.\89\ Further, Section 21C of the Act authorizes the Commission to enter a cease-and-desist order against any person who has been ``a cause of'' a violation of any provision of the Act through an act or omission that the person knew or should have known would contribute to the violation.\90\ These provisions are applicable to all entities' dealings with MIAX PEARL, including Miami Holdings. --------------------------------------------------------------------------- \88\ 15 U.S.C. 78t(a). \89\ 15 U.S.C. 78t(e). \90\ 15 U.S.C. 78u-3. --------------------------------------------------------------------------- 3. Regulation of MIAX PEARL As a prerequisite to the Commission's granting of an exchange's application for registration, an exchange must be so organized and have the capacity to carry out the purposes of the Act.\91\ Specifically, an exchange must be able to enforce compliance by its members, and persons associated with its members, with the Act and the rules and regulations thereunder and the rules of the exchange.\92\ The discussion below summarizes how MIAX PEARL proposes to structure and conduct its regulatory operations. --------------------------------------------------------------------------- \91\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1). \92\ See id. See also Section 19(g) of the Act, 15 U.S.C. 78s(g). --------------------------------------------------------------------------- a. Regulatory Oversight Committee The regulatory operations of MIAX PEARL will be monitored by the Regulatory Oversight Committee of the Exchange Board. The Regulatory Oversight Committee will consist of at least three directors, all of whom will be Non-Industry Directors. The Regulatory Oversight Committee will be responsible for overseeing the adequacy and effectiveness of MIAX PEARL's regulatory and SRO responsibilities, assessing MIAX PEARL's regulatory performance, and assisting the Exchange Board (and committees of the Exchange Board) in reviewing MIAX PEARL's regulatory plan and the overall effectiveness of MIAX PEARL's regulatory functions.\93\ --------------------------------------------------------------------------- \93\ See MIAX PEARL By-Laws, Article IV, Section 4.5(c). The Regulatory Oversight Committee is responsible for reviewing MIAX PEARL's regulatory budget, and also will meet regularly with the Chief Regulatory Officer. See id. --------------------------------------------------------------------------- Further, a Chief Regulatory Officer (``CRO'') of MIAX PEARL will have general day-to-day supervision over MIAX PEARL's regulatory operations.\94\ The Regulatory Oversight Committee also will be responsible for recommending compensation and personnel actions involving the CRO and senior regulatory personnel to the Compensation Committee of MIAX PEARL for action.\95\ The CRO will report to the Regulatory Oversight Committee.\96\ --------------------------------------------------------------------------- \94\ See MIAX PEARL By-Laws, Article VI, Section 6.10. \95\ See MIAX PEARL By-Laws, Article IV, Section 4.5(c). \96\ See MIAX PEARL By-Laws, Article VI, Section 6.10. --------------------------------------------------------------------------- b. Regulatory Funding To help assure the Commission that it has and will continue to have adequate funding to be able to meet its responsibilities under the Act, MIAX PEARL represents in its Form 1 Application that, prior to beginning operations as a national securities exchange, Miami Holdings will provide sufficient funding to MIAX PEARL for the exchange to carry out its [[Page 92908]] responsibilities under the Act.\97\ Specifically, MIAX PEARL represents that Miami Holdings has allocated sufficient operational assets to enable its operation and that prior to launching operations, Miami Holdings will make a capital contribution of not less than $5,000,000 into MIAX PEARL's capital account, in addition to any previously- provided in-kind contributions, such as legal, regulatory, and infrastructure-related services.\98\ MIAX PEARL represents that such cash and in-kind contributions by Miami Holdings will be adequate to begin operation of the Exchange, including the regulation of the Exchange. --------------------------------------------------------------------------- \97\ See MIAX PEARL Form 1 Application, Exhibit I. \98\ See id. --------------------------------------------------------------------------- MIAX PEARL also represents in its Form 1 application that there is a written agreement between MIAX PEARL and Miami Holdings that requires Miami Holdings to provide adequate funding for MIAX PEARL's ongoing operations, including the regulation of MIAX PEARL. This agreement provides that MIAX PEARL will receive all fees, including regulatory fees and trading fees, payable by MIAX PEARL's members, as well as any funds received from any applicable market data fees and OPRA tape revenue. The agreement further provides that Miami Holdings will reimburse MIAX PEARL for its costs and expenses to the extent MIAX PEARL's assets are insufficient to meets its costs and expenses.\99\ --------------------------------------------------------------------------- \99\ See id. --------------------------------------------------------------------------- Further, any revenues received by MIAX PEARL from fees derived from its regulatory function or regulatory penalties will not be used for non-regulatory purposes.\100\ Any excess funds, as determined by MIAX PEARL, may be remitted to Miami Holdings, however ``Regulatory Funds'' will not be remitted to Miami Holdings.\101\ --------------------------------------------------------------------------- \100\ See MIAX PEARL By-Laws, Article IX, Section 9.4. \101\ See MIAX PEARL Form 1 Application, Exhibit I. See also MIAX PEARL LLC Agreement, Section 16; and MIAX PEARL By-Laws, Article IX, Section 9.4. MIAX PEARL By-Laws, Article 1(gg) defines ``Regulatory Funds'' as ``fees, fines, or penalties derived from the regulatory operations of [MIAX PEARL]'', but such term does not include ``revenues derived from listing fees, market data revenues, transaction revenues, or any other aspect of the commercial operations of [MIAX PEARL], even if such revenues are used to pay costs associated with the regulatory operations of [MIAX PEARL].'' This definition is consistent with the rules of other SROs. See, e.g., By-Laws of MIAX Exchange, Article I(ll); By-Laws of NASDAQ PHLX LLC, Article I(ii); and By-Laws of NASDAQ BX, Inc., Article I(ii). --------------------------------------------------------------------------- c. Rule 17d-2 Agreements; Regulatory Contract With FINRA Unless the SRO is relieved of this responsibility pursuant to Section 17(d) or Section 19(g)(2) of the Act,\102\ Section 19(g)(1) of the Act, among other things, requires every SRO registered as a national securities exchange, absent reasonable justification or excuse, to enforce compliance by its members and persons associated with its members with the Act, the rules and regulations thereunder, and the SRO's own rules.\103\ Section 17(d) of the Act and Rule 17d-2 thereunder permit SROs to propose joint plans to allocate regulatory responsibilities among themselves for their common rules with respect to their common members.\104\ These agreements, which must be filed with and declared effective by the Commission, generally cover areas where each SRO's rules substantively overlap, including such regulatory functions as personnel registration and sales practices. Without this relief, the statutory obligation of each individual SRO could result in a pattern of multiple examinations of broker-dealers that maintain memberships in more than one SRO.\105\ Such regulatory duplication would add unnecessary expense for common members and their SROs. A 17d- 2 plan that is declared effective by the Commission relieves the specified SRO of those regulatory responsibilities allocated by the plan to another SRO.\106\ Many SROs have entered into Rule 17d-2 agreements.\107\ --------------------------------------------------------------------------- \102\ 15 U.S.C. 78q(d) and 15 U.S.C. 78s(g)(2), respectively. \103\ 15 U.S.C. 78s(g)(1). \104\ See Section 17(d)(1) of the Act and Rule 17d-2 thereunder, 15 U.S.C. 78q(d)(1) and 17 CFR 240.17d-2. Section 17(d)(1) of the Act allows the Commission to relieve an SRO of certain responsibilities with respect to members of the SRO who are also members of another SRO. Specifically, Section 17(d)(1) allows the Commission to relieve an SRO of its responsibilities to: (i) Receive regulatory reports from such members; (ii) examine such members for compliance with the Act and the rules and regulations thereunder, and the rules of the SRO; or (iii) carry out other specified regulatory responsibilities with respect to such members. \105\ Section 17(d) was intended, in part, to eliminate unnecessary multiple examinations and regulatory duplication with respect to Common Members. See Securities Exchange Act Release No. 12935 (October 28, 1976), 41 FR 49091 (November 8, 1976). \106\ See id. \107\ See, e.g., Securities Exchange Act Release Nos. 77321 (March 8, 2016), 81 FR 13434 (March 14, 2016) (File No. 4-697) (Financial Industry Regulatory Authority, Inc. (``FINRA'')/ISE Mercury, LLC), 73641 (November 19, 2014), 79 FR 70230 (November 25, 2014) (File No. 4-678) (FINRA/MIAX Exchange); 70053 (July 26, 2013), 78 FR 46656 (August 1, 2013) (File No. 4-663) (FINRA/ISE Gemini, LLC); 59218 (January 8, 2009), 74 FR 2143 (January 14, 2009) (File No. 4-575) (FINRA/Boston Stock Exchange, Inc.); 58818 (October 20, 2008), 73 FR 63752 (October 27, 2008) (File No. 4-569) (FINRA/BATS Exchange, Inc.); 55755 (May 14, 2007), 72 FR 28087 (May 18, 2007) (File No. 4-536) (National Association of Securities Dealers, Inc. (``NASD'') (n/k/a FINRA) and Chicago Board of Options Exchange, Inc. concerning the CBOE Stock Exchange, LLC); 55367 (February 27, 2007), 72 FR 9983 (March 6, 2007) (File No. 4-529) (NASD/International Securities Exchange, LLC); and 54136 (July 12, 2006), 71 FR 40759 (July 18, 2006) (File No. 4-517) (NASD/The Nasdaq Stock Market LLC). --------------------------------------------------------------------------- A 17d-2 plan that is declared effective by the Commission relieves the specified SRO of those regulatory responsibilities allocated by the plan to another SRO.\108\ MIAX PEARL has represented to the Commission that it intends to become a party to the existing multiparty options Rule 17d-2 plans concerning sales practice regulation and market surveillance.\109\ MIAX PEARL has also represented that it will enter into a bi-lateral 17d-2 agreement to allocate regulatory responsibility to FINRA for common rules of dual members between MIAX PEARL and FINRA. Under these agreements, the examining SROs will examine firms that are common members of MIAX PEARL and the particular examining SRO for compliance with certain provisions of the Act, certain rules and regulations adopted thereunder, and certain MIAX PEARL Rules. --------------------------------------------------------------------------- \108\ See supra notes 104-105. \109\ See MIAX PEARL Form 1 Application, Exhibit L. See also Securities Exchange Act Release No. 68363 (December 5, 2012), 77 FR 73711 (December 11, 2012) (File No. S7-966) (notice of filing and order approving and declaring effective an amendment to the multiparty 17d-2 plan concerning options-related sales practice matters); and 68362 (December 5, 2012), 77 FR 73719 (December 11, 2012) (File No. 4-551) (notice of filing and order approving and declaring effective an amendment to the multiparty 17d-2 plan concerning options-related market surveillance). --------------------------------------------------------------------------- In addition, MIAX PEARL has represented that it will enter into a Regulatory Services Agreement (``RSA'') with FINRA, under which FINRA will perform certain regulatory functions on behalf of MIAX PEARL.\110\ Pursuant to the RSA, FINRA, in its capacity as service provider to MIAX PEARL, will perform various services on MIAX PEARL's behalf, including assisting MIAX PEARL with member registration and related administrative support services; certain cross-market surveillance services; certain options trading examinations; at MIAX PEARL's request, investigating potential violations of enumerated MIAX PEARL market rules, as well as federal securities laws, and rules and regulations thereunder, related to MIAX PEARL market activity; performing examinations of options, including routine and for cause examinations of [[Page 92909]] MIAX PEARL members under certain MIAX PEARL rules and federal securities laws; bringing formal disciplinary actions, including hearing officer services; and providing arbitration, mediation, and other dispute resolution services to MIAX PEARL member firms.\111\ Notwithstanding the RSA, MIAX PEARL, as an SRO, has the ultimate legal responsibility for the regulation of its members and market. --------------------------------------------------------------------------- \110\ See MIAX PEARL Form 1 Application, Exhibit L. \111\ See id. --------------------------------------------------------------------------- The Commission believes that it is consistent with the Act for MIAX PEARL to contract with other SROs to perform certain examination, enforcement, and disciplinary functions.\112\ This regulatory structure would be consistent with that of other SROs.\113\ These functions are fundamental elements of a regulatory program, and constitute core self- regulatory functions. The Commission believes that FINRA, as an SRO that provides contractual services to other SROs, should have the capacity to perform these functions for MIAX PEARL.\114\ However, MIAX PEARL, unless relieved by the Commission of its responsibility,\115\ bears the ultimate responsibility for self-regulatory responsibilities and primary liability for self-regulatory failures, not the SRO retained to perform regulatory functions on MIAX PEARL's behalf. In performing these regulatory functions, however, the SRO retained to perform regulatory functions may nonetheless bear liability for causing or aiding and abetting the failure of MIAX PEARL to perform its regulatory functions.\116\ Accordingly, although FINRA will not act on its own behalf in carrying out these regulatory services for MIAX PEARL, as the SRO retained to perform certain regulatory functions, FINRA may have secondary liability if, for example, the Commission finds that the contracted functions are being performed so inadequately as to cause a violation of the federal securities laws by MIAX PEARL. --------------------------------------------------------------------------- \112\ See, e.g., Regulation ATS Release, supra note 29. See also Securities Exchange Act Release Nos. 50122 (July 29, 2004), 69 FR 47962 (August 6, 2004) (SR-Amex-2004-32) (order approving rule that allowed Amex to contract with another SRO for regulatory services) (``Amex Regulatory Services Approval Order''); 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004) (``NOM Approval Order''); Nasdaq Order, supra note 27; and BATS Order, supra note 13. \113\ For example, MIAX Exchange, ISE Mercury, EDGA Exchange, Inc., EDGX Exchange Inc., and BATS have entered into 17d-2 Plans and RSAs with FINRA. \114\ See, e.g., Amex Regulatory Services Approval Order, supra note 112; NOM Approval Order, supra note 112; and Nasdaq Order, supra note 27. The Commission notes that the RSA is not before the Commission and, therefore, the Commission is not acting on them. \115\ See supra note 104. \116\ For example, if failings by the SRO retained to perform regulatory functions have the effect of leaving an exchange in violation of any aspect of the exchange's self-regulatory obligations, the exchange will bear direct liability for the violation, while the SRO retained to perform regulatory functions may bear liability for causing or aiding and abetting the violation. See, e.g., Nasdaq Order, supra note 27; BATS Order, supra note 13; and Release No. 42455 (February 24, 2000), 65 FR 11388 (March 2, 2000) (File No. 10-127) (approval of registration of International Securities Exchange Act, LLC (``ISE'') as a national securities exchange). --------------------------------------------------------------------------- C. Trading System 1. Access to MIAX PEARL Access to MIAX PEARL will be granted to individuals or organizations who are approved to become Members.\117\ Approved Members will be issued Trading Permits that grant the Member the ability to transact on MIAX PEARL through its electronic systems.\118\ Trading Permits will not convey upon Members any ownership interest in MIAX PEARL, and they will not be transferable except in cases where a Member experiences a change in control or corporate reorganization.\119\ Membership will be open to any broker-dealer that: (1) Is registered under Section 15 of the Act; \120\ and (2) has and maintains membership in another registered options exchange (other than the MIAX Exchange) or FINRA.\121\ As explained below, a holder of a MIAX Exchange trading permit will not be required to submit a full application for membership on MIAX PEARL.\122\ There will be no limit to the number of Trading Permits that MIAX PEARL can issue, although MIAX PEARL could determine in the future a limit or decrease in the number of Trading Permits issued.\123\ Members of MIAX PEARL may be Market Makers,\124\ or they may be EEMs.\125\ --------------------------------------------------------------------------- \117\ A ``Member'' is defined as an individual or organization that is registered with the Exchange pursuant to Chapter II of the MIAX PEARL Rules for purposes of trading on the Exchange as an ``Electronic Exchange Member'' (``EEM'') or ``Market Maker.'' Members are deemed ``members'' under the Exchange Act. See MIAX PEARL Rule 100. \118\ See MIAX PEARL Rule 200(a). MIAX PEARL represents that it has designed its systems to allow its Members to individually determine the best method for accessing the Exchange, whether by using customized front-end software using protocols determined by the Exchange or through third-party vendors who route orders to MIAX PEARL through a front-end or service bureau configuration. See MIAX PEARL Form 1 Application, Exhibit E. \119\ See MIAX PEARL Rule 200(e). \120\ See MIAX PEARL Rule 200(b). \121\ See MIAX PEARL Rule 200(d). If such other options exchange has not been designated by the Commission to examine Members for compliance with financial responsibility rules, then the broker- dealer must have and maintain a membership in FINRA. Id. \122\ See MIAX PEARL Rule 200(c) and infra notes 127-128 and accompanying text. \123\ See MIAX PEARL Rule 200(a). MIAX PEARL would announce in advance any limitation or decrease it plans to impose pursuant to Rule 200(a). See id. In the event that MIAX PEARL imposes a limitation or decrease, MIAX PEARL, in doing so, may not eliminate the ability of an existing member to trade on the Exchange unless MIAX PEARL is permitted to do so pursuant to a rule filing submitted to the Commission under Section 19(b) of the Act. See id. In addition, MIAX PEARL's exercise of authority under proposed Rule 200 would be subject to the provisions of Section 6(c)(4) of the Act. See id. See also Chicago Board Options Exchange, Incorporated (``CBOE'') Rule 3.1(a)(vi) and MIAX Exchange Rule 200(a) (concerning limiting or reducing the number of trading permits). Further, MIAX PEARL's exercise of authority under proposed Rule 200 would be subject to the provisions of Section 6(b)(2) of the Act, which requires the rules of an exchange to provide that any registered broker or dealer or any natural person associated with a registered broker or dealer may become a member of such exchange and any person may become associated with a member thereof. See 15 U.S.C. 78f(b)(2). \124\ See MIAX PEARL Rule 600. Market Maker registration is discussed in greater detail below, infra Section III.C.3. \125\ See supra note 117. --------------------------------------------------------------------------- A holder of a MIAX Exchange trading permit in good standing will be eligible to receive one MIAX PEARL Trading Permit.\126\ MIAX Exchange member applicants will not be required to submit a full application for membership on MIAX PEARL, but rather will only need to complete selected MIAX PEARL forms concerning their election to trade on MIAX PEARL, consent to MIAX PEARL's jurisdiction, and other operational matters.\127\ This waive-in application process is similar to arrangements in place at other exchanges.\128\ --------------------------------------------------------------------------- \126\ See MIAX PEARL Rule 200(c)(1). \127\ See id. \128\ See, e.g., C2 Options Exchange, Inc. Rule 3.1(c)(1) (containing similar expedited waive-in membership process for members of CBOE) and ISE Mercury, LLC Rule 302(a) (containing similar expedited waive-in membership process for members of the ISE and ISE Gemini, LLC). --------------------------------------------------------------------------- Non-MIAX Exchange members seeking to become members of MIAX PEARL would submit a full application in accordance with procedures established by the Exchange.\129\ Entities that become members, and their associated persons, will be required to meet and maintain certain qualification and registration criteria similar to what is required by other options exchanges.\130\ In addition, MIAX PEARL proposes further requirements on members that seek to do business with [[Page 92910]] the public.\131\ Applicants who are denied membership may appeal MIAX PEARL's decision pursuant to MIAX PEARL's rules governing Hearings, Review, and Arbitration.\132\ Every Member will be subject to MIAX PEARL's regulatory jurisdiction, including MIAX PEARL's disciplinary jurisdiction.\133\ --------------------------------------------------------------------------- \129\ See MIAX PEARL Rule 200(c)(2). \130\ See MIAX PEARL Rules Chapter II. Such criteria include, but are not limited to, capital maintenance requirements. See, e.g., MIAX Exchange Rule 200 Series and C2 Options Exchange, Inc. Rules 3.1 and 3.2 (containing similar criteria). \131\ See MIAX PEARL Rules Chapter XIII (incorporating by reference Chapter XIII of the MIAX Exchange Rules). Chapter XIII of the MIAX Exchange Rules also are similar to the rules of other exchanges. See, e.g., ISE Rules Chapter 6. \132\ See MIAX PEARL Rules Chapter XI (incorporating by reference Chapter XI of the MIAX Exchange Rules). \133\ See MIAX PEARL Rule 200(g). For MIAX PEARL's rules concerning discipline, see Chapter X of the MIAX PEARL Rules. --------------------------------------------------------------------------- The Commission finds that MIAX PEARL's proposed membership rules are consistent with the Act, including Section 6(b)(2) of the Act, which requires the rules of an exchange to provide that any registered broker or dealer or natural person associated with a broker or dealer may become a member of such exchange or associated with a member thereof.\134\ MIAX PEARL's proposed rules with respect to exchange membership are substantively similar to the rules of other exchanges. --------------------------------------------------------------------------- \134\ 15 U.S.C. 78f(b)(2). --------------------------------------------------------------------------- The Commission notes that pursuant to Section 6(c) of the Act,\135\ an exchange must deny membership to any person, other than a natural person, that is not a registered broker or dealer, any natural person that is not, or is not associated with, a registered broker or dealer, and registered broker-dealers that do not satisfy certain standards, such as financial responsibility or operational capacity. As a registered exchange, MIAX PEARL must independently determine if an applicant satisfies the standards set forth in the Act, regardless of whether an applicant is a member of another SRO.\136\ --------------------------------------------------------------------------- \135\ 15 U.S.C. 78f(c). \136\ See, e.g., ISE Mercury Order, supra note 27, at 6076; ISE Gemini Order, supra note 27, at 46633; MIAX Order, supra note 13, at 73074; BOX Order, supra note 14, at 26337; BATS Order, supra note 13, at 49502; and Nasdaq Order, supra note 27, at 3555. --------------------------------------------------------------------------- In addition, Members may enter into arrangements with other parties, including non-Members and other Members, to provide ``Sponsored Access'' to trading on MIAX PEARL.\137\ Members who provide such Sponsored Access will be responsible for all trading conducted pursuant to the access agreement, and to the same extent as if the Member were trading directly.\138\ Accordingly, Members that provide Sponsored Access must maintain and implement policies and procedures to supervise and monitor sponsored trading activity.\139\ Additionally, non-Members who seek to trade on MIAX PEARL through Sponsored Access agreements will need to agree to comply with all applicable federal securities laws and rules and Exchange rules.\140\ MIAX PEARL's rules governing Sponsored Access arrangements are similar to the rules of other exchanges.\141\ --------------------------------------------------------------------------- \137\ See MIAX PEARL Rule 210. \138\ See MIAX PEARL Rule 210(b). \139\ See MIAX PEARL Rule 210(b)-(c). \140\ See MIAX PEARL Rule 210(b). See also, e.g., 17 CFR 240.15c3-5. \141\ See, e.g., MIAX Exchange Rule 210 and NASDAQ Stock Market LLC Rule 4615. --------------------------------------------------------------------------- 2. Linkage MIAX PEARL intends to become a participant in the Plan Relating to Options Order Protection and Locked/Crossed Markets or any successor plan (``Linkage Plan'').\142\ If admitted as a participant to the Linkage Plan, other plan participants would be able to send orders to MIAX PEARL in accordance with the terms of the plan as applied to the Exchange. The MIAX PEARL Rules include relevant definitions, establish the conditions pursuant to which members may enter orders in accordance with the Linkage Plan, impose obligations on the Exchange regarding how it must process incoming orders, establish a general standard that members and MIAX PEARL should avoid trade-throughs, establish potential regulatory liability for members that engage in a pattern or practice of trading through other exchanges, and establish obligations with respect to locked and crossed markets. --------------------------------------------------------------------------- \142\ See MIAX PEARL Form 1 Application, Exhibit E. See also Securities Exchange Act Release No. 60405 (July 30, 2009), 74 FR 39362 (August 6, 2009) (File No. 4-546) (order approving the national market system Plan Relating to Options Order Protection and Locked/Crossed Markets Submitted by the Chicago Board Options Exchange, Incorporated, ISE, The NASDAQ Stock Market LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX, Inc., NYSE Amex LLC, and NYSE Arca, Inc.). --------------------------------------------------------------------------- The Commission believes that MIAX PEARL has proposed rules that are designed to comply with the requirements of the Linkage Plan.\143\ Further, as provided below, before MIAX PEARL can commence operations as a national securities exchange, it must become a participant in the Linkage Plan. --------------------------------------------------------------------------- \143\ See Chapter XIV of the MIAX PEARL Rules (incorporating by reference Chapter XIV of the MIAX Exchange Rules). --------------------------------------------------------------------------- 3. Market Makers a. Registration of Market Makers MIAX PEARL Members may register as Market Makers for the purpose of making markets in options contracts traded on the Exchange.\144\ Market Makers are entitled to receive certain benefits and privileges in exchange for fulfilling certain affirmative and negative market-making obligations. To begin the process of registering as a Market Maker, a Member will be required to file a written application with MIAX PEARL.\145\ MIAX PEARL will consider an applicant's market making ability and other factors it deems appropriate in determining whether to approve an applicant's registration.\146\ All Market Makers will be designated as specialists on MIAX PEARL for all purposes under the Act and rules thereunder.\147\ The Exchange will not place any limit on the number of entities that may become Market Makers.\148\ The good standing of a Market Maker may be suspended, terminated or otherwise withdrawn if the conditions for approval cease to be maintained or the Market Maker violates any of its agreements with MIAX PEARL or any provisions of the MIAX PEARL Rules.\149\ A Member that has qualified as a Market Maker may register to make markets in individual series of options.\150\ --------------------------------------------------------------------------- \144\ See MIAX PEARL Rule 600. \145\ See MIAX PEARL Rule 600(a). \146\ See id. The provision permitting MIAX PEARL to consider ``such other factors as [it] deems appropriate'' must be applied in a manner that is consistent with the Act, including provisions that prohibit an exchange from acting in an unfairly discriminatory manner. See 15 U.S.C. 78f(b)(5); see also C2 Order, supra note 75. \147\ See MIAX PEARL Rule 600. \148\ See MIAX PEARL Rule 600(c). \149\ See MIAX PEARL Rule 603(b). \150\ See MIAX PEARL Rule 602(a). --------------------------------------------------------------------------- The Commission finds that the MIAX PEARL qualification requirements are consistent with the Act. MIAX PEARL's rules provide an objective process by which a Member could become a Market Maker on MIAX PEARL. The Commission notes that MIAX PEARL's proposed Market Maker qualification requirements are similar to those of other options exchanges.\151\ --------------------------------------------------------------------------- \151\ See, e.g., Bats BZX Exchange, Inc. (``Bats BZX'') Rules 22.2, 22.3 and 22.4, and NASDAQ Options Market Rules, Chapter VII, Sections 2, 3, and 4. --------------------------------------------------------------------------- b. Market Maker Obligations Pursuant to MIAX PEARL rules, there will be one class of Market Makers. All Market Makers will be subject to a number of general obligations. In particular, the transactions of a Market Maker must constitute a course of dealings reasonably calculated to contribute to the maintenance of a fair and orderly market.\152\ Among other things, a Market Maker must: (1) [[Page 92911]] Maintain a two-sided market during trading hours, in a manner that enhances the depth, liquidity, and competitiveness of the market; (2) engage in dealings for its own account when there is a lack of price continuity, a temporary disparity between the supply of (or demand for) a particular option contract, or a temporary distortion of the price relationships between option contracts of the same series; (3) compete with other market makers; (4) make markets that will be honored for the number of contracts entered; (5) update quotations in response to changed market conditions; and (6) maintain active markets.\153\ Market Makers must provide continuous two-sided quotes throughout the trading day 90% of the time in 75% of the series in which the Market Maker is registered.\154\ Further, a Market Maker may be called upon by MIAX PEARL to submit a single bid or offer or maintain continuous bid and offers in one or more series to which it is registered whenever, in the judgment of the Exchange, it is necessary to do so in the interest of fair and orderly markets.\155\ In addition, Market Makers must maintain minimum net capital in accordance with the federal securities laws.\156\ In options classes other than to which it is registered, the total number of contracts executed during a quarter by a Market Maker in series in which it is not registered may not exceed 25% of the total number of all contracts executed by such Market Maker.\157\ If MIAX PEARL finds any failure by a Market Maker to properly perform as a Market Maker, such Market Maker may be subject to suspension or termination of registration.\158\ --------------------------------------------------------------------------- \152\ See MIAX PEARL Rule 604(a). \153\ See MIAX PEARL Rule 604(a). \154\ See MIAX PEARL Rule 605(d)(1) and (d)(3). Immediate-or- Cancel Orders from Market Makers will not be counted for the continuous quoting obligations of Market Makers. See MIAX PEARL Rule 605, Interpretations and Policies .01. \155\ See MIAX PEARL Rule 605(d)(2). \156\ See MIAX PEARL Rule 608. \157\ See MIAX PEARL Rule 605(e). See also Bats BZX Rule 22.6(e) and NASDAQ Options Market Rules, Chapter VII, Section 6(e). \158\ See MIAX PEARL Rule 600(b). --------------------------------------------------------------------------- Market Makers will receive certain benefits in return for satisfying their responsibilities.\159\ For example, a broker-dealer or other lender may extend ``good faith'' credit to a member of a national securities exchange or registered broker-dealer to finance its activities as a market maker or specialist.\160\ In addition, market makers are excepted from the prohibition in Section 11(a) of the Act.\161\ The Commission believes that a market maker must be subject to sufficient and commensurate affirmative obligations, including the obligation to hold itself out as willing to buy and sell options for its own account on a regular or continuous basis, to justify favorable treatment.\162\ The Commission further believes that the rules of all U.S. options markets need not provide the same standards for market maker participation, so long as they impose affirmative obligations that are consistent with the Act.\163\ Market Makers on MIAX PEARL will not receive special trading allocations or similar rights vis-[agrave]- vis other Members.\164\ The Commission believes that MIAX PEARL's Market Maker participation requirements impose sufficient affirmative obligations on MIAX PEARL's Market Makers and, accordingly, that MIAX PEARL's requirements are consistent with the Act. The Commission believes that while Market Makers may become an important source of liquidity on MIAX PEARL, they will likely not be the only source as MIAX PEARL is designed to match buying and selling interest of all MIAX PEARL participants. Therefore, the Commission believes that MIAX PEARL's proposed structure is consistent with the Exchange Act. --------------------------------------------------------------------------- \159\ See, e.g., NOM Approval Order, supra note 112, at 14526 and Securities Exchange Act Release No. 61419 (January 26, 2010), 75 FR 5157, 5159 (February 1, 2010) (``BATS Options Approval Order'') (discussing the benefits and obligations of market makers). \160\ See 12 CFR 221.5 and 12 CFR 220.7; see also 17 CFR 240.15c3-1(a)(6) (capital requirements for market makers). \161\ 15 U.S.C. 78k(a). See also, infra Section III.C.5. \162\ See NOM Approval Order, supra note 112, at 14526 and BATS Options Approval Order, supra note 159, at 5159. \163\ See id. \164\ See MIAX PEARL Rule 514; see also MIAX PEARL Form 1 Application, Exhibit E at 2. --------------------------------------------------------------------------- 4. Order Display, Execution, and Priority MIAX PEARL will operate a fully automated electronic options marketplace. Liquidity will be derived from orders to buy and orders to sell, including orders from Market Makers,\165\ submitted to MIAX PEARL electronically by its members from remote locations. There will be no physical trading floor. Options traded on the Exchange will be subject to Minimum Price Variations (``MPV'') that will begin at $0.05 for option contracts trading at less than $3.00 per option, and $.10 for option contracts trading at $3.00 per option or higher.\166\ In addition, MIAX PEARL will participate in the penny pilot program pursuant to which it will permit certain options with premiums under $3 (as well as heavily traded options on certain indices) to be quoted and traded in increments as low as $.01.\167\ --------------------------------------------------------------------------- \165\ The definition of ``quote'' or ``quotation'' means a bid or offer entered by a Market Maker as a firm order that updates the Market Maker's previous bid or offer, if any. An order entered by the Market Maker in the options series to which such Market maker is registered shall, as applicable, constitute a quote or quotation on MIAX PEARL. See MIAX PEARL Rule 100. \166\ See MIAX PEARL Rule 510(a). \167\ See MIAX PEARL Rule 510, Interpretations and Policies .01. MIAX PEARL has established a scheduled expiration date of December 31, 2016. However, MIAX PEARL may not be operational before December 31, 2016, thus the Exchange may need to file a proposed rule change under Section 19(b) of the Exchange Act to update this proposed rule. --------------------------------------------------------------------------- Orders submitted to MIAX PEARL will be displayed unless the order is an immediately marketable order or is a contingent order, such as an immediate or cancel order. Additionally, orders may have a non- displayed price that is different than the displayed price, as further described below. Displayed orders and quotes will be displayed on an anonymous basis at a specified price. Non-displayed prices associated with orders will not be displayed to any participant. Members may submit the following types of orders: Market; Marketable Limit; Cancel-Replacement; Immediate-or-Cancel; Intermarket Sweep; Do Not Route; Day Limit; Good `Til Cancelled; and Post- Only.\168\ All of these order types are based on similar order types available on other options exchanges.\169\ The Commission believes that these order types are substantially similar to order types approved by the Commission on other exchanges and thus raise no new regulatory issues. --------------------------------------------------------------------------- \168\ See MIAX PEARL Rule 516 for a description of each of the order types. MIAX PEARL notes that some of these order types will be valid only during certain portions of the trading day (e.g., after the opening). MIAX PEARL further notes that not all order types will be available for use on each of the MEO interface and the FIX interface, and that the Exchange will issue a Regulatory Circular listing which order types, among the order types listed above, are available for delivery via the MEO interface and which are available for delivery via the FIX interface. \169\ See, e.g., Bats BZX Rule 21.1(d)(8) (Post Only Order); NASDAQ Options Market Rules, Chapter VI, Section 1(e)(8) (Intermarket Sweep Order) and (1)(e)(1) (Cancel-replacement Order); NASDAQ PHLX LLC Rule 1080(m)(iv)(A) (Do Not Route Order and Immediate or Cancel Order); NYSE MKT LLC Rule 900.3NY(m) (Day Order) and (n) (Good-Til-Cancelled Order). --------------------------------------------------------------------------- After the opening, trades will execute on MIAX PEARL when a buy order and a sell order match one another on the MIAX PEARL order book (``MIAX PEARL Book'' or ``Book''). The MIAX PEARL system will continuously and automatically match orders pursuant to price-time priority.\170\ The highest bid [[Page 92912]] and lowest offer shall have priority on the Exchange. Within each price level, if there are two or more orders at the best price, trading interest will be executed in time priority.\171\ MIAX PEARL proposes to make available order processing and matching features, which are based on those features available on MIAX Exchange.\172\ MIAX PEARL's system will automatically execute incoming orders that are executable against orders in its system, provided that such incoming orders will not be executed at prices inferior to the NBBO.\173\ MIAX PEARL Rule 515 sets forth how the MIAX PEARL system will handle incoming orders that cannot be executed in part or in full. In particular, MIAX PEARL Rule 515 specifies a ``price protection process,'' a Managed Interest Process, and a Post Only Process, each discussed more fully below. --------------------------------------------------------------------------- \170\ See MIAX PEARL Rule 514(b). \171\ See id. \172\ See infra discussion of MIAX PEARL's proposed price protection process and managed interest process, which are based on substantially similar order processing and matching features on MIAX Exchange. \173\ See MIAX PEARL Rule 515(a) and (b). --------------------------------------------------------------------------- The MIAX PEARL system offers a ``price protection'' process for all orders.\174\ Price protection prevents an order from being executed beyond the price designated in the order's price protection instructions (``the price protection limit''). The price protection limit is expressed in units of MPV away from the national best bid and offer (``NBBO'') at the time of the order's receipt, or the MIAX PEARL Best Bid and Offer (``PBBO'') if the best bid or offer on away markets (``ABBO'') is crossing the PBBO.\175\ When triggered, price protection will cancel an order or the remaining contracts of an order. The MIAX PEARL system will not execute such orders at prices inferior to the current NBBO.\176\ --------------------------------------------------------------------------- \174\ See MIAX PEARL Rule 515(c). \175\ See MIAX PEARL Rule 515(c). The Exchange will publish a Regulatory Circular setting a minimum and maximum number of MPVs away from the NBBO (or PBBO if the ABBO is crossing the PBBO) that a market participant may designate for its price protection limit. The Exchange will also set, and announce by Regulatory Circular, a default price protection limit within 1 to 5 MPVs away from the NBBO (or PBBO if the ABBO is crossing the PBBO). \176\ See MIAX PEARL Rule 515(c). --------------------------------------------------------------------------- The MIAX PEARL price protection process is substantially similar to that adopted by MIAX Exchange.\177\ The Commission believes that this price protection functionality can benefit all market participants. --------------------------------------------------------------------------- \177\ See MIAX Exchange Rule 515(c)(1). The MIAX Exchange price protection process applies only to non-market maker orders, whereas the MIAX PEARL price protection process applies to all market participants, including market makers. The Commission believes that this is consistent with the price protection rules of other exchanges. See, e.g., NYSE Arca, Inc. Rules 6.60 (Price Protection-- Orders) and 6.61 (Price Protection--Quotes). --------------------------------------------------------------------------- The Exchange's rules also provide for a ``Managed Interest Process'' that would apply to non-routable orders \178\ that would either lock or cross the current opposite side NBBO where the PBBO is inferior to the NBBO.\179\ The MIAX PEARL system will not execute such orders at prices inferior to the current NBBO.\180\ The managed order would be displayed at one MPV away from the current opposite side NBBO and placed on the MIAX PEARL Book at a price equal to the opposite side NBBO.\181\ Should the NBBO price change to an inferior price level, the order's displayed price will continue to re-price so that it is displayed one MPV away from the new NBBO, and the order's Book price will continuously reprice to lock the new NBBO.\182\ Such re-pricing will continue until the managed order is fully executed, reaches its limit price, reaches its price protection limit, or is cancelled.\183\ --------------------------------------------------------------------------- \178\ Non-routable orders would include, for example, orders marked ``Do Not Route'' or Post-Only orders being handled under the Managed Interest Process. \179\ See MIAX PEARL Rule 515(d)(2). \180\ See MIAX PEARL Rule 515(d)(2). \181\ See MIAX PEARL Rule 515(d)(2)(ii). See also MIAX Exchange Rule 515(c)(1)(ii) (providing for the same Managed Interest Process on MIAX Exchange). \182\ See id. \183\ See id. --------------------------------------------------------------------------- During the Managed Interest Process, if the Exchange receives a new order or quote on the opposite side of the market from the managed order that could be executed, the MIAX PEARL system will immediately execute the remaining contracts to the extent possible at the initiating order's current booked bid or offer price, provided that it does not trade through the current NBBO.\184\ --------------------------------------------------------------------------- \184\ See MIAX PEARL Rule 515(d)(2)(iii)(A). See also MIAX Exchange Rule 515(c)(1)(ii). --------------------------------------------------------------------------- The Commission believes that the MIAX PEARL's Managed Interest Process is consistent with the managed interest process that the Commission approved for MIAX Exchange.\185\ With regard to the treatment of Post-Only Orders under MIAX PEARL's Managed Interest Process, the Commission believes that the rules are consistent with rules that have been adopted by other exchanges governing the execution of Post-Only Orders.\186\ --------------------------------------------------------------------------- \185\ See MIAX Exchange Rule 515(c)(1)(ii). \186\ See, e.g., Bats BZX Rule 21.1(h) and Securities Exchange Act Release No. 77818 (May 12, 2016), 81 FR 31283 (May 18, 2016) (SR-BatsBZX-2016-16). --------------------------------------------------------------------------- MIAX PEARL will have a process for the handling of certain Post- Only Orders (``POP Process'').\187\ The POP Process will apply to Post- Only Orders where the limit price of the Post-Only Order locks or crosses the current opposite side PBBO where the PBBO is the NBBO (i.e., locks or crosses an order on the MIAX PEARL Book).\188\ The MIAX PEARL system will display and book such Post-Only Orders one MPV away from the current opposite side PBBO.\189\ Should the PBBO price change to an inferior price level, the Post-Only Order's Book price and displayed price would continuously re-price to one MPV away from new PBBO until Post-Only Order is fully executed, reaches its limit price, reaches its price protection limit, or is cancelled.\190\ --------------------------------------------------------------------------- \187\ See MIAX PEARL Rule 515(g). \188\ Post-Only Orders that lock or cross the current opposite side NBBO and the PBBO is inferior to the NBBO would be handled through the Managed Interest Process under Rule 515(d)(2) as described above. \189\ See MIAX PEARL Rule 515(g)(ii). \190\ Id. --------------------------------------------------------------------------- Under the POP Process, if the Exchange receives a new order or quote on the opposite side of the market from the Post-Only Order that could be executed, the MIAX PEARL system will immediately execute the remaining contracts to the extent possible at the Post-Only Order's current booked bid or offer price, provided that it does not trade through the current NBBO.\191\ If the Exchange receives a new Post-Only Order on the opposite side of the market from a Post-Only Order being managed under the POP Process, and the new Post-Only Order locks or crosses the book price of the resting Post-Only Order, the Exchange will book and display the new Post-Only Order one MPV away from the current opposite side PBBO.\192\ --------------------------------------------------------------------------- \191\ See MIAX PEARL Rule 515(g)(iii)(A). \192\ See MIAX PEARL Rule 515(g)(iii)(B). --------------------------------------------------------------------------- The POP Process under MIAX PEARL's rules is substantially similar to the Managed Interest Process described above for MIAX PEARL and that the Commission approved for the MIAX Exchange.\193\ The primary difference is that, under the POP Process, Post-Only Orders are booked and displayed at the same price--one MPV away from the current opposite side PBBO. This aspect of the POP Process is consistent with the treatment of Post-Only Orders on other exchanges.\194\ --------------------------------------------------------------------------- \193\ See MIAX PEARL Rule 515(d)(2) and MIAX Exchange Rule 515(c)(1)(ii). \194\ See, e.g., Bats BZX Rule 21.1(i) (Price Adjust) (providing that an order that, at the time of entry, would lock or cross a protected quotation of another options exchange or Bats BZX will be ranked and displayed by the Bats BZX system at one MPV below the current NBO (for bids) or to one MPV above the current NBB (for offers)); NASDAQ Options Market Rules, Chapter VI, Section 1(e)(11) (providing that if a Post-Only Order would lock or cross an order on the NASDAQ Options Market system, the order will be re-priced to $.01 below the current low offer (for bids) or above the current best bid (for offers) and displayed at one MPV below the current low offer (for bids) or above the current best bid (for offers)). --------------------------------------------------------------------------- [[Page 92913]] The Commission believes that MIAX PEARL's proposed display, execution, and priority rules discussed above in this section are consistent with the Act. In particular, the Commission finds that the proposed rules are consistent with Section 6(b)(5) of the Act,\195\ which, among other things, requires that the rules of a national securities exchange be designed to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating 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, and to not permit unfair discrimination between customers, issuers, or dealers. The Commission also finds that the proposed rules are consistent with Section 6(b)(8) of the Act,\196\ which requires that the rules of an exchange not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The trading rules of MIAX PEARL are substantially similar to the current trading rules of MIAX Exchange and other exchanges, as noted above, which were filed with and approved by the Commission (or otherwise became effective) pursuant to Section 19(b) of the Act.\197\ Therefore, the Commission believes that these rules raise no new regulatory issues and are consistent with the Act. --------------------------------------------------------------------------- \195\ 15 U.S.C. 78f(b)(5). \196\ 15 U.S.C. 78f(b)(8). \197\ Many of MIAX Exchange's rules were approved at the time that MIAX Exchange's registration as a national securities exchanged was granted. See MIAX Order, supra note 13. --------------------------------------------------------------------------- 5. Section 11(a) of the Act Section 11(a)(1) of the Act \198\ prohibits a member of a national securities exchange from effecting transactions on that exchange for its own account, the account of an associated person, or an account over which it or its associated person exercises investment discretion (collectively, ``covered accounts''), unless an exception applies. The Exchange has represented that it has analyzed its rules proposed hereunder, and believes that they are consistent with Section 11(a) of the Act and rules thereunder.\199\ For the reasons set forth below, based on MIAX PEARL's representations, the Commission believes that MIAX PEARL's order execution algorithm will allow members to meet the requirements of Rule 11a2-2(T) for executions on MIAX PEARL. --------------------------------------------------------------------------- \198\ 15 U.S.C. 78k(a)(1). \199\ See Letter from Barbara J. Comly, EVP, General Counsel and Corporate Secretary, Miami Holdings, to Brent J. Fields, Secretary, Commission, and John C. Roeser, Associate Director, Office of Market Supervision, Division of Trading and Markets, Commission, dated November 4, 2016 (``MIAX PEARL 11(a) Request Letter''). --------------------------------------------------------------------------- Rule 11a2-2(T) under the Act,\200\ known as the ``effect versus execute'' rule, provides exchange members with an exemption from the Section 11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member, subject to certain conditions, to effect transactions for covered accounts by arranging for an unaffiliated member to execute the transactions on the exchange. To comply with Rule 11a2-2(T)'s conditions, a member: (i) May not be associated with the executing member; (ii) must transmit the order from off the exchange floor; (iii) may not participate in the execution of the transaction once it has been transmitted to the member performing the execution; \201\ and (iv) with respect to an account over which the member or an associated person has investment discretion, neither the member nor its associated person may retain any compensation in connection with effecting the transaction except as provided in the Rule. --------------------------------------------------------------------------- \200\ 17 CFR 240.11a2-2(T). \201\ This prohibition also applies to associated persons. See 15 U.S.C. 78f(b)(8). The member may, however, participate in clearing and settling the transaction. See Securities Exchange Act Release No. 14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) (regarding the NYSE's Designated Order Turnaround System) (``1978 Release''). --------------------------------------------------------------------------- In a letter to the Commission,\202\ MIAX PEARL requested that the Commission concur with its conclusion that MIAX PEARL members that enter orders into the MIAX PEARL trading system satisfy the requirements of Rule 11a2-2(T). For the reasons set forth below, the Commission believes that MIAX PEARL members entering orders into the MIAX PEARL trading system will satisfy the conditions of Rule 11a2- 2(T). --------------------------------------------------------------------------- \202\ See MIAX PEARL 11(a) Request Letter, supra note 199. --------------------------------------------------------------------------- First, Rule 11a2-2(T) requires that orders for covered accounts be transmitted from off the exchange floor. MIAX PEARL will not have a physical trading floor, and like other automated systems, the MIAX PEARL trading system will receive orders from members electronically through remote terminals or computer-to-computer interfaces. In the context of other automated trading systems, the Commission has found that the off-floor transmission requirement is met if a covered account order is transmitted from a remote location directly to an exchange's floor by electronic means.\203\ Since the MIAX PEARL trading system receives all orders electronically through remote terminals or computer-to-computer interfaces, the Commission believes that the MIAX PEARL trading system satisfies the off-floor transmission requirement. --------------------------------------------------------------------------- \203\ See, e.g., Securities Exchange Act Release Nos. 59154 (December 23, 2008), 73 FR 80468 (December 31, 2008) (SR-BSE-2008- 48) (order approving proposed rules of BX); 49068, (January 13, 2004), 69 FR 2775 (January 20, 2004) (establishing, among other things, BOX as an options trading facility of BSE); 44983 (October 25, 2001), 66 FR 55225 (November 1, 2001) (approving the PCX's use of the Archipelago Exchange as its equity trading facility); 29237 (May 24, 1991), 56 FR 24853 (May 31, 1991) (regarding NYSE's Off- Hours Trading Facility). See 1978 Release, supra note 201. See also Securities Exchange Act Release No. 15533 (January 29, 1979), 44 FR 6084 (January 31, 1979) (regarding the American Stock Exchange (``Amex'') Post Execution Reporting System, the Amex Switching System, the Intermarket Trading System, the Multiple Dealer Trading Facility of the Cincinnati Stock Exchange, the PCX Communications and Execution System, and the Philadelphia Stock Exchange Automated Communications and Execution System) (``1979 Release''). --------------------------------------------------------------------------- Second, Rule 11a2-2(T) requires that the member not participate in the execution of its order once it has been transmitted to the member performing the execution. MIAX PEARL has represented that the MIAX PEARL trading system will at no time following the submission of an order allow a member or an associated person of such member to acquire control or influence over the result or timing of an order's execution.\204\ According to MIAX PEARL, the execution of a member's order is determined solely by what orders, bids, or offers are present in the MIAX PEARL trading system at the time the member submits the order and the order priority based on MIAX PEARL rules.\205\ Accordingly, the Commission believes that a MIAX PEARL member will not participate in the execution of its order submitted into the trading system. --------------------------------------------------------------------------- \204\ See MIAX PEARL 11(a) Request Letter, supra note 199. Members may change or cancel an order or quote at any time before the order is executed on the Exchange. See MIAX PEARL Form 1 Application, Exhibit E. The Commission has stated that the non- participation requirement is satisfied under such circumstances, so long as such modifications or cancellations are also transmitted from off the floor. See 1978 Release, supra note 201 (stating that the ``non-participation requirement does not prevent initiating members from canceling of modifying orders (or the instructions pursuant to which the initiating member wishes orders to be executed) after the orders have been transmitted to the executing member, provided that any such instructions are also transmitted from off the floor''). \205\ See MIAX PEARL 11(a) Request Letter, supra note 199. --------------------------------------------------------------------------- Rule 11a2-2(T)'s third condition is that the order be executed by an [[Page 92914]] exchange member who is unaffiliated with the member initiating the order. The Commission has stated that the requirement is satisfied when automated exchange facilities, such as the MIAX PEARL trading system, are used, as long as the design of these systems ensures that members do not possess any special or unique trading advantages over non- members in handling their orders after transmitting them to the Exchange.\206\ MIAX PEARL has represented that the design of its trading system ensures that no member has any special or unique trading advantage over non-members in the handling of its orders after transmitting its orders to MIAX PEARL.\207\ Based on MIAX PEARL's representation, the Commission believes that the MIAX PEARL trading system satisfies this requirement. --------------------------------------------------------------------------- \206\ In considering the operation of automated execution systems operated by an exchange, the Commission noted that while there is no independent executing exchange member, the execution of an order is automatic once it has been transmitted into each system. Because the design of these systems ensures that members do not possess any special or unique trading advantages in handling their orders after transmitting them to the exchange, the Commission has stated that executions obtained through these systems satisfy the independent execution requirement of Rule 11a2-2(T). See 1979 Release, supra note 203. \207\ See MIAX PEARL 11(a) Request Letter, supra note 199. --------------------------------------------------------------------------- Fourth, in the case of a transaction effected for an account with respect to which the initiating member or an associated person thereof exercises investment discretion, neither the initiating member nor any associated person thereof may retain any compensation in connection with effecting the transaction, unless the person authorized to transact business for the account has expressly provided otherwise by written contract referring to Section 11(a) of the Act and Rule 11a2- 2(T).\208\ MIAX PEARL members trading for covered accounts over which they exercise investment discretion must comply with this condition in order to rely on the rule's exemption.\209\ --------------------------------------------------------------------------- \208\ 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2- 2(T)(d) requires a member or associated person authorized by written contract to retain compensation, in connection with effecting transactions for covered accounts over which such member or associated person thereof exercises investment discretion, to furnish at least annually to the person authorized to transact business for the account a statement setting forth the total amount of compensation retained by the member in connection with effecting transactions for the account during the period covered by the statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, supra note 201 (stating ``[t]he contractual and disclosure requirements are designed to assure that accounts electing to permit transaction- related compensation do so only after deciding that such arrangements are suitable to their interests''). \209\ See MIAX PEARL 11(a) Request Letter, supra note 199. --------------------------------------------------------------------------- D. Discipline and Oversight of Members As noted above, one prerequisite for the Commission's grant of an exchange's application for registration is that a proposed exchange must be so organized and have the capacity to be able to carry out the purposes of the Act.\210\ Specifically, an exchange must be able to enforce compliance by its members and persons associated with its members with the Act and the rules and regulations thereunder and the rules of the exchange.\211\ --------------------------------------------------------------------------- \210\ See 15 U.S.C. 78f(b)(1). \211\ See id. --------------------------------------------------------------------------- MIAX PEARL's rules codify MIAX PEARL's disciplinary jurisdiction over its members, thereby facilitating its ability to enforce its members' compliance with its rules and the federal securities laws.\212\ MIAX PEARL's rules permit it to sanction members for violations of its rules and violations of any provision of the Exchange Act or the rules and regulations promulgated thereunder, by, among other things, expelling or suspending members; limiting members' activities, functions, or operations; fining or censuring members; suspending or barring a person from being associated with a member; or any other fitting sanction in accordance with MIAX rules.\213\ --------------------------------------------------------------------------- \212\ See MIAX PEARL Rule 1000. \213\ See id. See also MIAX Rule 1000, CBOE Rule 17.1(a), and ISE Rule 1600(a) (containing similar provisions). --------------------------------------------------------------------------- MIAX PEARL's disciplinary and oversight functions will be administered in accordance with Chapter X of the MIAX PEARL rules, which governs disciplinary actions. Unless delegated to another SRO pursuant to the terms of any effective 17d-2 plan,\214\ MIAX PEARL regulatory staff (including regulatory staff of another SRO that may be acting on MIAX PEARL's behalf pursuant to a regulatory services agreement) will, among other things, investigate potential securities laws violations and initiate charges pursuant to MIAX PEARL rules.\215\ --------------------------------------------------------------------------- \214\ See supra Section III.B.3.c (concerning the 17d-2 plans to which MIAX PEARL has committed to join). \215\ See MIAX PEARL Rules 1002 and 1004. As noted above, MIAX PEARL has entered into an RSA with FINRA under which FINRA will perform certain regulatory functions on behalf of MIAX PEARL. See MIAX PEARL Rule 1015. --------------------------------------------------------------------------- Upon a finding of probable cause of a violation within the disciplinary jurisdiction of MIAX PEARL and where further proceedings are warranted,\216\ MIAX PEARL will conduct a hearing on disciplinary matters before a professional hearing officer \217\ and two members of the Business Conduct Committee \218\ (the ``Panel'').\219\ The MIAX PEARL member (or their associated person) or the MIAX PEARL regulatory staff may petition for review of the decision of the Panel by the MIAX PEARL Board.\220\ Any review would be conducted by the MIAX PEARL Board or a committee thereof composed of at least three Directors of the MIAX PEARL Board \221\ (whose decision must be ratified by the MIAX PEARL Board) and such decision will be final.\222\ In addition, the MIAX PEARL Board on its own motion may order review of a disciplinary decision.\223\ --------------------------------------------------------------------------- \216\ See MIAX PEARL Rule 1004. \217\ See MIAX PEARL Rule 1015, Interpretation and Policy .01. \218\ See MIAX PEARL By-Laws, Article IV, Section 4.7. \219\ See MIAX PEARL Rule 1006. \220\ See MIAX PEARL Rule 1010. \221\ Specifically, the Chairman of the MIAX PEARL Board, with the approval of the Board, shall appoint an Appeals Committee to preside over all appeals related to disciplinary and adverse action determinations. See note 46 and accompanying text (detailing the composition of the Appeals Committee). If the Independent Director serving on the Appeals Committee recuses himself or herself from an appeal, due to conflict of interest or otherwise, the Independent Director may be replaced by a Non-Industry Director for purposes of the applicable appeal if there is no other Independent Director able to serve as the replacement. See MIAX PEARL By-Laws, Article IV, Section 4.5(d). See also MIAX Exchange Amended and Restated By-Laws, Article IV, Section 4.5(d). \222\ See MIAX PEARL Rule 1010. \223\ See id. --------------------------------------------------------------------------- Appeals from any determination that impacts access to MIAX PEARL, such as termination or suspension of membership, will be instituted under, and governed by, the provisions in the Chapter XI of the MIAX PEARL Rules which incorporates by reference Chapter XI of the MIAX Exchange Rules. MIAX PEARL's Chapter XI applies to persons economically aggrieved by any of the following actions of MIAX PEARL including, but not limited to: (a) Denial of an application to become a Member; (b) barring a person from becoming associated with a Member; (c) limiting or prohibiting services provided by MIAX PEARL or services of any exchange member.\224\ --------------------------------------------------------------------------- \224\ See MIAX PEARL Rule 1100 (which incorporates by reference MIAX Exchange Rule 1100). As noted above, MIAX PEARL has entered into a RSA with FINRA under which FINRA will perform certain regulatory functions on behalf of MIAX PEARL. MIAX PEARL may perform some or all of the functions specified in the Chapter XI of the MIAX PEARL Rules, which incorporates by reference Chapter XI of the MIAX Exchange Rules. See supra note 110. See also MIAX PEARL Rule 1106 (which incorporates by reference MIAX Exchange Rule 1106). --------------------------------------------------------------------------- [[Page 92915]] Any person aggrieved by an action of MIAX PEARL within the scope of Chapter XI may file a written application to be heard within thirty days \225\ after such action has been taken.\226\ Applications for hearing and review will be referred to the Business Conduct Committee, which will appoint a hearing panel of no less than three members of such Committee.\227\ The decision of the hearing panel made pursuant to Chapter XI of the MIAX PEARL rules is subject to review by the MIAX PEARL Board, either on its own motion within 30 days after issuance of the decision, or upon written request submitted by the applicant or the President of MIAX PEARL within 15 days after issuance of the decision.\228\ The review would be conducted by the MIAX PEARL Board or a committee of the MIAX PEARL Board composed of at least three directors.\229\ --------------------------------------------------------------------------- \225\ An applicant may file for an extension of time as allowed by the Chairman of the Business Conduct Committee within thirty days of MIAX PEARL's action. An application for an extension will be ruled upon by the Chairman of the Business Conduct Committee, and his ruling will be given in writing. Rulings on applications for extensions of time are not subject to appeal. See MIAX PEARL Rule 1101 (which incorporates by reference MIAX Exchange Rule 1101). \226\ The application must include: (1) The action for which review is sought; (2) the specific reasons for the applicant's exception to such action; (3) the relief sought; and (4) whether the applicant intends to submit any documents, statements, arguments or other material in support of the application, with a description of any such materials. See MIAX PEARL Rule 1101(a) (which incorporates by reference MIAX Exchange Rule 1101(a)). \227\ See MIAX PEARL Rule 1102 (which incorporates by reference MIAX Exchange Rule 1102). The decision of the hearing panel will be made in writing and sent to the parties to the proceedings. See MIAX PEARL Rule 1103(d) (which incorporates by reference MIAX Exchange Rule 1103(d)). \228\ See MIAX PEARL Rule 1104(a) (which incorporates by reference MIAX Exchange Rule 1104(a)). The MIAX PEARL Board, or a committee of the MIAX PEARL Board, will have sole discretion to grant or deny either request. See id. \229\ See MIAX PEARL Rule 1104(b) (which incorporates by reference MIAX Exchange Rule 1104(b)). The MIAX PEARL Board or its designated committee may affirm, reverse, or modify in whole or in part, the decision of the hearing panel. The decision of the MIAX PEARL Board or its designated committee would be final, and must be in writing and would be sent to the parties to the proceeding. See MIAX PEARL Rule 1104(c) (which incorporates by reference MIAX Exchange Rule 1104(c)). --------------------------------------------------------------------------- The Commission finds that MIAX PEARL's proposed disciplinary and oversight rules and structure, as well as its proposed process for persons economically aggrieved by certain MIAX PEARL actions, are consistent with the requirements of Sections 6(b)(6) and 6(b)(7) of the Act \230\ in that they provide fair procedures for the disciplining of members and persons associated with members. The Commission further finds that the proposed MIAX PEARL rules are designed to provide MIAX PEARL with the ability to comply, and with the authority to enforce compliance by its members and persons associated with its members, with the provisions of the Act, the rules and regulations thereunder, and the rules of MIAX PEARL.\231\ The Commission notes that MIAX PEARL's proposed disciplinary and oversight rules and structures are similar to the rules of other exchanges.\232\ --------------------------------------------------------------------------- \230\ 15 U.S.C. 78f(b)(6) and (b)(7), respectively. \231\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1). \232\ See, e.g., ISE Mercury Order, supra note 27, ISE Gemini Order, supra note 27 and MIAX Order, supra note 13. --------------------------------------------------------------------------- E. Listing Requirements MIAX PEARL does not intend to initially list or trade common stock or non-option securities of operating companies but rather intends to initially only trade option contracts that meet the options listing standards of the Exchange.\233\ --------------------------------------------------------------------------- \233\ See MIAX PEARL Form 1 Application, Exhibit H. MIAX PEARL's listing rules, including the criteria for the underlying securities of the options to be traded, are substantially similar to the listing rules of MIAX Exchange. See MIAX PEARL Rules Chapter IV (Option Contracts Traded on the Exchange); MIAX Exchange Rules Chapter IV. See also ISE Gemini LLC Rule 500 Series and BOX Options Exchange LLC Rule 5000 Series. --------------------------------------------------------------------------- The Commission finds that MIAX PEARL's proposed initial and continued listing rules are consistent with the Act, including Section 6(b)(5),\234\ in that they are designed to protect investors and the public interest, prevent fraudulent and manipulative acts and practices, and promote just and equitable principles of trade. Before beginning operation, MIAX PEARL will need to become a participant in the Plan for the Purpose of Developing and Implementing Procedures Designed to Facilitate the Listing and Trading of Standardized Options Submitted Pursuant to Section 11A(a)(3)(B) of the Securities Exchange Act of 1934 (``OLPP'').\235\ In addition, before beginning operation, MIAX PEARL will need to become a participant in the Options Clearing Corporation. --------------------------------------------------------------------------- \234\ 15 U.S.C. 78f(b)(5). \235\ 15 U.S.C. 78k-1(a)(3)(B). --------------------------------------------------------------------------- IV. Exemption From Section 19(b) of the Act With Regard to MIAX Exchange, CBOE, New York Stock Exchange (``NYSE'') and FINRA Rules Incorporated by Reference MIAX PEARL proposes to incorporate by reference certain MIAX Exchange, CBOE, NYSE and FINRA rules.\236\ Thus, for certain MIAX PEARL rules, MIAX PEARL members will comply with a MIAX PEARL rule by complying with the referenced MIAX Exchange, CBOE, NYSE and FINRA rules. --------------------------------------------------------------------------- \236\ Specifically, MIAX PEARL proposes to incorporate by reference the following MIAX Exchange Rules: Chapter III (Business Conduct), Chapter VII (Exercises and Deliveries), Chapter VIII (Records, Reports and Audits), Chapter IX (Summary Suspension), Chapter XI (Hearings, Review and Arbitration), Chapter XIII (Doing Business With the Public), Chapter XIV (Order Protection, Locked and Crossed Markets), Chapter XV (Margins), Chapter XVI (Net Capital Requirements). The following rules are cross-referenced in the MIAX Exchange rules: MIAX Exchange Rule 1107 (Arbitration) incorporates by reference the Rule 12000 Series and Rule 13000 Series of the FINRA Manual and FINRA Rule 2268; MIAX Exchange Rule 1321 (Transfer of Accounts) cross-references FINRA Rule 11870; MIAX Exchange Rule 1502 (Margin Requirements) cross-references the CBOE and NYSE rules concerning initial and maintenance margin requirements that may be in effect from time to time. --------------------------------------------------------------------------- In connection with the proposal to incorporate MIAX Exchange, CBOE, NYSE and FINRA rules by reference, MIAX PEARL requests, pursuant to Rule 240.0-12 under the Act,\237\ an exemption under Section 36 of the Act from the rule filing requirements of Section 19(b) of the Act for changes to the MIAX PEARL rules that are effected solely by virtue of a change to a cross-referenced MIAX Exchange, CBOE, NYSE or FINRA rule.\238\ MIAX PEARL proposes to incorporate by reference categories of rules, rather than individual rules within a category, that are not trading rules. In addition, MIAX PEARL agrees to provide written notice to its members whenever MIAX Exchange, CBOE, NYSE or FINRA proposes a change to a cross-referenced rule \239\ and whenever any such proposed changes are approved by the Commission or otherwise become effective.\240\ --------------------------------------------------------------------------- \237\ 17 CFR 240.0-12. \238\ See Letter from Barbara J. Comly, EVP, General Counsel and Corporate Secretary, Miami Holdings, to Brent J. Fields, Secretary, Commission, dated November 4, 2016. \239\ See id. \240\ MIAX PEARL will provide such notice through a posting on the same Web site location where MIAX PEARL posts its own rule filings pursuant to Rule 19b-4 under the Act, within the required time frame. The Web site posting will include a link to the location on the MIAX Exchange, CBOE, NYSE or FINRA Web site where MIAX Exchange, CBOE, NYSE or FINRA's proposed rule change is posted. See id. --------------------------------------------------------------------------- Using the authority under Section 36 of the Act, the Commission previously exempted certain SROs from the requirement to file proposed rule changes under Section 19(b) of the Act.\241\ The Commission is hereby [[Page 92916]] granting MIAX PEARL's request for exemption, pursuant to Section 36 of the Act, from the rule filing requirements of Section 19(b) of the Act with respect to the rules that MIAX PEARL proposes to incorporate by reference. The exemption is conditioned upon MIAX PEARL providing written notice to MIAX PEARL members whenever MIAX Exchange, CBOE, NYSE or FINRA proposes to change an incorporated by reference rule and when the Commission approves any such changes. The Commission believes that the exemption is appropriate in the public interest and consistent with the protection of investors because it will promote more efficient use of Commission's and SROs' resources by avoiding duplicative rule filings based on simultaneous changes to identical rule text sought to be implemented by more than one SRO. --------------------------------------------------------------------------- \241\ See, e.g., Mercury Order, supra note 27, BATS Order, supra note 13, C2 Order, supra note 75, Nasdaq Order, supra note 27, and NOM Approval Order, supra note 112. --------------------------------------------------------------------------- V. Conclusion It is ordered that the application of MIAX PEARL for registration as a national securities exchange be, and it hereby is, granted. It is furthered ordered that operation of MIAX PEARL is conditioned on the satisfaction of the requirements below: A. Participation in National Market System Plans Relating to Options Trading. MIAX PEARL must join: (1) The Plan for the Reporting of Consolidated Options Last Sale Reports and Quotation Information (Options Price Reporting Authority); (2) the OLPP; (3) the Linkage Plan; (4) the Plan of the Options Regulatory Surveillance Authority; and (5) the Plan Governing the Consolidated Audit Trail; B. Participation in Multiparty Rule 17d-2 Plans. MIAX PEARL must become a party to the multiparty Rule 17d-2 agreements concerning options sales practice regulation and market surveillance, and covered Regulation NMS rules; C. Participation in the Options Clearing Corporation. MIAX PEARL must become an Options Clearing Corporation participant exchange; and D. Participation in the Intermarket Surveillance Group. MIAX PEARL must join the Intermarket Surveillance Group. It is further ordered, pursuant to Section 36 of the Act,\242\ that MIAX PEARL shall be exempted from the rule filing requirements of Section 19(b) of the Act with respect to the MIAX Exchange, CBOE, NYSE and FINRA rules that MIAX PEARL proposes to incorporate by reference, subject to the conditions specified in this order that MIAX PEARL provide written notice to MIAX PEARL members whenever MIAX Exchange, CBOE, NYSE or FINRA proposes to change an incorporated by reference rule and when the Commission approves any such changes. --------------------------------------------------------------------------- \242\ 15 U.S.C. 78mm. By the Commission. Brent J. Fields, Secretary. [FR Doc. 2016-30538 Filed 12-19-16; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices 92901
exercise or conversion thereof, pursuant 16. Applicant represents that the pursuant to compensation plans) during
to an executive compensation plan withholding provisions in the Plan do the term of the Plan.
which meets the requirements of section not raise concerns about preferential 5. The Board will review the Plan at
61(a)(3)(B) of the Act. Applicant submits treatment of Applicant’s insiders least annually. In addition, the Board
that the issuance of Restricted Stock because the Plan is a bona fide will review periodically the potential
pursuant to the Plan poses no greater compensation plan of the type that is impact that the issuance of Restricted
risk to stockholders than the issuances common among corporations generally. Stock under the Plan could have on the
permitted by section 57(j)(1) of the Act. Furthermore, the vesting schedule is Fund’s earnings and net asset value per
determined at the time of the initial share, such review to take place prior to
Section 23(c)
grant of the Restricted Stock and the any decisions to grant Restricted Stock
13. Section 23(c) of the Act, which is option exercise price is determined at under the Plan, but in no event less
made applicable to BDCs by section 63 the time of the initial grant of the
of the Act, generally prohibits a BDC frequently than annually. Adequate
Options. Applicant represents that all procedures and records will be
from purchasing any securities of which purchases may be made only as
it is the issuer except in the open market maintained to permit such review. The
permitted by the Plan, which has been Board will be authorized to take
pursuant to tenders, or under other approved by the Fund’s stockholders.
circumstances as the Commission may appropriate steps to ensure that the
Applicant believes that granting the issuance of Restricted Stock under the
permit to ensure that the purchases are requested relief would be consistent
made in a manner or on a basis that Plan will be in the best interest of the
with the policies underlying the Fund and its shareholders. This
does not unfairly discriminate against provisions of the Act permitting the use
any holders of the class or classes of authority will include the authority to
of equity compensation as well as prior
securities to be purchased. Applicant prevent or limit the granting of
exemptive relief granted by the
states that the withholding or purchase additional Restricted Stock under the
Commission under section 23(c) of the
of shares of Restricted Stock and Plan. All records maintained pursuant
Act.
common stock in payment of applicable to this condition will be subject to
withholding tax obligations or of Applicant’s Conditions examination by the Commission and its
common stock in payment for the Applicant agrees that the order staff.
exercise price of an Option might be granting the requested relief will be For the Commission, by the Division of
deemed to be purchases by the Fund of subject to the following conditions: Investment Management, under delegated
its own securities within the meaning of 1. The Plan will be authorized by the authority.
section 23(c) and therefore prohibited Fund’s shareholders. Brent J. Fields,
by the Act. 2. Each issuance of Restricted Stock to Secretary.
14. Section 23(c)(3) of the Act permits a Participant will be approved by the [FR Doc. 2016–30539 Filed 12–19–16; 8:45 am]
a BDC to purchase securities of which Required Majority on the basis that such BILLING CODE 8011–01–P
it is the issuer in circumstances in grant is in the best interest of the Fund
which the repurchase is made in a and its shareholders.
manner or on a basis that does not 3. The amount of voting securities SECURITIES AND EXCHANGE
unfairly discriminate against any that would result from the exercise of all COMMISSION
holders of the class or classes of of the Fund’s outstanding warrants,
securities to be purchased. Applicant Options and rights, together with any
[Release No. 34–79543; File No. 10–227]
believes that the requested relief meets Restricted Stock issued pursuant to the
the standards of section 23(c)(3). Plan, at the time of issuance shall not In the Matter of the Application of MIAX
15. Applicant submits that these exceed 25% of the outstanding voting PEARL, LLC for Registration as a
purchases will be made in a manner that securities of the Fund, except that if the National Securities Exchange;
does not unfairly discriminate against amount of voting securities that would Findings, Opinion, and Order of the
Applicant’s stockholders because result from the exercise of all of the Commission
Applicant will use the closing sales Fund’s outstanding warrants, Options
price of its shares of common stock on and rights issued to the Fund’s December 13, 2016.
the New York Stock Exchange (or any directors, officers and employees,
I. Introduction
primary exchange on which its shares of together with any Restricted Stock
common stock may be traded in the issued pursuant to the Plan, would On August 12, 2016, MIAX PEARL,
future) as the ‘‘fair market value’’ of its exceed 15% of the outstanding voting LLC (‘‘MIAX PEARL’’ or ‘‘Exchange’’)
common stock under the Plan (i.e., the securities of the Fund, then the total submitted to the Securities and
public market price on the date of grant amount of voting securities that would Exchange Commission (‘‘Commission’’)
of Restricted Stock and the date of grant result from the exercise of all an application for Registration as a
of Options). Applicant submits that outstanding warrants, Options and National Securities Exchange (‘‘Form 1
because all transactions with respect to rights, together with any Restricted Application’’) under Section 6 of the
the Plan will take place at the public Stock issued pursuant to the Plan, at the Securities Exchange Act of 1934
market price for the Fund’s common time of issuance shall not exceed 20% (‘‘Exchange Act’’), seeking registration
stock, these transactions will not be of the outstanding voting securities of as a national securities exchange under
significantly different than could be the Fund. Section 6 of the Exchange Act.1 Notice
achieved by any stockholder selling in 4. The maximum amount of shares of
mstockstill on DSK3G9T082PROD with NOTICES
of the Form 1 Application was
a transaction on the New York Stock Restricted Stock that may be issued published for comment in the Federal
Exchange. Applicant represents that no under the Plan will be 10% of the Register on September 14, 2016,2 and
transactions will be conducted pursuant outstanding shares of common stock of the Commission received no comments.
to the requested order on days where the Fund on the effective date of the
there are no reported market Plan plus 10% of the number of shares 1 15U.S.C. 78f.
transactions involving Applicant’s of the Fund’s common stock issued or 2 SeeSecurities Exchange Act Release No. 78793
shares. delivered by the Fund (other than (September 8, 2016), 81 FR 63238 (‘‘Notice’’).
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![92902 Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices
II. Statutory Standards business and affairs, including • At least 20% of the directors on the
Under Sections 6(b) and 19(a) of the governance of MIAX PEARL as a self- Exchange Board will be Member
Act,3 the Commission shall by order regulatory organization (‘‘SRO’’).7 Representative Directors.15
grant an application for registration as a Under the By-Laws of MIAX PEARL For the interim board (discussed
national securities exchange if the (‘‘MIAX PEARL By-Laws’’): 8 below), and subsequently at the first
Commission finds, among other things, annual meeting and each annual
• The Exchange Board will be meeting thereafter, Miami International
that the proposed exchange is so composed of not less than ten
organized and has the capacity to carry Holdings, Inc. (‘‘Miami Holdings’’), as
directors; 9 the sole LLC Member of MIAX PEARL,
out the purposes of the Act and to
comply, and to enforce compliance by • One director will be the Chief will elect the MIAX PEARL Board
its members and persons associated Executive Officer of MIAX PEARL; 10 pursuant to the MIAX PEARL By-
with its members, with the provisions of • The number of Non-Industry Laws.16 In addition, Miami Holdings
the Act, the rules and regulations Directors,11 including at least one will appoint the initial Nominating
thereunder, and the rules of the Independent Director,12 will equal or Committee 17 and Member Nominating
exchange. exceed the sum of the number of Committee,18 consistent with each
As discussed in greater detail below, Industry Directors 13 and Member committee’s compositional
the Commission finds that MIAX Representative Directors; 14 and requirements,19 to nominate candidates
PEARL’s application for exchange for election to the Exchange Board. Each
registration meets the requirements of 7 See MIAX PEARL By-Laws, Section 2.1. See also
of the Nominating Committee and
the Act and the rules and regulations MIAX PEARL LLC Agreement, Section 8(b). Member Nominating Committee, after
thereunder. Further, the Commission 8 The MIAX PEARL By-Laws are included in the completion of its respective duties for
finds that the proposed rules of MIAX Amended and Restated Limited Liability Company nominating directors for election to the
PEARL are consistent with Section 6 of Agreement of MIAX PEARL (‘‘MIAX PEARL LLC Board for that year, shall nominate
Agreement’’).
the Act in that, among other things, they 9 See MIAX PEARL By-Laws, Article II, Section
candidates to serve on the succeeding
assure a fair representation of the 2.2(a). year’s Nominating Committee or
Exchange’s members in the selection of 10 See MIAX PEARL By-Laws, Article II, Section Member Nominating Committee, as
its directors and administration of its 2.2(b). applicable. Additional candidates for
affairs and provide that one or more 11 ‘‘Non-Industry Director’’ means a Director who
the Member Nominating Committee
directors will be representative of is an Independent Director or any other individual may be nominated and elected by MIAX
who would not be an Industry Director. See MIAX
issuers and investors and not be PEARL By-Laws, Article I(aa). PEARL members pursuant to a petition
associated with a member of the 12 ‘‘Independent Director’’ means a ‘‘Director who process.20
exchange, or with a broker or dealer; 4 has no material relationship with [MIAX PEARL] or The Nominating Committee will
and that they are designed to prevent any affiliate of [MIAX PEARL], or any [MIAX nominate candidates for each director
PEARL member] or any affiliate of any such [MIAX position, and Miami Holdings, as the
fraudulent and manipulative acts and PEARL member]; provided, however, that an
practices, promote just and equitable individual who otherwise qualifies as an sole LLC Member, will elect those
principles of trade, foster cooperation Independent Director shall not be disqualified from directors. For Member Representative
and coordination with persons engaged serving in such capacity solely because such Director positions, the Nominating
Director is a Director of [MIAX PEARL] or [Miami Committee will nominate those
in regulating, clearing, settling, Holdings].’’ See MIAX PEARL By-Laws, Article I(p).
processing information with respect to, 13 An ‘‘Industry Director’’ is, among other things, candidates submitted to it, and
and facilitating transactions in a Director that is or has served within the prior approved, by the Member Nominating
securities, and remove impediments to three years as an officer, director, employee, or Committee.21 Additional candidates,
and perfect the mechanisms of a free owner of a broker or dealer, as well as any Director
who has, or has had, a consulting or employment 15 See MIAX PEARL By-Laws, Article II, Section
and open market and a national market relationship with MIAX PEARL or any affiliate of 2.2(b)(ii).
system and, in general, protect investors MIAX PEARL within the prior three years. See 16 See MIAX PEARL By-Laws, Article II, Section
and the public interest and are not MIAX PEARL By-Laws, Article I(r). This definition
2.4. See also MIAX PEARL LLC Agreement, Section
designed to permit unfair is consistent with what the Commission has
9(a).
approved for other exchanges. See Securities
discrimination between customers, Exchange Act Release Nos. 68341 (December 3,
17 The Nominating Committee will be comprised
issuers, or broker-dealers.5 Finally, the 2012), 77 FR 73065 (December 7, 2012) (File No. of at least three directors, and the number of Non-
Industry members on the Nominating Committee
Commission finds that MIAX PEARL’s 10–207) (order granting the registration of MIAX
must equal or exceed the number of Industry
proposed rules do not impose any Exchange) (‘‘MIAX Order’’); 58375 (August 18,
2008), 73 FR 49498 (August 21, 2008) (File No. 10– members. See MIAX PEARL By-Laws, Article V,
burden on competition not necessary or 182) (order granting the registration of BATS Section 5.2. See also MIAX PEARL By-Laws, Article
appropriate in furtherance of the Exchange, Inc.) (‘‘BATS Order’’); and 66871 (April IV, Section 4.2(a).
18 The Member Nominating Committee will be
purposes of the Act.6 27, 2012), 77 FR 26323 (May 3, 2012) (File No. 10–
206) (order granting the registration of BOX Options comprised of at least three directors, and each
III. Discussion Exchange LLC) (‘‘BOX Order’’). member of the Member Nominating Committee
14 See MIAX PEARL By-Laws, Article II, Section shall be a Member Representative member and shall
A. Governance of MIAX PEARL 2.2 (b)(i). ‘‘Member Representative Director’’ means not be required to be a Director of the Exchange.
a Director who has been appointed by Miami See MIAX PEARL By-Laws, Article V, Section 5.3.
1. MIAX PEARL Board of Directors International Holdings, Inc. as an initial Director See also MIAX PEARL By-Laws, Article IV, Section
pursuant to Section 2.5 of the MIAX PEARL By- 4.2(a). Pursuant to MIAX PEARL By-Laws, Article
The board of directors of MIAX I(y), a ‘‘Member Representative member’’ is a
Laws to serve until the first annual meeting or who
PEARL (‘‘Exchange Board’’ or ‘‘MIAX ‘‘has been elected by the Miami International member of any committee or hearing panel
PEARL Board’’) will be its governing Holdings, Inc. after having been nominated by the appointed by the Exchange Board who has been
mstockstill on DSK3G9T082PROD with NOTICES
body and will possess all of the powers Member Nominating Committee or by an Exchange elected or appointed after having been nominated
Member pursuant to [the] By-Laws and confirmed by the Member Nominating Committee pursuant to
necessary for the management of its the By-Laws and who is an officer, director,
as the nominee of Exchange Members after majority
vote of Exchange Members, if applicable. A Member employee, or agent of an Exchange Member.
3 15 U.S.C. 78f(b) and 15 U.S.C. 78s(a), 19 See MIAX PEARL By-Laws, Article V, Section
Representative Director may, but is not required to
respectively. be, an officer, director, employee, or agent of an 5.1.
4 See 15 U.S.C. 78f(b)(3). 20 See id.
Exchange Member.’’ See MIAX PEARL By-Laws,
5 See 15 U.S.C. 78f(b)(5). 21 The Member Nominating Committee will
Article I(x). See also MIAX PEARL By-Laws Article
6 See 15 U.S.C. 78f(b)(8). II, Section 2.5. solicit comments from MIAX PEARL members for
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maintained in the United States 80 and, the governance and other provisions out the purposes of the Act.91
to the extent they are related to the that are the subject of this Order. Specifically, an exchange must be able
operation or administration of MIAX Further, Section 19(h)(1) of the Act 86 to enforce compliance by its members,
PEARL, Miami Holdings books and provides the Commission with the and persons associated with its
records will be subject at all times to authority ‘‘to suspend for a period not members, with the Act and the rules
inspection and copying by the exceeding twelve months or revoke the and regulations thereunder and the
Commission.81 registration of [an SRO], or to censure or rules of the exchange.92 The discussion
• Furthermore, to the extent they impose limitations upon the activities, below summarizes how MIAX PEARL
relate to the activities of MIAX PEARL, functions, and operations of [an SRO], if proposes to structure and conduct its
the books, records, premises, officers, [the Commission] finds, on the record regulatory operations.
directors, employees, and agents of after notice and opportunity for hearing,
Miami Holdings will be deemed to be that [the SRO] has violated or is unable a. Regulatory Oversight Committee
the books, records, premises, officers, to comply with any provision of the Act, The regulatory operations of MIAX
directors, employees, and agents of the rules or regulations thereunder, or PEARL will be monitored by the
MIAX PEARL, for purposes of, and its own rules or without reasonable Regulatory Oversight Committee of the
subject to oversight pursuant to, the justification or excuse has failed to Exchange Board. The Regulatory
Act.82 enforce compliance’’ with any such Oversight Committee will consist of at
• Miami Holdings will take necessary provision by its members (including least three directors, all of whom will be
steps to cause its officers, directors, associated persons thereof).87 If Non-Industry Directors. The Regulatory
employees, and agents, prior to Commission staff were to find, or Oversight Committee will be
accepting a position as an officer, become aware of, through staff review responsible for overseeing the adequacy
director, employee or agent (as and inspection or otherwise, facts and effectiveness of MIAX PEARL’s
applicable) to consent in writing to the indicating any violations of the Act, regulatory and SRO responsibilities,
applicability of provisions regarding including without limitation Sections assessing MIAX PEARL’s regulatory
books and records, confidentiality, 6(b)(1) and 19(g)(1), these matters could performance, and assisting the Exchange
jurisdiction, and regulatory obligations, provide the basis for a disciplinary Board (and committees of the Exchange
with respect to their activities related to proceeding under Section 19(h)(1) of the Board) in reviewing MIAX PEARL’s
MIAX PEARL.83 Act. regulatory plan and the overall
• Miami Holdings Certificate and By- The Commission also notes that, even effectiveness of MIAX PEARL’s
Laws require that, so long as Miami in the absence of the governance regulatory functions.93
Holdings controls MIAX PEARL, any provisions described above, under Further, a Chief Regulatory Officer
changes to those documents be Section 20(a) of the Act, any person (‘‘CRO’’) of MIAX PEARL will have
submitted to the MIAX PEARL Board, with a controlling interest in MIAX general day-to-day supervision over
and, if such change is required to be PEARL would be jointly and severally MIAX PEARL’s regulatory operations.94
filed with the Commission pursuant to liable with and to the same extent that The Regulatory Oversight Committee
Section 19(b) of the Act and the rules MIAX PEARL is liable under any also will be responsible for
and regulations thereunder, such change provision of the Act, unless the recommending compensation and
shall not be effective until filed with, or controlling person acted in good faith personnel actions involving the CRO
filed with and approved by, the and did not directly or indirectly induce and senior regulatory personnel to the
Commission.84 the act or acts constituting the violation Compensation Committee of MIAX
The Commission believes that the PEARL for action.95 The CRO will report
or cause of action.88 In addition, Section
provisions discussed in this section, to the Regulatory Oversight
20(e) of the Act creates aiding and
which are designed to help maintain the Committee.96
abetting liability for any person who
independence of MIAX PEARL’s
regulatory function and help facilitate knowingly provides substantial b. Regulatory Funding
the ability of MIAX PEARL to carry out assistance to another person in violation
of any provision of the Act or rule To help assure the Commission that it
its regulatory responsibilities and has and will continue to have adequate
operate in a manner consistent with the thereunder.89 Further, Section 21C of
the Act authorizes the Commission to funding to be able to meet its
Act, are appropriate and consistent with responsibilities under the Act, MIAX
the requirements of the Act, particularly enter a cease-and-desist order against
any person who has been ‘‘a cause of’’ PEARL represents in its Form 1
with Section 6(b)(1), which requires, in Application that, prior to beginning
part, an exchange to be so organized and a violation of any provision of the Act
through an act or omission that the operations as a national securities
have the capacity to carry out the exchange, Miami Holdings will provide
purposes of the Act.85 Whether MIAX person knew or should have known
would contribute to the violation.90 sufficient funding to MIAX PEARL for
PEARL operates in compliance with the the exchange to carry out its
Act, however, depends on how it and These provisions are applicable to all
Miami Holdings in practice implement entities’ dealings with MIAX PEARL,
91 See Section 6(b)(1) of the Act, 15 U.S.C.
including Miami Holdings.
78f(b)(1).
80 See MIAX PEARL By-Laws, Article X, Section
3. Regulation of MIAX PEARL 92 See id. See also Section 19(g) of the Act, 15
10.4; and Miami Holdings By-Laws, Article VII, U.S.C. 78s(g).
Section 3. As a prerequisite to the Commission’s 93 See MIAX PEARL By-Laws, Article IV, Section
81 See Miami Holdings By-Laws, Article VII,
granting of an exchange’s application for 4.5(c). The Regulatory Oversight Committee is
mstockstill on DSK3G9T082PROD with NOTICES
Section 3. registration, an exchange must be so responsible for reviewing MIAX PEARL’s regulatory
82 See Miami Holdings By-Laws, Article VII, budget, and also will meet regularly with the Chief
Section 3.
organized and have the capacity to carry Regulatory Officer. See id.
83 See Miami Holdings By-Laws, Article VII, 94 See MIAX PEARL By-Laws, Article VI, Section
86 See 15 U.S.C. 78s(h)(1).
Section 6. 6.10.
84 See Miami Holdings Certificate, Article VIII; 87 See id. 95 See MIAX PEARL By-Laws, Article IV, Section
88 15 U.S.C. 78t(a).
and Miami Holdings By-Laws, Article XII, Section 4.5(c).
1. 89 15 U.S.C. 78t(e). 96 See MIAX PEARL By-Laws, Article VI, Section
85 15 U.S.C. 78f(b)(1). 90 15 U.S.C. 78u–3. 6.10.
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![92908 Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices
responsibilities under the Act.97 c. Rule 17d–2 Agreements; Regulatory A 17d–2 plan that is declared
Specifically, MIAX PEARL represents Contract With FINRA effective by the Commission relieves the
that Miami Holdings has allocated Unless the SRO is relieved of this specified SRO of those regulatory
sufficient operational assets to enable its responsibility pursuant to Section 17(d) responsibilities allocated by the plan to
operation and that prior to launching or Section 19(g)(2) of the Act,102 Section another SRO.108 MIAX PEARL has
operations, Miami Holdings will make a 19(g)(1) of the Act, among other things, represented to the Commission that it
capital contribution of not less than requires every SRO registered as a intends to become a party to the existing
$5,000,000 into MIAX PEARL’s capital national securities exchange, absent multiparty options Rule 17d–2 plans
account, in addition to any previously- reasonable justification or excuse, to concerning sales practice regulation and
provided in-kind contributions, such as enforce compliance by its members and market surveillance.109 MIAX PEARL
legal, regulatory, and infrastructure- persons associated with its members has also represented that it will enter
related services.98 MIAX PEARL with the Act, the rules and regulations into a bi-lateral 17d–2 agreement to
thereunder, and the SRO’s own rules.103 allocate regulatory responsibility to
represents that such cash and in-kind
Section 17(d) of the Act and Rule 17d– FINRA for common rules of dual
contributions by Miami Holdings will
2 thereunder permit SROs to propose members between MIAX PEARL and
be adequate to begin operation of the FINRA. Under these agreements, the
Exchange, including the regulation of joint plans to allocate regulatory
responsibilities among themselves for examining SROs will examine firms that
the Exchange. are common members of MIAX PEARL
their common rules with respect to their
MIAX PEARL also represents in its common members.104 These and the particular examining SRO for
Form 1 application that there is a agreements, which must be filed with compliance with certain provisions of
written agreement between MIAX and declared effective by the the Act, certain rules and regulations
PEARL and Miami Holdings that Commission, generally cover areas adopted thereunder, and certain MIAX
requires Miami Holdings to provide where each SRO’s rules substantively PEARL Rules.
adequate funding for MIAX PEARL’s overlap, including such regulatory In addition, MIAX PEARL has
ongoing operations, including the functions as personnel registration and represented that it will enter into a
regulation of MIAX PEARL. This sales practices. Without this relief, the Regulatory Services Agreement (‘‘RSA’’)
agreement provides that MIAX PEARL statutory obligation of each individual with FINRA, under which FINRA will
will receive all fees, including SRO could result in a pattern of perform certain regulatory functions on
regulatory fees and trading fees, payable multiple examinations of broker-dealers behalf of MIAX PEARL.110 Pursuant to
by MIAX PEARL’s members, as well as that maintain memberships in more the RSA, FINRA, in its capacity as
any funds received from any applicable than one SRO.105 Such regulatory service provider to MIAX PEARL, will
duplication would add unnecessary perform various services on MIAX
market data fees and OPRA tape
expense for common members and their PEARL’s behalf, including assisting
revenue. The agreement further
SROs. A 17d–2 plan that is declared MIAX PEARL with member registration
provides that Miami Holdings will and related administrative support
reimburse MIAX PEARL for its costs effective by the Commission relieves the
specified SRO of those regulatory services; certain cross-market
and expenses to the extent MIAX surveillance services; certain options
PEARL’s assets are insufficient to meets responsibilities allocated by the plan to
another SRO.106 Many SROs have trading examinations; at MIAX PEARL’s
its costs and expenses.99 request, investigating potential
entered into Rule 17d–2 agreements.107
Further, any revenues received by violations of enumerated MIAX PEARL
MIAX PEARL from fees derived from its 102 15 U.S.C. 78q(d) and 15 U.S.C. 78s(g)(2), market rules, as well as federal
regulatory function or regulatory respectively. securities laws, and rules and
penalties will not be used for non- 103 15 U.S.C. 78s(g)(1). regulations thereunder, related to MIAX
regulatory purposes.100 Any excess
104 See Section 17(d)(1) of the Act and Rule 17d–
PEARL market activity; performing
2 thereunder, 15 U.S.C. 78q(d)(1) and 17 CFR examinations of options, including
funds, as determined by MIAX PEARL, 240.17d–2. Section 17(d)(1) of the Act allows the
may be remitted to Miami Holdings, Commission to relieve an SRO of certain routine and for cause examinations of
however ‘‘Regulatory Funds’’ will not be responsibilities with respect to members of the SRO
who are also members of another SRO. Specifically, FR 63752 (October 27, 2008) (File No. 4–569)
remitted to Miami Holdings.101 Section 17(d)(1) allows the Commission to relieve (FINRA/BATS Exchange, Inc.); 55755 (May 14,
an SRO of its responsibilities to: (i) Receive 2007), 72 FR 28087 (May 18, 2007) (File No. 4–536)
97 See MIAX PEARL Form 1 Application, Exhibit regulatory reports from such members; (ii) examine (National Association of Securities Dealers, Inc.
I. such members for compliance with the Act and the (‘‘NASD’’) (n/k/a FINRA) and Chicago Board of
98 See
id. rules and regulations thereunder, and the rules of Options Exchange, Inc. concerning the CBOE Stock
99 See
the SRO; or (iii) carry out other specified regulatory Exchange, LLC); 55367 (February 27, 2007), 72 FR
id.
responsibilities with respect to such members. 9983 (March 6, 2007) (File No. 4–529) (NASD/
100 See MIAX PEARL By-Laws, Article IX, Section
105 Section 17(d) was intended, in part, to International Securities Exchange, LLC); and 54136
9.4. eliminate unnecessary multiple examinations and (July 12, 2006), 71 FR 40759 (July 18, 2006) (File
101 See MIAX PEARL Form 1 Application, Exhibit
regulatory duplication with respect to Common No. 4–517) (NASD/The Nasdaq Stock Market LLC).
I. See also MIAX PEARL LLC Agreement, Section Members. See Securities Exchange Act Release No. 108 See supra notes 104–105.
16; and MIAX PEARL By-Laws, Article IX, Section 12935 (October 28, 1976), 41 FR 49091 (November 109 See MIAX PEARL Form 1 Application, Exhibit
9.4. MIAX PEARL By-Laws, Article 1(gg) defines 8, 1976). L. See also Securities Exchange Act Release No.
‘‘Regulatory Funds’’ as ‘‘fees, fines, or penalties 106 See id. 68363 (December 5, 2012), 77 FR 73711 (December
derived from the regulatory operations of [MIAX 107 See, e.g., Securities Exchange Act Release Nos. 11, 2012) (File No. S7–966) (notice of filing and
PEARL]’’, but such term does not include ‘‘revenues 77321 (March 8, 2016), 81 FR 13434 (March 14, order approving and declaring effective an
mstockstill on DSK3G9T082PROD with NOTICES
derived from listing fees, market data revenues, 2016) (File No. 4–697) (Financial Industry amendment to the multiparty 17d–2 plan
transaction revenues, or any other aspect of the Regulatory Authority, Inc. (‘‘FINRA’’)/ISE Mercury, concerning options-related sales practice matters);
commercial operations of [MIAX PEARL], even if LLC), 73641 (November 19, 2014), 79 FR 70230 and 68362 (December 5, 2012), 77 FR 73719
such revenues are used to pay costs associated with (November 25, 2014) (File No. 4–678) (FINRA/ (December 11, 2012) (File No. 4–551) (notice of
the regulatory operations of [MIAX PEARL].’’ This MIAX Exchange); 70053 (July 26, 2013), 78 FR filing and order approving and declaring effective
definition is consistent with the rules of other 46656 (August 1, 2013) (File No. 4–663) (FINRA/ISE an amendment to the multiparty 17d–2 plan
SROs. See, e.g., By-Laws of MIAX Exchange, Article Gemini, LLC); 59218 (January 8, 2009), 74 FR 2143 concerning options-related market surveillance).
I(ll); By-Laws of NASDAQ PHLX LLC, Article I(ii); (January 14, 2009) (File No. 4–575) (FINRA/Boston 110 See MIAX PEARL Form 1 Application,
and By-Laws of NASDAQ BX, Inc., Article I(ii). Stock Exchange, Inc.); 58818 (October 20, 2008), 73 Exhibit L.
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![92910 Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices
the public.131 Applicants who are maintain and implement policies and traded on the Exchange.144 Market
denied membership may appeal MIAX procedures to supervise and monitor Makers are entitled to receive certain
PEARL’s decision pursuant to MIAX sponsored trading activity.139 benefits and privileges in exchange for
PEARL’s rules governing Hearings, Additionally, non-Members who seek to fulfilling certain affirmative and
Review, and Arbitration.132 Every trade on MIAX PEARL through negative market-making obligations. To
Member will be subject to MIAX Sponsored Access agreements will need begin the process of registering as a
PEARL’s regulatory jurisdiction, to agree to comply with all applicable Market Maker, a Member will be
including MIAX PEARL’s disciplinary federal securities laws and rules and required to file a written application
jurisdiction.133 Exchange rules.140 MIAX PEARL’s rules with MIAX PEARL.145 MIAX PEARL
The Commission finds that MIAX governing Sponsored Access will consider an applicant’s market
PEARL’s proposed membership rules arrangements are similar to the rules of making ability and other factors it
are consistent with the Act, including other exchanges.141 deems appropriate in determining
Section 6(b)(2) of the Act, which whether to approve an applicant’s
requires the rules of an exchange to 2. Linkage
registration.146 All Market Makers will
provide that any registered broker or MIAX PEARL intends to become a be designated as specialists on MIAX
dealer or natural person associated with participant in the Plan Relating to PEARL for all purposes under the Act
a broker or dealer may become a Options Order Protection and Locked/ and rules thereunder.147 The Exchange
member of such exchange or associated Crossed Markets or any successor plan will not place any limit on the number
with a member thereof.134 MIAX (‘‘Linkage Plan’’).142 If admitted as a of entities that may become Market
PEARL’s proposed rules with respect to participant to the Linkage Plan, other Makers.148 The good standing of a
exchange membership are substantively plan participants would be able to send Market Maker may be suspended,
similar to the rules of other exchanges. orders to MIAX PEARL in accordance terminated or otherwise withdrawn if
The Commission notes that pursuant with the terms of the plan as applied to the conditions for approval cease to be
to Section 6(c) of the Act,135 an the Exchange. The MIAX PEARL Rules maintained or the Market Maker violates
exchange must deny membership to any include relevant definitions, establish any of its agreements with MIAX PEARL
person, other than a natural person, that the conditions pursuant to which or any provisions of the MIAX PEARL
is not a registered broker or dealer, any members may enter orders in Rules.149 A Member that has qualified
natural person that is not, or is not accordance with the Linkage Plan, as a Market Maker may register to make
associated with, a registered broker or impose obligations on the Exchange markets in individual series of
dealer, and registered broker-dealers regarding how it must process incoming
options.150
that do not satisfy certain standards, orders, establish a general standard that
The Commission finds that the MIAX
such as financial responsibility or members and MIAX PEARL should
PEARL qualification requirements are
operational capacity. As a registered avoid trade-throughs, establish potential
consistent with the Act. MIAX PEARL’s
exchange, MIAX PEARL must regulatory liability for members that
rules provide an objective process by
independently determine if an applicant engage in a pattern or practice of trading
which a Member could become a Market
satisfies the standards set forth in the through other exchanges, and establish
Maker on MIAX PEARL. The
Act, regardless of whether an applicant obligations with respect to locked and
Commission notes that MIAX PEARL’s
is a member of another SRO.136 crossed markets.
The Commission believes that MIAX proposed Market Maker qualification
In addition, Members may enter into requirements are similar to those of
arrangements with other parties, PEARL has proposed rules that are
designed to comply with the other options exchanges.151
including non-Members and other
Members, to provide ‘‘Sponsored requirements of the Linkage Plan.143 b. Market Maker Obligations
Access’’ to trading on MIAX PEARL.137 Further, as provided below, before
MIAX PEARL can commence operations Pursuant to MIAX PEARL rules, there
Members who provide such Sponsored will be one class of Market Makers. All
Access will be responsible for all as a national securities exchange, it
must become a participant in the Market Makers will be subject to a
trading conducted pursuant to the number of general obligations. In
access agreement, and to the same Linkage Plan.
particular, the transactions of a Market
extent as if the Member were trading 3. Market Makers Maker must constitute a course of
directly.138 Accordingly, Members that dealings reasonably calculated to
provide Sponsored Access must a. Registration of Market Makers
contribute to the maintenance of a fair
MIAX PEARL Members may register and orderly market.152 Among other
131 See MIAX PEARL Rules Chapter XIII as Market Makers for the purpose of things, a Market Maker must: (1)
(incorporating by reference Chapter XIII of the making markets in options contracts
MIAX Exchange Rules). Chapter XIII of the MIAX
144 See MIAX PEARL Rule 600.
Exchange Rules also are similar to the rules of other 139 See
exchanges. See, e.g., ISE Rules Chapter 6. MIAX PEARL Rule 210(b)–(c). 145 See MIAX PEARL Rule 600(a).
140 See MIAX PEARL Rule 210(b). See also, e.g.,
132 See MIAX PEARL Rules Chapter XI 146 See id. The provision permitting MIAX PEARL
(incorporating by reference Chapter XI of the MIAX 17 CFR 240.15c3–5. to consider ‘‘such other factors as [it] deems
141 See, e.g., MIAX Exchange Rule 210 and
Exchange Rules). appropriate’’ must be applied in a manner that is
133 See MIAX PEARL Rule 200(g). For MIAX NASDAQ Stock Market LLC Rule 4615. consistent with the Act, including provisions that
142 See MIAX PEARL Form 1 Application, Exhibit
PEARL’s rules concerning discipline, see Chapter X prohibit an exchange from acting in an unfairly
of the MIAX PEARL Rules. E. See also Securities Exchange Act Release No. discriminatory manner. See 15 U.S.C. 78f(b)(5); see
134 15 U.S.C. 78f(b)(2). 60405 (July 30, 2009), 74 FR 39362 (August 6, 2009) also C2 Order, supra note 75.
(File No. 4–546) (order approving the national
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135 15 U.S.C. 78f(c). 147 See MIAX PEARL Rule 600.
market system Plan Relating to Options Order 148 See MIAX PEARL Rule 600(c).
136 See, e.g., ISE Mercury Order, supra note 27,
Protection and Locked/Crossed Markets Submitted 149 See MIAX PEARL Rule 603(b).
at 6076; ISE Gemini Order, supra note 27, at 46633; by the Chicago Board Options Exchange,
MIAX Order, supra note 13, at 73074; BOX Order, Incorporated, ISE, The NASDAQ Stock Market LLC, 150 See MIAX PEARL Rule 602(a).
supra note 14, at 26337; BATS Order, supra note NASDAQ OMX BX, Inc., NASDAQ OMX PHLX, 151 See, e.g., Bats BZX Exchange, Inc. (‘‘Bats
13, at 49502; and Nasdaq Order, supra note 27, at Inc., NYSE Amex LLC, and NYSE Arca, Inc.). BZX’’) Rules 22.2, 22.3 and 22.4, and NASDAQ
3555. 143 See Chapter XIV of the MIAX PEARL Rules Options Market Rules, Chapter VII, Sections 2, 3,
137 See MIAX PEARL Rule 210. and 4.
(incorporating by reference Chapter XIV of the
138 See MIAX PEARL Rule 210(b). MIAX Exchange Rules). 152 See MIAX PEARL Rule 604(a).
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![92914 Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices
exchange member who is unaffiliated must comply with this condition in MIAX PEARL will conduct a hearing on
with the member initiating the order. order to rely on the rule’s exemption.209 disciplinary matters before a
The Commission has stated that the professional hearing officer 217 and two
D. Discipline and Oversight of Members
requirement is satisfied when members of the Business Conduct
automated exchange facilities, such as As noted above, one prerequisite for Committee 218 (the ‘‘Panel’’).219 The
the MIAX PEARL trading system, are the Commission’s grant of an exchange’s MIAX PEARL member (or their
application for registration is that a associated person) or the MIAX PEARL
used, as long as the design of these
proposed exchange must be so regulatory staff may petition for review
systems ensures that members do not
organized and have the capacity to be of the decision of the Panel by the MIAX
possess any special or unique trading able to carry out the purposes of the
advantages over non-members in PEARL Board.220 Any review would be
Act.210 Specifically, an exchange must conducted by the MIAX PEARL Board
handling their orders after transmitting be able to enforce compliance by its
them to the Exchange.206 MIAX PEARL or a committee thereof composed of at
members and persons associated with least three Directors of the MIAX PEARL
has represented that the design of its its members with the Act and the rules
trading system ensures that no member Board 221 (whose decision must be
and regulations thereunder and the ratified by the MIAX PEARL Board) and
has any special or unique trading rules of the exchange.211 such decision will be final.222 In
advantage over non-members in the MIAX PEARL’s rules codify MIAX
addition, the MIAX PEARL Board on its
handling of its orders after transmitting PEARL’s disciplinary jurisdiction over
own motion may order review of a
its orders to MIAX PEARL.207 Based on its members, thereby facilitating its
disciplinary decision.223
MIAX PEARL’s representation, the ability to enforce its members’
Commission believes that the MIAX compliance with its rules and the Appeals from any determination that
PEARL trading system satisfies this federal securities laws.212 MIAX impacts access to MIAX PEARL, such as
requirement. PEARL’s rules permit it to sanction termination or suspension of
members for violations of its rules and membership, will be instituted under,
Fourth, in the case of a transaction violations of any provision of the and governed by, the provisions in the
effected for an account with respect to Exchange Act or the rules and Chapter XI of the MIAX PEARL Rules
which the initiating member or an regulations promulgated thereunder, by, which incorporates by reference Chapter
associated person thereof exercises among other things, expelling or XI of the MIAX Exchange Rules. MIAX
investment discretion, neither the suspending members; limiting members’ PEARL’s Chapter XI applies to persons
initiating member nor any associated activities, functions, or operations; economically aggrieved by any of the
person thereof may retain any fining or censuring members; following actions of MIAX PEARL
compensation in connection with suspending or barring a person from including, but not limited to: (a) Denial
effecting the transaction, unless the being associated with a member; or any of an application to become a Member;
person authorized to transact business other fitting sanction in accordance with (b) barring a person from becoming
for the account has expressly provided MIAX rules.213 associated with a Member; (c) limiting
otherwise by written contract referring MIAX PEARL’s disciplinary and or prohibiting services provided by
to Section 11(a) of the Act and Rule oversight functions will be administered MIAX PEARL or services of any
11a2–2(T).208 MIAX PEARL members in accordance with Chapter X of the exchange member.224
trading for covered accounts over which MIAX PEARL rules, which governs
disciplinary actions. Unless delegated to 217 See MIAX PEARL Rule 1015, Interpretation
they exercise investment discretion
another SRO pursuant to the terms of and Policy .01.
206 In considering the operation of automated
any effective 17d–2 plan,214 MIAX 218 See MIAX PEARL By-Laws, Article IV, Section
PEARL regulatory staff (including 4.7.
execution systems operated by an exchange, the 219 See MIAX PEARL Rule 1006.
Commission noted that while there is no regulatory staff of another SRO that may 220 See MIAX PEARL Rule 1010.
independent executing exchange member, the be acting on MIAX PEARL’s behalf 221 Specifically, the Chairman of the MIAX
execution of an order is automatic once it has been pursuant to a regulatory services PEARL Board, with the approval of the Board, shall
transmitted into each system. Because the design of agreement) will, among other things, appoint an Appeals Committee to preside over all
these systems ensures that members do not possess
any special or unique trading advantages in
investigate potential securities laws appeals related to disciplinary and adverse action
violations and initiate charges pursuant determinations. See note 46 and accompanying text
handling their orders after transmitting them to the (detailing the composition of the Appeals
exchange, the Commission has stated that to MIAX PEARL rules.215 Committee). If the Independent Director serving on
executions obtained through these systems satisfy Upon a finding of probable cause of the Appeals Committee recuses himself or herself
the independent execution requirement of Rule a violation within the disciplinary from an appeal, due to conflict of interest or
11a2–2(T). See 1979 Release, supra note 203. otherwise, the Independent Director may be
207 See MIAX PEARL 11(a) Request Letter, supra
jurisdiction of MIAX PEARL and where
replaced by a Non-Industry Director for purposes of
note 199. further proceedings are warranted,216 the applicable appeal if there is no other
208 17 CFR 240.11a2–2(T)(a)(2)(iv). In addition, Independent Director able to serve as the
209 See MIAX PEARL 11(a) Request Letter, supra
Rule 11a2–2(T)(d) requires a member or associated replacement. See MIAX PEARL By-Laws, Article IV,
person authorized by written contract to retain note 199. Section 4.5(d). See also MIAX Exchange Amended
210 See 15 U.S.C. 78f(b)(1). and Restated By-Laws, Article IV, Section 4.5(d).
compensation, in connection with effecting
211 See id. 222 See MIAX PEARL Rule 1010.
transactions for covered accounts over which such
member or associated person thereof exercises 212 See MIAX PEARL Rule 1000. 223 See id.
investment discretion, to furnish at least annually 213 See id. See also MIAX Rule 1000, CBOE Rule 224 See MIAX PEARL Rule 1100 (which
to the person authorized to transact business for the 17.1(a), and ISE Rule 1600(a) (containing similar incorporates by reference MIAX Exchange Rule
account a statement setting forth the total amount provisions). 1100). As noted above, MIAX PEARL has entered
mstockstill on DSK3G9T082PROD with NOTICES
of compensation retained by the member in 214 See supra Section III.B.3.c (concerning the into a RSA with FINRA under which FINRA will
connection with effecting transactions for the 17d–2 plans to which MIAX PEARL has committed perform certain regulatory functions on behalf of
account during the period covered by the statement. to join). MIAX PEARL. MIAX PEARL may perform some or
See 17 CFR 240.11a2–2(T)(d). See also 1978 215 See MIAX PEARL Rules 1002 and 1004. As all of the functions specified in the Chapter XI of
Release, supra note 201 (stating ‘‘[t]he contractual noted above, MIAX PEARL has entered into an RSA the MIAX PEARL Rules, which incorporates by
and disclosure requirements are designed to assure with FINRA under which FINRA will perform reference Chapter XI of the MIAX Exchange Rules.
that accounts electing to permit transaction-related certain regulatory functions on behalf of MIAX See supra note 110. See also MIAX PEARL Rule
compensation do so only after deciding that such PEARL. See MIAX PEARL Rule 1015. 1106 (which incorporates by reference MIAX
arrangements are suitable to their interests’’). 216 See MIAX PEARL Rule 1004. Exchange Rule 1106).
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![92916 Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices
granting MIAX PEARL’s request for conditions specified in this order that II. Self-Regulatory Organization’s
exemption, pursuant to Section 36 of MIAX PEARL provide written notice to Statement of the Purpose of, and
the Act, from the rule filing MIAX PEARL members whenever MIAX Statutory Basis for, the Proposed Rule
requirements of Section 19(b) of the Act Exchange, CBOE, NYSE or FINRA Change
with respect to the rules that MIAX proposes to change an incorporated by In its filing with the Commission, the
PEARL proposes to incorporate by reference rule and when the Exchange included statements
reference. The exemption is conditioned Commission approves any such concerning the purpose of and basis for
upon MIAX PEARL providing written changes. the proposed rule change and discussed
notice to MIAX PEARL members By the Commission. any comments it received on the
whenever MIAX Exchange, CBOE, Brent J. Fields, proposed rule change. The text of these
NYSE or FINRA proposes to change an statements may be examined at the
Secretary.
incorporated by reference rule and places specified in Item IV below. The
[FR Doc. 2016–30538 Filed 12–19–16; 8:45 am]
when the Commission approves any Exchange has prepared summaries, set
such changes. The Commission believes BILLING CODE 8011–01–P
forth in sections A, B, and C below, of
that the exemption is appropriate in the the most significant aspects of such
public interest and consistent with the statements.
SECURITIES AND EXCHANGE
protection of investors because it will
COMMISSION A. Self-Regulatory Organization’s
promote more efficient use of
Commission’s and SROs’ resources by [Release No. 34–79545; File No. SR–Phlx– Statement of the Purpose of, and
avoiding duplicative rule filings based 2016–118] Statutory Basis for, the Proposed Rule
on simultaneous changes to identical Change
rule text sought to be implemented by Self-Regulatory Organizations;
NASDAQ PHLX LLC; Notice of Filing 1. Purpose
more than one SRO.
and Immediate Effectiveness of On August 25, 2014, Phlx and several
V. Conclusion Proposed Rule Change To Amend Rule other self-regulatory organizations (the
It is ordered that the application of 3317 (Compliance With Regulation ‘‘Participants’’) filed with the
MIAX PEARL for registration as a NMS Plan To Implement a Tick Size Commission, pursuant to Section 11A of
national securities exchange be, and it Pilot) the Act 3 and Rule 608 of Regulation
hereby is, granted. NMS thereunder,4 the Plan to
December 14, 2016.
It is furthered ordered that operation Implement a Tick Size Pilot Program.5
of MIAX PEARL is conditioned on the Pursuant to Section 19(b)(1) of the The Participants filed the Plan to
satisfaction of the requirements below: Securities Exchange Act of 1934 comply with an order issued by the
A. Participation in National Market (‘‘Act’’),1 and Rule 19b–4 thereunder,2 Commission on June 24, 2014.6 The
System Plans Relating to Options notice is hereby given that on November Plan was published for comment in the
Trading. MIAX PEARL must join: (1) 30, 2016, NASDAQ PHLX LLC (‘‘Phlx’’ Federal Register on November 7, 2014,
The Plan for the Reporting of or ‘‘Exchange’’) filed with the Securities and approved by the Commission, as
Consolidated Options Last Sale Reports and Exchange Commission (‘‘SEC’’ or modified, on May 6, 2015.7 The
and Quotation Information (Options ‘‘Commission’’) the proposed rule Commission approved the Pilot on a
Price Reporting Authority); (2) the change as described in Items I and II two-year basis, with implementation to
OLPP; (3) the Linkage Plan; (4) the Plan below, which Items have been prepared begin no later than May 6, 2016.8 On
of the Options Regulatory Surveillance by the Exchange. The Commission is November 6, 2015, the SEC exempted
Authority; and (5) the Plan Governing publishing this notice to solicit the Participants from implementing the
the Consolidated Audit Trail; comments on the proposed rule change Pilot until October 3, 2016.9 Under the
B. Participation in Multiparty Rule from interested persons. revised Pilot implementation date, the
17d–2 Plans. MIAX PEARL must I. Self-Regulatory Organization’s Pre-Pilot data collection period
become a party to the multiparty Rule Statement of the Terms of Substance of commenced on April 4, 2016. On
17d–2 agreements concerning options the Proposed Rule Change September 13, 2016, the SEC exempted
sales practice regulation and market the Participants from the requirement to
surveillance, and covered Regulation The Exchange proposes to amend
fully implement the Pilot on October 3,
NMS rules; Phlx Rule 3317 to modify the Web site
2016, to permit the Participants to
C. Participation in the Options data publication requirements relating
implement the pilot on a phased-in
Clearing Corporation. MIAX PEARL to the Regulation NMS Plan to
basis, as described in the Participants’
must become an Options Clearing Implement a Tick Size Pilot Program
exemptive request.10
Corporation participant exchange; and (‘‘Plan’’) and to clarify a provision
D. Participation in the Intermarket related to the reporting of certain Market 3 15 U.S.C. 78k–1.
Surveillance Group. MIAX PEARL must Maker profitability data. Phlx also 4 17 CFR 242.608.
join the Intermarket Surveillance Group. proposes to amend Rule 3317(b)(5) to 5 See Letter from Brendon J. Weiss, Vice
It is further ordered, pursuant to clarify the timing and format of President, Intercontinental Exchange, Inc., to
publication of data related to Market Secretary, Commission, dated August 25, 2014.
Section 36 of the Act,242 that MIAX 6 See Securities Exchange Act Release No 72460
PEARL shall be exempted from the rule Maker registration. (June 24, 2014), 79 FR 36840 (June 30, 2014).
filing requirements of Section 19(b) of The text of the proposed rule change 7 See Securities Exchange Act Release No. 74892
mstockstill on DSK3G9T082PROD with NOTICES
the Act with respect to the MIAX is available on the Exchange’s Web site (May 6, 2015), 80 FR 27513 (May 13, 2015)
Exchange, CBOE, NYSE and FINRA at http://nasdaqphlx.cchwallstreet. (‘‘Approval Order’’).
8 See Approval Order at 27533 and 27545.
rules that MIAX PEARL proposes to com/, at the principal office of the
9 See Securities Exchange Act Release No. 76382
incorporate by reference, subject to the Exchange, and at the Commission’s
(November 6, 2015), 80 FR 70284 (November 13,
Public Reference Room. 2015).
Nasdaq Order, supra note 27, and NOM Approval 10 See Letter from David S. Shillman, Associate
Order, supra note 112. 1 15 U.S.C. 78s(b)(1). Director, Division of Trading and Markets,
242 15 U.S.C. 78mm. 2 17 CFR 240.19b–4. Commission, to Eric Swanson, EVP, General
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Document Created: 2018-02-14 09:09:56
Document Modified: 2018-02-14 09:09:56
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 81 FR 92901 |
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