82 FR 25856 - Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt Rules 5220 and 9560 and Amend Rule 8313
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 106 (June 5, 2017)
Federal Register Volume 82, Issue 106 (June 5, 2017)
| Page Range | 25856-25862 | |
| FR Document | 2017-11502 |
[Federal Register Volume 82, Number 106 (Monday, June 5, 2017)] [Notices] [Pages 25856-25862] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-11502] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80807; File No. SR-NYSE-2017-21] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt Rules 5220 and 9560 and Amend Rule 8313 May 30, 2017. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on May 17, 2017, New York Stock Exchange LLC (``NYSE'' or ``Exchange'') filed with the Securities and Exchange Commission (``SEC'' or ``Commission'') the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes (1) a new Rule 5220 that defines and prohibits two types of disruptive quoting and trading activity on the Exchange; (2) a new Rule 9560 governing supplemental expedited suspension proceedings; and (3) amendments to Rule 8313 to permit release to the public of suspension notices and orders issued pursuant to proposed Rule 9560. The proposed rule change is available on the Exchange's Web site at www.nyse.com, at the principal office of the Exchange, and at the Commission's Public Reference Room. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes (1) a new Rule 5220 that defines and prohibits two types of disruptive quoting and trading activity on the Exchange; (2) a new Rule 9560 governing supplemental expedited suspension proceedings; and (3) amendments to Rule 8313 (Release of Disciplinary Complaints, Decisions and Other Information) to permit release to the public of suspension notices and orders issued pursuant to proposed Rule 9560. The proposed rule change is based on rules recently adopted by Bats BZX Exchange, Inc., formerly known as BATS Exchange, Inc. (``BATS''), and The Nasdaq Stock Market LLC (``NASDAQ'').\3\ The proposed rules are the same as those adopted by BATS and NASDAQ, with the following exceptions discussed below: (1) Conforming references to reflect the Exchange's membership; and (2) the call for review process in proposed Rule 9560(f). The Exchange believes that having consistent rules for issuing a cease and desist order on an expedited basis as other self- regulatory organizations (``SROs'') to halt certain disruptive and manipulative quoting and trading activity would enhance the Exchange's ability to protect investors and market integrity. --------------------------------------------------------------------------- \3\ On February 18, 2016, the SEC approved a proposed rule change filed by BATS to adopt new BATS Rule 12.15, which prohibits certain types of disruptive quoting and trading activities, and BATS Rule 8.17, which permits BATS to conduct a new expedited suspension proceeding when it believes BATS Rule 12.15 has been violated. See Securities Exchange Act Release No. 77171 (February 18, 2016), 81 FR 9017 (February 23, 2016) (SR-BATS-2015-101) (``BATS Approval Order''); see also Securities Exchange Act Release No. 77606 (April 13, 2016), 81 FR 23026 (April 19, 2016) (SR-BatsEDGA-2016-03) (adopting identical rules for Bats EDGA Exchange, Inc.); Securities Exchange Act Release No. 77602 (April 13, 2016), 81 FR 23046 (April 19, 2016) (SR-BatsBYX-2016-03) (adopting identical rules for Bats BYX Exchange, Inc.); Securities Exchange Act Release No. 77589 (April 12, 2016), 81 FR 22691 (April 18, 2016) (SR-BatsEDGX-2016-04) (adopting identical rules for Bats EDGX Exchange, Inc.). On May 19, 2016, NASDAQ filed a substantially similar proposed rule change with the SEC for immediate effectiveness. See Securities Exchange Act Release No. 77913 (May 25, 2016), 81 FR 35081 (June 1, 2016) (SR- NASDAQ-2016-074). NASDAQ has also extended the rule to other exchanges. See, e.g., Securities Exchange Act Release No. 78208 (June 30, 2016), 81 FR 44366 (July 7, 2016) (SR-NASDAQ-2016-092). Similarly, the Financial Industry Regulatory Authority, Inc. (``FINRA'') also recently prohibited disruptive quoting and trading and amended its procedural rules. See Securities Exchange Act Release No. 76361 (November 21, 2016), 81 FR 85650 (November 28, 2016) (SR-FINRA-2016-043). --------------------------------------------------------------------------- Background As a national securities exchange registered pursuant to Section 6 of the Act, the Exchange is required to be organized and to have the capacity to enforce compliance by its member organizations and persons associated with its member organizations, with the Act, the rules and regulations thereunder, and the Exchange's Rules.\4\ Further, the Exchange's Rules are required to be ``designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade . . . and, in general, to protect investors and the public interest.'' \5\ --------------------------------------------------------------------------- \4\ 15 U.S.C. 78f(b)(1). \5\ 15 U.S.C. 78f(b)(1). --------------------------------------------------------------------------- In fulfilling these requirements, the Exchange has developed a comprehensive regulatory program that includes automated surveillance of trading activity operated directly by Exchange staff. When disruptive and potentially manipulative or improper quoting and trading activity is identified, the Exchange conducts an investigation into the activity and requests documents and information. To the extent violations of the Act, the rules and regulations thereunder, or Exchange Rules are identified, the Exchange will commence disciplinary proceedings, which could result in, among other things, a censure, a requirement to take certain remedial actions, one or more restrictions on future business activities, a monetary fine, or a temporary or permanent ban from the securities industry. The process described above, from the identification of disruptive and [[Page 25857]] potentially manipulative or improper quoting and trading activity to a final resolution of the matter, can often take several years. The Exchange believes that this time period sometimes is necessary and appropriate to afford adequate due process, particularly in complex cases. However, as described below, the Exchange believes that there are certain obvious and uncomplicated cases of disruptive and manipulative behavior or cases where the potential harm to investors is so large that the Exchange should have the authority to initiate an expedited suspension proceeding in order to stop the behavior from continuing on the Exchange. In recent years, several cases have been brought and resolved by the Exchange and other SROs involving allegations of wide-spread market manipulation, much of which was ultimately being conducted by foreign persons and entities using relatively rudimentary technology to access the markets and over which the Exchange and other SROs had no direct jurisdiction. In each case, the conduct involved a pattern of disruptive quoting and trading activity indicative of manipulative layering \6\ or spoofing.\7\ --------------------------------------------------------------------------- \6\ ``Layering'' can include a form of market manipulation in which multiple, non-bona fide limit orders are entered on one side of the market at various price levels in order to create the appearance of a change in the levels of supply and demand, thereby artificially moving the price of the security. An order is then executed on the opposite side of the market at the artificially created price, and the non-bona fide orders are cancelled. \7\ ``Spoofing'' can include a form of market manipulation that involves the market manipulator placing non-bona fide orders that are intended to trigger some type of market movement and/or response from other market participants, from which the market manipulator might benefit by trading bona fide orders. --------------------------------------------------------------------------- The Exchange and other SROs were able to identify the disruptive quoting and trading activity in real-time or near real-time; nonetheless, the parties responsible for such conduct or responsible for their customers' conduct continued the disruptive quoting and trading activity on the Exchange and other exchanges during the entirety of the subsequent lengthy investigation and enforcement process. To supplement other Exchange Rules on which it may already rely to stop such activity from continuing, the Exchange believes that it should have additional authority to initiate expedited suspension proceedings in order to stop behavior from continuing on the Exchange if a member organization or a person associated with its member organization is engaging in or facilitating disruptive quoting and trading activity and the member organization or associated person has received sufficient notice with an opportunity to respond, but such activity has not ceased. The following examples involving the Exchange and its affiliate NYSE Arca, Inc. (``NYSE Arca''), are instructive regarding the rationale for the proposed rule change. In July 2012, Biremis Corp. (formerly Swift Trade Securities USA, Inc.) (``Biremis'') and its CEO were barred from the securities industry for, among other things, supervisory violations related to a failure by Biremis to detect and prevent disruptive and allegedly manipulative trading activities, including layering, short sale violations, and anti-money laundering violations.\8\ Biremis' sole business was providing trade execution services via a proprietary day trading platform and order management system to day traders located in foreign jurisdictions. Thus, the disruptive and allegedly manipulative trading activity introduced by Biremis to U.S. markets originated directly or indirectly from its foreign clients. The pattern of disruptive and allegedly manipulative quoting and trading activity was widespread across multiple exchanges, and the Exchange, FINRA, and other SROs identified clear patterns of the behavior in 2007 and 2008. Although Biremis and its principals were on notice of the disruptive and allegedly manipulative quoting and trading activity that was occurring, Biremis took little to no action to attempt to supervise or prevent such quoting and trading activity until at least 2009. Even when it put some controls in place, they were deficient and the pattern of disruptive and allegedly manipulative trading activity continued to occur. As noted above, the final resolution of the enforcement action to bar the firm and its CEO from the industry was not concluded until 2012, four years after the disruptive and allegedly manipulative trading activity was first identified. --------------------------------------------------------------------------- \8\ See Biremis Corp. and Peter Beck, FINRA Letter of Acceptance, Waiver and Consent No. 2010021162202, July 30, 2012. --------------------------------------------------------------------------- In September of 2012, Hold Brothers On-Line Investment Services, Inc. (``Hold Brothers'') settled a regulatory action in connection with its provision of a trading platform, trade software and trade execution, support and clearing services for day traders.\9\ Many traders using the firm's services were located in foreign jurisdictions. Hold Brothers ultimately settled the action with FINRA and several exchanges, including NYSE Arca, for a total monetary fine of $3.4 million. In a separate action, the Firm settled with the Commission for a monetary fine of $2.5 million.\10\ Among the alleged violations in the case were disruptive and allegedly manipulative quoting and trading activity, including spoofing, layering, wash trading, and pre-arranged trading. Through its conduct and insufficient procedures and controls, Hold Brothers also allegedly committed anti- money laundering violations by failing to detect and report manipulative and suspicious trading activity. Hold Brothers was alleged to have not only provided foreign traders with access to the U.S. markets to engage in such activities, but that its principals also owned and funded foreign subsidiaries that engaged in the disruptive and allegedly manipulative quoting and trading activity. Although the pattern of disruptive and allegedly manipulative quoting and trading activity was identified in 2009, as noted above, the enforcement action was not concluded until 2012. Thus, although disruptive and allegedly manipulative quoting and trading was promptly detected, it continued for several years. The Exchange also notes that criminal proceedings were initiated against Navinder Singh Sarao for manipulative trading activity, including forms of layering and spoofing in the futures markets, that were identified as a contributing factor to the ``Flash Crash'' of 2010, and yet continued through 2015. In November 2016, Mr. Sarao pled guilty to one count each of wire fraud and spoofing.\11\ --------------------------------------------------------------------------- \9\ See Hold Brothers On-Line Investment Services, LLC, FINRA Letter of Acceptance, Waiver and Consent No. 20100237710001, September 25, 2012. \10\ In the Matter of Hold Brothers On-Line Investment Services, LLC, Exchange Act Release No. 67924, September 25, 2012. \11\ The plea agreement in United States v. Navinder Singh Sarao, Docket Number: 1:15-CR-00075-1 (N.D. Ill.), is available at https://www.justice.gov/criminal-fraud/file/910196/download. --------------------------------------------------------------------------- The Exchange believes that the activities described in the cases above provide justification for the proposed rule change, which is described below. Proposed Rule Change Proposed Rule 5220 The Exchange proposes to adopt new Rule 5220 of the Exchange's Conduct Rules to define and prohibit disruptive quoting and trading activity on the Exchange. Proposed Rule 5220(a) would prohibit member organizations and covered persons \12\ from engaging in or [[Page 25858]] facilitating disruptive quoting and trading activity on the Exchange, as described in proposed Rule 5220(b)(1) and (2), including acting in concert with other persons to effect such activity. The Exchange believes that it is necessary to extend the prohibition to situations when persons are acting in concert to avoid a potential loophole where disruptive quoting and trading activity is simply split between several brokers or customers. The Exchange also believes, that with respect to persons acting in concert perpetrating an abusive scheme, it is important that the Exchange have authority to act against the parties perpetrating the abusive scheme, whether it is one person or multiple persons. The Exchange proposes to adopt Rule 5220(b)(1) and (2) providing additional details regarding disruptive quoting and trading activity. Proposed Rule 5220(b)(1) would describe disruptive quoting and trading activity containing many of the elements indicative of layering. For purposes of the proposed Rule, disruptive quoting and trading activity would include a frequent pattern in which the following facts are present: --------------------------------------------------------------------------- \12\ Rule 9120(g) defines ``covered person'' to include a member, principal executive, approved person, registered or nonregistered employee of a member organization, or other person (excluding a member organization) subject to the jurisdiction of the Exchange. Rule 2(b) defines ``member organization'' as a registered broker or dealer (unless exempt pursuant to the Act) that is a member of FINRA or another registered securities exchange. ---------------------------------------------------------------------------A party enters multiple limit orders on one side of the market at various price levels (the ``Displayed Orders'') (proposed Rule 5220(b)(1)(A)); and following the entry of the Displayed Orders, the level of supply and demand for the security changes (proposed Rule 5220(b)(1)(B)); and the party enters one or more orders on the opposite side of the market of the Displayed Orders (the ``Contra-Side Orders'') that are subsequently executed (proposed Rule 5220(b)(1)(C)); and following the execution of the Contra-Side Orders, the party cancels the Displayed Orders (proposed Rule 5220(b)(1)(D)). Proposed Rule 5220(b)(2) would describe disruptive quoting and trading activity containing many of the elements indicative of spoofing and would describe disruptive quoting and trading activity as a frequent pattern in which the following facts are present: A party narrows the spread for a security by placing an order inside the national best bid or offer (proposed Rule 5220(b)(2)(A)); and the party then submits an order on the opposite side of the market that executes against another market participant that joined the new inside market established by the order described in proposed (b)(2)(A) that narrowed the spread (proposed Rule 5220(b)(2)(B)). The Exchange believes that the proposed descriptions of disruptive quoting and trading activity articulated in the rule are consistent with the activities that have been identified and described in the client access cases described above and with the rules of other SROs.\13\ --------------------------------------------------------------------------- \13\ See, e.g., BATS Rule 12.15; NASDAQ Rule 2170. See generally note 4, supra. --------------------------------------------------------------------------- Proposed Rule 5220(c) would provide that, unless otherwise indicated, the descriptions of disruptive quoting and trading activity do not require the facts to occur in a specific order in order for the Rule to apply. For instance, with respect to the pattern defined in proposed Rule 5220(b)(1)(A)-(D), it is of no consequence whether a party first enters Displayed Orders and then Contra-side Orders or vice-versa. However, as proposed, it is required for supply and demand to change following the entry of the Displayed Orders. The Exchange also proposes to make clear that disruptive quoting and trading activity includes a pattern or practice in which some portion of the disruptive quoting and trading activity is conducted on the Exchange and the other portions of the disruptive quoting and trading activity are conducted on one or more other exchanges. The Exchange believes that this authority is necessary to address market participants who would otherwise seek to avoid the prohibitions of the proposed Rule by spreading their activity amongst various execution venues. Proposed Rule 9560 Proposed Rule 9560 would set forth procedures for issuing suspension orders, immediately prohibiting a member organization or covered person from conducting continued disruptive quoting and trading activity on the Exchange. Importantly, these procedures would also provide the Exchange the authority to order a member organization or covered person to cease and desist from providing access to the Exchange to a client that is conducting disruptive quoting and trading activity. Under proposed paragraph (a)(1) of Rule 9560, with the prior written authorization of the Chief Regulatory Officer (``CRO'') or such other senior officers as the CRO may designate, the Exchange's Enforcement department may initiate an expedited suspension proceeding with respect to alleged violations of proposed Rule 5220. Proposed paragraph (a) would also set forth the requirements for notice ((a)(2)) and service of such notice ((a)(3)) pursuant to the Rule, including the required method of service and the content of notice. Proposed paragraph (b) of Rule 9560 would govern the appointment of a Hearing Panel as well as potential disqualification or recusal of Hearing Officers. The proposed provision is consistent with current Rule 9231(b), which governs the appointment of a hearing panel or extended hearing panel to conduct disciplinary proceedings. The Exchange's Rules provide for a Hearing Officer to be recused in the event he or she has a conflict of interest or bias or other circumstances exist where his or her fairness might reasonably be questioned in accordance with Rules [sic] 9233(a). In addition to recusal initiated by such a Hearing Officer, a party to the proceeding will be permitted to file a motion to disqualify a Hearing Officer. However, due to the compressed schedule pursuant to which the process would operate under Rule 9560, the proposed rule would require such motion to be filed no later than 5 days after the announcement of the Hearing Panel and the Exchange's brief in opposition to such motion would be required to be filed no later than 5 days after service thereof. Pursuant to existing Rule 9233(c), a motion for disqualification of a Hearing Officer shall be decided by the Chief Hearing Officer based on a prompt investigation. The applicable Hearing Officer shall remove himself or herself and request the Chief Executive Officer to reassign the hearing to another Hearing Officer such that the Hearing Panel still meets the compositional requirements described in Rule 9231(b). If the Chief Hearing Officer determines that the Respondent's grounds for disqualification are insufficient, it shall deny the Respondent's motion for disqualification by setting forth the reasons for the denial in writing and the Hearing Panel will proceed with the hearing. Under paragraph (c)(1) of the proposed Rule, the hearing would be held not later than 15 days after service of the notice initiating the suspension proceeding, unless otherwise extended by the Chairman of the Hearing Panel with the consent of the Parties for good cause shown. In the event of a recusal or disqualification of a Hearing Officer, the hearing shall be held not later than five days after a replacement Hearing Officer is appointed. Under paragraph (c)(2) of the proposed Rule, a notice of date, time, and place of the hearing shall be served on the Parties not later than seven days before the hearing, unless otherwise ordered by the Chairman of the Hearing Panel. Under the proposed Rule, service [[Page 25859]] shall be made by personal service or overnight commercial courier and shall be effective upon service. Proposed paragraph (c) would also govern how the hearing is conducted, including the authority of Hearing Officers ((c)(3), witnesses ((c)(4)), additional information that may be required by the Hearing Panel ((c)(5)), the requirement that a transcript of the proceeding be created and details related to such transcript ((c)(6)), and details regarding the creation and maintenance of the record of the proceeding ((c)(7)). Proposed paragraph (c)(8) would also provide that if a Respondent fails to appear at a hearing for which it has notice, the allegations in the notice and accompanying declaration may be deemed admitted, and the Hearing Panel may issue a suspension order without further proceedings. Finally, as proposed, if the Exchange fails to appear at a hearing for which it has notice, the Hearing Panel may order that the suspension proceeding be dismissed. Under paragraph (d)(1) of the proposed Rule, the Hearing Panel would be required to issue a written decision stating whether a suspension order would be imposed. The Hearing Panel would be required to issue the decision not later than 10 days after receipt of the hearing transcript, unless otherwise extended by the Chairman of the Hearing Panel with the consent of the Parties for good cause shown. The proposed Rule would state that a suspension order shall be imposed if the Hearing Panel finds by a preponderance of the evidence that the alleged violation specified in the notice has occurred and that the violative conduct or continuation thereof is likely to result in significant market disruption or other significant harm to investors. Proposed paragraph (d)(2) would also describe the content, scope and form of a suspension order. As proposed, a suspension order shall be limited to ordering a Respondent to cease and desist from violating proposed Rule 5220, and/or to ordering a Respondent to cease and desist from providing access to the Exchange to a client of Respondent that is causing violations of proposed Rule 5220 ((d)(2)(A)). Under the proposed rule, a suspension order shall also set forth the alleged violation and the significant market disruption or other significant harm to investors that is likely to result without the issuance of an order ((d)(2)(B)). The order shall describe in reasonable detail the act or acts the Respondent is to take or refrain from taking, and suspend such Respondent unless and until such action is taken or refrained from ((d)(2)(C)). Finally, the order shall include the date and hour of its issuance ((d)(2)(D)). As proposed, under proposed paragraph (d)(3), a suspension order would remain effective and enforceable unless modified, set aside, limited, or revoked pursuant to proposed paragraph (e), as described below. Finally, paragraph (d)(4) would require service of the Hearing Panel's decision and any suspension order consistent with other portions of the proposed rule related to service. Proposed paragraph (e) of Rule 9560 would provide that at any time after the Hearing Officers served the Respondent with a suspension order, a Party could apply to the Hearing Panel to have the order modified, set aside, limited, or revoked. If any part of a suspension order is modified, set aside, limited, or revoked, proposed paragraph (e) of Rule 9560 provides the Hearing Panel discretion to leave the cease and desist part of the order in place. For example, if a suspension order suspends Respondent unless and until Respondent ceases and desists providing access to the Exchange to a client of Respondent, and after the order is entered the Respondent complies, the Hearing Panel is permitted to modify the order to lift the suspension portion of the order while keeping in place the cease and desist portion of the order. With its broad modification powers, the Hearing Panel also maintains the discretion to impose conditions upon the removal of a suspension--for example, the Hearing Panel could modify an order to lift the suspension portion of the order in the event a Respondent complies with the cease and desist portion of the order but additionally order that the suspension will be re-imposed if Respondent violates the cease and desist provisions modified order in the future. The Hearing Panel generally would be required to respond to the request in writing within 10 days after receipt of the request. An application to modify, set aside, limit or revoke a suspension order would not stay the effectiveness of the suspension order. Proposed paragraph (f) would describe the call for review process by the Exchange Board of Directors. Specifically, the proposed Rule would provide that if there is no pending application to the Hearing Panel to have a suspension order modified, set aside, limited, or revoked, the Exchange Board of Directors, in accordance with Rule 9310 (Review by Exchange Board of Directors), may call for review the Hearing Panel decision on whether to issue a suspension order. Further, the proposed Rule would provide that a call for review by the Exchange Board of Directors shall not stay the effectiveness of a suspension order. Finally, proposed paragraph (g) would provide that sanctions issued under the proposed Rule 9560 would constitute final and immediately effective disciplinary sanctions imposed by the Exchange, and that the right to have any action under the Rule reviewed by the Commission would be governed by Section 19 of the Act. The filing of an application for review would not stay the effectiveness of a suspension order unless the Commission otherwise ordered. Proposed Amendments to Rule 8313 Finally, the Exchange proposes amendments to Rule 8313 to permit release to the public of suspension notices and orders issued pursuant to proposed Rule 9560. Specifically, the Exchange proposes to amend Rule 8313(a)(3), which provides that the Exchange shall release to the public information with respect to any suspension, cancellation, expulsion, or bar that constitutes final Exchange action imposed pursuant various Exchange Rules, to include a reference to proposed Rule 9560. The Exchange also proposes to include a notice of the initiation of a suspension proceeding served pursuant to proposed Rule 9560 in the definition of ``disciplinary complaint'' under Rule 8313(e)(1). Similarly, the Exchange would include suspension orders issued pursuant to proposed Rule 9560 in the definition of ``disciplinary decision'' under Rule 8313(e)(2). The proposed amendments to Rule 8313 are consistent with the FINRA Rule 8313 and the rules of the other SROs modeled on FINRA Rule 8313.\14\ --------------------------------------------------------------------------- \14\ See FINRA Rule 8313; BATS Rule 8.18. --------------------------------------------------------------------------- * * * * * In summary, proposed Rule 5220, coupled with proposed Rule 9560, would provide the Exchange with another form and means of authority to promptly act to prevent disruptive quoting and trading activity from continuing on the Exchange. The following example illustrates how the proposed rule would operate. Assume that through its surveillance program, Exchange staff identifies a pattern of potentially disruptive quoting and trading activity. After an initial investigation, the Exchange would contact the member organization or covered person responsible for the orders that caused the activity to request an explanation of the activity as well as any additional relevant information, [[Page 25860]] including the source of the activity. If the Exchange were to continue to see the same pattern from the same member organization or covered person and the source of the activity is the same or has been previously identified as a frequent source of disruptive quoting and trading activity then the Exchange could initiate an expedited suspension proceeding by serving notice on the member organization or covered person that would include details regarding the alleged violations as well as the proposed sanction. In such a case the proposed sanction would likely be to order the member organization or covered person to cease and desist providing access to the Exchange to the client that is responsible for the disruptive quoting and trading activity and to suspend such member organization or covered person unless and until such action is taken. The member organization or covered person would have the opportunity to be heard in front of a Hearing Panel at a hearing to be conducted within 15 days of the notice. If the Hearing Panel determined that the violation alleged in the notice did not occur or that the conduct or its continuation would not have the potential to result in significant market disruption or other significant harm to investors, then the Hearing Panel would dismiss the suspension order proceeding. If the Hearing Panel determined that the violation alleged in the notice did occur and that the conduct or its continuation is likely to result in significant market disruption or other significant harm to investors, then the Hearing Panel would issue the order including the proposed sanction, ordering the member organization or covered person to cease providing access to the client at issue and suspending such Member unless and until such action is taken. If such member organization or covered person wished for the suspension to be lifted because the client ultimately responsible for the activity no longer would be provided access to the Exchange, then such member organization or covered person could apply to the Hearing Panel to have the order modified, set aside, limited or revoked. The Exchange notes that the issuance of a suspension order would not alter the Exchange's ability to further investigate the matter and/or later sanction the member or member organization pursuant to the Exchange's standard disciplinary process for supervisory violations or other violations of Exchange rules or the Act. The Exchange reiterates that it already has broad authority to take action against a member organization or covered person in the event that such member organization or covered person is engaging in or facilitating disruptive or manipulative trading activity on the Exchange. For the reasons described above, and in light of recent matters such as the client access cases described above, as well as other cases currently under investigation, the Exchange believes that it is equally important for the Exchange to have this supplemental authority to promptly initiate expedited suspension proceedings against any member organization or covered person who has demonstrated a clear pattern or practice of disruptive quoting and trading activity, as described above, and to take action including ordering such member organization or covered person to terminate access to the Exchange to one or more clients that are [sic] responsible for the violative activity. The Exchange recognizes that its proposed authority to issue a suspension order is a powerful measure that should be used very cautiously. Consequently, the proposed rules have been designed to ensure that the proceedings are used to address only the most clear and serious types of disruptive quoting and trading activity and that the interests of respondents are protected. For example, to ensure that proceedings are used appropriately and that the decision to initiate a proceeding is made only at the highest staff levels, the proposed rules require the CRO or another senior officer of the Exchange to issue written authorization before the Exchange can institute an expedited suspension proceeding. In addition, the rule by its terms is limited to violations of proposed Rules [sic] 5220, when necessary to protect investors, other member organizations or covered persons, and the Exchange. Further, the Exchange believes that the proposed expedited suspension provisions described above that provide the opportunity to respond as well as a Hearing Panel determination prior to taking action will ensure that the Exchange would not utilize its authority in the absence of a clear pattern or practice of disruptive quoting and trading activity. Notwithstanding the adoption of the proposed rules along with existing disciplinary rules in the 9000 series, the Exchange also notes that that pursuant to Rule 9555(a)(2) (Failure to Meet the Eligibility or Qualification Standards or Prerequisites for Access to Services), if a member organization or covered person cannot continue to have access to services offered by the Exchange or a member thereof with safety to investors, creditors, members, or the Exchange, the Exchange may provide written notice to such member or person limiting or prohibiting access to services offered by the Exchange or a member thereof. This ability to impose a temporary restriction upon Members assists the Exchange in maintaining the integrity of the market and protecting investors and the public interest. 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act,\15\ in general, and furthers the objectives of Section 6(b)(5) of the Act,\16\ in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general to protect investors and the public interest. Pursuant to the proposal, the Exchange will have a mechanism to promptly initiate expedited suspension proceedings in the event the Exchange believes that it has sufficient proof that a violation of proposed Rule 5220 has occurred and is ongoing. --------------------------------------------------------------------------- \15\ 15 U.S.C. 78f(b). \16\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- Further, the Exchange believes that the proposal is consistent with Sections 6(b)(1) and 6(b)(6) of the Act,\17\ which require that the rules of an exchange enforce compliance with, and provide appropriate discipline for, violations of the Commission and Exchange rules. The Exchange believes that the proposal is consistent with the public interest, the protection of investors, or otherwise in furtherance of the purposes of the Act because the proposal helps to strengthen the Exchange's ability to carry out its oversight and enforcement responsibilities as a self-regulatory organization in cases where awaiting the conclusion of a full disciplinary proceeding is unsuitable in view of the potential harm to other member organization and their customers. The Exchange notes that if this type of conduct is allowed to continue on the Exchange, the Exchange's reputation could be harmed because it may appear to the public that the Exchange is not acting to address the behavior. The proposed expedited process would enable the Exchange to address the behavior with greater speed. --------------------------------------------------------------------------- \17\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- As noted throughout this filing, the Exchange believes that these rule proposals are necessary for the [[Page 25861]] protection of investors rather than allowing disruptive quoting and trading activity to occur for several years. The Exchange believes that the pattern of disruptive and allegedly manipulative quoting and trading activity was widespread across multiple exchanges, and the Exchange, FINRA, and other SROs identified clear patterns of the behavior in 2007 and 2008 in the equities markets.\18\ The Exchange believes that this proposal will provide the Exchange with additional means to enforce against such behavior in an expedited manner while providing member organizations or covered person with the necessary due process. The Exchange believes that its proposal is consistent with the Act because it provides the Exchange with the ability to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general to protect investors and the public interest from such ongoing behavior. --------------------------------------------------------------------------- \18\ See Section 3 herein, the Purpose section, for examples of conduct referred to herein. --------------------------------------------------------------------------- The Exchange believes that the proposal is also consistent with Section 6(b)(7) of the Act,\19\ which requires that the rules of an exchange ``provide a fair procedure for the disciplining of members and persons associated with members . . . and the prohibition or limitation by the exchange of any person with respect to access to services offered by the exchange or a member thereof.'' Finally, the Exchange also believes the proposal is consistent with Sections 6(d)(1) and 6(d)(2) of the Act,\20\ which require that the rules of an exchange with respect to a disciplinary proceeding or proceeding that would limit or prohibit access to or membership in the exchange require the exchange to: Provide adequate and specific notice of the charges brought against a member or person associated with a member, provide an opportunity to defend against such charges, keep a record, and provide details regarding the findings and applicable sanctions in the event a determination to impose a disciplinary sanction is made. The Exchange believes that each of these requirements is addressed by the notice and due process provisions included within proposed Rule 9560. Importantly, as noted above, the Exchange will use the authority proposed in this filing only in clear and egregious cases when necessary to protect investors, other member organizations or covered persons and the Exchange, and even in such cases, respondents will be afforded due process in connection with the suspension proceedings. --------------------------------------------------------------------------- \19\ 15 U.S.C. 78f(b)(7). \20\ 15 U.S.C. 78f(d)(1). --------------------------------------------------------------------------- Finally, the Exchange believes that amending Rule 8313 to permit release to the public of suspension notices and orders issued pursuant to proposed Rule 9560 furthers the objectives of Section 6(b)(5) of the Act \21\ by providing greater clarity, consistency, and transparency regarding the release of disciplinary complaints, decisions and other information to the public. The Exchange also believes that the proposed rule change promotes greater transparency to the Exchange's disciplinary process by providing greater access to information regarding its disciplinary actions and valuable guidance and information to persons subject to the Exchange's jurisdiction, regulators, and the investing public. --------------------------------------------------------------------------- \21\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. To the contrary, the Exchange believes that each self-regulatory organization should be empowered to regulate trading occurring on their [sic] market consistent with the Act and without regard to competitive issues. The Exchange is requesting authority to take appropriate action if necessary for the protection of investors, other member organizations or covered persons, and the Exchange. The Exchange also believes that it is important for all exchanges to be able to take similar action to enforce its [sic] rules against manipulative conduct thereby leaving no exchange prey to such conduct. The Exchange does not believe that the proposed rule change imposes an undue burden on competition, rather this process will provide the Exchange with necessary means to enforce against violations of manipulative quoting and trading activity in an expedited manner, while providing member organizations or covered persons with the necessary due process. Finally, the proposed rule change is designed to enhance the Exchange's rules governing the release of disciplinary complaints, decisions and other information to the public, thereby providing greater clarity and consistency and resulting in less burdensome and more efficient regulatory compliance and facilitating performance of regulatory functions. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The Exchange has filed the proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act \22\ and Rule 19b-4(f)(6) thereunder.\23\ Because the proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative prior to 30 days from the date on which it was filed, or such shorter time as the Commission may designate, if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b- 4(f)(6)(iii) thereunder. --------------------------------------------------------------------------- \22\ 15 U.S.C. 78s(b)(3)(A)(iii). \23\ 17 CFR 240.19b-4(f)(6). --------------------------------------------------------------------------- A proposed rule change filed under Rule 19b-4(f)(6) \24\ normally does not become operative prior to 30 days after the date of the filing. However, pursuant to Rule 19b-4(f)(6)(iii),\25\ the Commission may designate a shorter time if such action is consistent with the protection of investors and the public interest. --------------------------------------------------------------------------- \24\ 17 CFR 240.19b-4(f)(6). \25\ 17 CFR 240.19b-4(f)(6)(iii). --------------------------------------------------------------------------- At any time within 60 days of the filing of such proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings under Section 19(b)(2)(B) \26\ of the Act to determine whether the proposed rule change should be approved or disapproved. --------------------------------------------------------------------------- \26\ 15 U.S.C. 78s(b)(2)(B). --------------------------------------------------------------------------- IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: [[Page 25862]] Electronic Comments Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to [email protected]. Please include File Number SR-NYSE-2017-21 on the subject line. Paper Comments Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-NYSE-2017-21. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NYSE-2017-21 and should be submitted on or before June 26, 2017. --------------------------------------------------------------------------- \27\ 17 CFR 200.30-3(a)(12). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\27\ Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-11502 Filed 6-2-17; 8:45 am] BILLING CODE 8011-01-P
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available for Web site viewing and notices and orders issued pursuant to the same as those adopted by BATS and
printing in the Commission’s Public proposed Rule 9560. The proposed rule NASDAQ, with the following
Reference Room, 100 F Street NE., change is available on the Exchange’s exceptions discussed below: (1)
Washington, DC 20549, on official Web site at www.nyse.com, at the Conforming references to reflect the
business days between the hours of principal office of the Exchange, and at Exchange’s membership; and (2) the call
10:00 a.m. and 3:00 p.m. Copies of such the Commission’s Public Reference for review process in proposed Rule
filing will also be available for Room. 9560(f). The Exchange believes that
inspection and copying at the principal having consistent rules for issuing a
II. Self-Regulatory Organization’s
office of the Exchange. All comments cease and desist order on an expedited
Statement of the Purpose of, and
received will be posted without change; basis as other self-regulatory
Statutory Basis for, the Proposed Rule
the Commission does not edit personal organizations (‘‘SROs’’) to halt certain
Change
identifying information from disruptive and manipulative quoting
submissions. You should submit only In its filing with the Commission, the and trading activity would enhance the
information that you wish to make self-regulatory organization included Exchange’s ability to protect investors
available publicly. All submissions statements concerning the purpose of, and market integrity.
should refer to File Number SR– and basis for, the proposed rule change
and discussed any comments it received Background
BatsBYX–2017–11 and should be
submitted on or before June 26, 2017. on the proposed rule change. The text As a national securities exchange
of those statements may be examined at registered pursuant to Section 6 of the
For the Commission, by the Division of
Trading and Markets, pursuant to delegated the places specified in Item IV below. Act, the Exchange is required to be
authority.61 The Exchange has prepared summaries, organized and to have the capacity to
Eduardo A. Aleman, set forth in sections A, B, and C below, enforce compliance by its member
Assistant Secretary. of the most significant parts of such organizations and persons associated
statements. with its member organizations, with the
[FR Doc. 2017–11504 Filed 6–2–17; 8:45 am]
Act, the rules and regulations
BILLING CODE 8011–01–P A. Self-Regulatory Organization’s thereunder, and the Exchange’s Rules.4
Statement of the Purpose of, and Further, the Exchange’s Rules are
Statutory Basis for, the Proposed Rule required to be ‘‘designed to prevent
SECURITIES AND EXCHANGE Change
COMMISSION fraudulent and manipulative acts and
1. Purpose practices, to promote just and equitable
[Release No. 34–80807; File No. SR–NYSE– principles of trade . . . and, in general,
2017–21] The Exchange proposes (1) a new
Rule 5220 that defines and prohibits to protect investors and the public
two types of disruptive quoting and interest.’’ 5
Self-Regulatory Organizations; New In fulfilling these requirements, the
York Stock Exchange LLC; Notice of trading activity on the Exchange; (2) a
new Rule 9560 governing supplemental Exchange has developed a
Filing and Immediate Effectiveness of comprehensive regulatory program that
Proposed Rule Change To Adopt Rules expedited suspension proceedings; and
(3) amendments to Rule 8313 (Release of includes automated surveillance of
5220 and 9560 and Amend Rule 8313
Disciplinary Complaints, Decisions and trading activity operated directly by
May 30, 2017. Other Information) to permit release to Exchange staff. When disruptive and
Pursuant to Section 19(b)(1) of the the public of suspension notices and potentially manipulative or improper
Securities Exchange Act of 1934 orders issued pursuant to proposed Rule quoting and trading activity is
(‘‘Act’’),1 and Rule 19b–4 thereunder,2 9560. identified, the Exchange conducts an
notice is hereby given that on May 17, The proposed rule change is based on investigation into the activity and
2017, New York Stock Exchange LLC rules recently adopted by Bats BZX requests documents and information. To
(‘‘NYSE’’ or ‘‘Exchange’’) filed with the Exchange, Inc., formerly known as the extent violations of the Act, the
Securities and Exchange Commission BATS Exchange, Inc. (‘‘BATS’’), and rules and regulations thereunder, or
(‘‘SEC’’ or ‘‘Commission’’) the proposed The Nasdaq Stock Market LLC Exchange Rules are identified, the
rule change as described in Items I, II, (‘‘NASDAQ’’).3 The proposed rules are Exchange will commence disciplinary
and III below, which Items have been proceedings, which could result in,
prepared by the Exchange. The 3 On February 18, 2016, the SEC approved a among other things, a censure, a
Commission is publishing this notice to proposed rule change filed by BATS to adopt new requirement to take certain remedial
solicit comments on the proposed rule BATS Rule 12.15, which prohibits certain types of actions, one or more restrictions on
disruptive quoting and trading activities, and BATS future business activities, a monetary
change from interested persons. Rule 8.17, which permits BATS to conduct a new
expedited suspension proceeding when it believes fine, or a temporary or permanent ban
I. Self-Regulatory Organization’s from the securities industry.
BATS Rule 12.15 has been violated. See Securities
Statement of the Terms of Substance of Exchange Act Release No. 77171 (February 18, The process described above, from the
the Proposed Rule Change 2016), 81 FR 9017 (February 23, 2016) (SR–BATS– identification of disruptive and
2015–101) (‘‘BATS Approval Order’’); see also
The Exchange proposes (1) a new Securities Exchange Act Release No. 77606 (April
Rule 5220 that defines and prohibits 13, 2016), 81 FR 23026 (April 19, 2016) (SR– (May 25, 2016), 81 FR 35081 (June 1, 2016) (SR–
two types of disruptive quoting and BatsEDGA–2016–03) (adopting identical rules for NASDAQ–2016–074). NASDAQ has also extended
the rule to other exchanges. See, e.g., Securities
asabaliauskas on DSKBBXCHB2PROD with NOTICES
trading activity on the Exchange; (2) a Bats EDGA Exchange, Inc.); Securities Exchange Act
Release No. 77602 (April 13, 2016), 81 FR 23046 Exchange Act Release No. 78208 (June 30, 2016), 81
new Rule 9560 governing supplemental (April 19, 2016) (SR–BatsBYX–2016–03) (adopting FR 44366 (July 7, 2016) (SR–NASDAQ–2016–092).
expedited suspension proceedings; and identical rules for Bats BYX Exchange, Inc.); Similarly, the Financial Industry Regulatory
(3) amendments to Rule 8313 to permit Securities Exchange Act Release No. 77589 (April Authority, Inc. (‘‘FINRA’’) also recently prohibited
12, 2016), 81 FR 22691 (April 18, 2016) (SR– disruptive quoting and trading and amended its
release to the public of suspension procedural rules. See Securities Exchange Act
BatsEDGX–2016–04) (adopting identical rules for
Bats EDGX Exchange, Inc.). On May 19, 2016, Release No. 76361 (November 21, 2016), 81 FR
61 17 CFR 200.30–3(a)(12). 85650 (November 28, 2016) (SR–FINRA–2016–043).
NASDAQ filed a substantially similar proposed rule
1 15 U.S.C. 78s(b)(1). 4 15 U.S.C. 78f(b)(1).
change with the SEC for immediate effectiveness.
2 17 CFR 240.19b–4. See Securities Exchange Act Release No. 77913 5 15 U.S.C. 78f(b)(1).
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facilitating disruptive quoting and The Exchange believes that the required method of service and the
trading activity on the Exchange, as proposed descriptions of disruptive content of notice.
described in proposed Rule 5220(b)(1) quoting and trading activity articulated Proposed paragraph (b) of Rule 9560
and (2), including acting in concert with in the rule are consistent with the would govern the appointment of a
other persons to effect such activity. The activities that have been identified and Hearing Panel as well as potential
Exchange believes that it is necessary to described in the client access cases disqualification or recusal of Hearing
extend the prohibition to situations described above and with the rules of Officers. The proposed provision is
when persons are acting in concert to other SROs.13 consistent with current Rule 9231(b),
avoid a potential loophole where Proposed Rule 5220(c) would provide which governs the appointment of a
disruptive quoting and trading activity that, unless otherwise indicated, the hearing panel or extended hearing panel
is simply split between several brokers descriptions of disruptive quoting and to conduct disciplinary proceedings.
or customers. The Exchange also trading activity do not require the facts The Exchange’s Rules provide for a
believes, that with respect to persons to occur in a specific order in order for Hearing Officer to be recused in the
acting in concert perpetrating an the Rule to apply. For instance, with event he or she has a conflict of interest
abusive scheme, it is important that the respect to the pattern defined in or bias or other circumstances exist
Exchange have authority to act against proposed Rule 5220(b)(1)(A)–(D), it is of where his or her fairness might
the parties perpetrating the abusive no consequence whether a party first reasonably be questioned in accordance
scheme, whether it is one person or enters Displayed Orders and then with Rules [sic] 9233(a). In addition to
multiple persons. The Exchange Contra-side Orders or vice-versa. recusal initiated by such a Hearing
proposes to adopt Rule 5220(b)(1) and However, as proposed, it is required for Officer, a party to the proceeding will be
(2) providing additional details supply and demand to change following permitted to file a motion to disqualify
regarding disruptive quoting and trading the entry of the Displayed Orders. a Hearing Officer. However, due to the
activity. Proposed Rule 5220(b)(1) The Exchange also proposes to make compressed schedule pursuant to which
would describe disruptive quoting and clear that disruptive quoting and trading the process would operate under Rule
trading activity containing many of the activity includes a pattern or practice in 9560, the proposed rule would require
elements indicative of layering. For which some portion of the disruptive such motion to be filed no later than 5
purposes of the proposed Rule, quoting and trading activity is days after the announcement of the
disruptive quoting and trading activity conducted on the Exchange and the Hearing Panel and the Exchange’s brief
would include a frequent pattern in other portions of the disruptive quoting in opposition to such motion would be
which the following facts are present: and trading activity are conducted on required to be filed no later than 5 days
• A party enters multiple limit orders one or more other exchanges. The after service thereof. Pursuant to
on one side of the market at various Exchange believes that this authority is existing Rule 9233(c), a motion for
price levels (the ‘‘Displayed Orders’’) necessary to address market participants disqualification of a Hearing Officer
(proposed Rule 5220(b)(1)(A)); and who would otherwise seek to avoid the shall be decided by the Chief Hearing
• following the entry of the Displayed prohibitions of the proposed Rule by Officer based on a prompt investigation.
Orders, the level of supply and demand spreading their activity amongst various The applicable Hearing Officer shall
for the security changes (proposed Rule execution venues. remove himself or herself and request
5220(b)(1)(B)); and the Chief Executive Officer to reassign
Proposed Rule 9560
• the party enters one or more orders the hearing to another Hearing Officer
on the opposite side of the market of the Proposed Rule 9560 would set forth such that the Hearing Panel still meets
Displayed Orders (the ‘‘Contra-Side procedures for issuing suspension the compositional requirements
Orders’’) that are subsequently executed orders, immediately prohibiting a described in Rule 9231(b). If the Chief
(proposed Rule 5220(b)(1)(C)); and member organization or covered person Hearing Officer determines that the
• following the execution of the from conducting continued disruptive Respondent’s grounds for
Contra-Side Orders, the party cancels quoting and trading activity on the disqualification are insufficient, it shall
the Displayed Orders (proposed Rule Exchange. Importantly, these deny the Respondent’s motion for
5220(b)(1)(D)). procedures would also provide the disqualification by setting forth the
Proposed Rule 5220(b)(2) would Exchange the authority to order a reasons for the denial in writing and the
describe disruptive quoting and trading member organization or covered person Hearing Panel will proceed with the
activity containing many of the to cease and desist from providing hearing.
elements indicative of spoofing and access to the Exchange to a client that Under paragraph (c)(1) of the
would describe disruptive quoting and is conducting disruptive quoting and proposed Rule, the hearing would be
trading activity as a frequent pattern in trading activity. held not later than 15 days after service
which the following facts are present: Under proposed paragraph (a)(1) of of the notice initiating the suspension
• A party narrows the spread for a Rule 9560, with the prior written proceeding, unless otherwise extended
security by placing an order inside the authorization of the Chief Regulatory by the Chairman of the Hearing Panel
national best bid or offer (proposed Rule Officer (‘‘CRO’’) or such other senior with the consent of the Parties for good
5220(b)(2)(A)); and officers as the CRO may designate, the cause shown. In the event of a recusal
• the party then submits an order on Exchange’s Enforcement department or disqualification of a Hearing Officer,
the opposite side of the market that may initiate an expedited suspension the hearing shall be held not later than
asabaliauskas on DSKBBXCHB2PROD with NOTICES
executes against another market proceeding with respect to alleged five days after a replacement Hearing
participant that joined the new inside violations of proposed Rule 5220. Officer is appointed.
market established by the order Proposed paragraph (a) would also set Under paragraph (c)(2) of the
described in proposed (b)(2)(A) that forth the requirements for notice ((a)(2)) proposed Rule, a notice of date, time,
narrowed the spread (proposed Rule and service of such notice ((a)(3)) and place of the hearing shall be served
5220(b)(2)(B)). pursuant to the Rule, including the on the Parties not later than seven days
before the hearing, unless otherwise
member of FINRA or another registered securities 13 See, e.g., BATS Rule 12.15; NASDAQ Rule ordered by the Chairman of the Hearing
exchange. 2170. See generally note 4, supra. Panel. Under the proposed Rule, service
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including the source of the activity. If against a member organization or provide written notice to such member
the Exchange were to continue to see covered person in the event that such or person limiting or prohibiting access
the same pattern from the same member member organization or covered person to services offered by the Exchange or a
organization or covered person and the is engaging in or facilitating disruptive member thereof. This ability to impose
source of the activity is the same or has or manipulative trading activity on the a temporary restriction upon Members
been previously identified as a frequent Exchange. For the reasons described assists the Exchange in maintaining the
source of disruptive quoting and trading above, and in light of recent matters integrity of the market and protecting
activity then the Exchange could initiate such as the client access cases described investors and the public interest.
an expedited suspension proceeding by above, as well as other cases currently
2. Statutory Basis
serving notice on the member under investigation, the Exchange
organization or covered person that believes that it is equally important for The Exchange believes that the
would include details regarding the the Exchange to have this supplemental proposed rule change is consistent with
alleged violations as well as the authority to promptly initiate expedited Section 6(b) of the Act,15 in general, and
proposed sanction. suspension proceedings against any furthers the objectives of Section 6(b)(5)
In such a case the proposed sanction member organization or covered person of the Act,16 in particular, in that it is
would likely be to order the member who has demonstrated a clear pattern or designed to prevent fraudulent and
organization or covered person to cease practice of disruptive quoting and manipulative acts and practices, to
and desist providing access to the trading activity, as described above, and promote just and equitable principles of
Exchange to the client that is to take action including ordering such trade, to foster cooperation and
responsible for the disruptive quoting member organization or covered person coordination with persons engaged in
and trading activity and to suspend to terminate access to the Exchange to facilitating transactions in securities,
such member organization or covered one or more clients that are [sic] and to remove impediments to and
person unless and until such action is responsible for the violative activity. perfect the mechanism of a free and
taken. The member organization or The Exchange recognizes that its open market and a national market
covered person would have the proposed authority to issue a system, and, in general to protect
opportunity to be heard in front of a suspension order is a powerful measure investors and the public interest.
Hearing Panel at a hearing to be that should be used very cautiously. Pursuant to the proposal, the Exchange
conducted within 15 days of the notice. Consequently, the proposed rules have will have a mechanism to promptly
If the Hearing Panel determined that the been designed to ensure that the initiate expedited suspension
violation alleged in the notice did not proceedings are used to address only the proceedings in the event the Exchange
occur or that the conduct or its most clear and serious types of believes that it has sufficient proof that
continuation would not have the disruptive quoting and trading activity a violation of proposed Rule 5220 has
potential to result in significant market and that the interests of respondents are occurred and is ongoing.
disruption or other significant harm to protected. For example, to ensure that Further, the Exchange believes that
investors, then the Hearing Panel would proceedings are used appropriately and the proposal is consistent with Sections
dismiss the suspension order that the decision to initiate a proceeding 6(b)(1) and 6(b)(6) of the Act,17 which
proceeding. If the Hearing Panel is made only at the highest staff levels, require that the rules of an exchange
determined that the violation alleged in the proposed rules require the CRO or enforce compliance with, and provide
the notice did occur and that the another senior officer of the Exchange to appropriate discipline for, violations of
conduct or its continuation is likely to issue written authorization before the the Commission and Exchange rules.
result in significant market disruption Exchange can institute an expedited The Exchange believes that the proposal
or other significant harm to investors, suspension proceeding. In addition, the is consistent with the public interest,
then the Hearing Panel would issue the rule by its terms is limited to violations the protection of investors, or otherwise
order including the proposed sanction, of proposed Rules [sic] 5220, when in furtherance of the purposes of the Act
ordering the member organization or necessary to protect investors, other because the proposal helps to strengthen
covered person to cease providing member organizations or covered the Exchange’s ability to carry out its
access to the client at issue and persons, and the Exchange. oversight and enforcement
suspending such Member unless and Further, the Exchange believes that responsibilities as a self-regulatory
until such action is taken. the proposed expedited suspension organization in cases where awaiting the
If such member organization or provisions described above that provide conclusion of a full disciplinary
covered person wished for the the opportunity to respond as well as a proceeding is unsuitable in view of the
suspension to be lifted because the Hearing Panel determination prior to potential harm to other member
client ultimately responsible for the taking action will ensure that the organization and their customers. The
activity no longer would be provided Exchange would not utilize its authority Exchange notes that if this type of
access to the Exchange, then such in the absence of a clear pattern or conduct is allowed to continue on the
member organization or covered person practice of disruptive quoting and Exchange, the Exchange’s reputation
could apply to the Hearing Panel to trading activity. Notwithstanding the could be harmed because it may appear
have the order modified, set aside, adoption of the proposed rules along to the public that the Exchange is not
limited or revoked. The Exchange notes with existing disciplinary rules in the acting to address the behavior. The
that the issuance of a suspension order 9000 series, the Exchange also notes that proposed expedited process would
asabaliauskas on DSKBBXCHB2PROD with NOTICES
would not alter the Exchange’s ability to that pursuant to Rule 9555(a)(2) (Failure enable the Exchange to address the
further investigate the matter and/or to Meet the Eligibility or Qualification behavior with greater speed.
later sanction the member or member Standards or Prerequisites for Access to As noted throughout this filing, the
organization pursuant to the Exchange’s Services), if a member organization or Exchange believes that these rule
standard disciplinary process for covered person cannot continue to have proposals are necessary for the
supervisory violations or other access to services offered by the
violations of Exchange rules or the Act. Exchange or a member thereof with 15 15 U.S.C. 78f(b).
The Exchange reiterates that it already safety to investors, creditors, members, 16 15 U.S.C. 78f(b)(5).
has broad authority to take action or the Exchange, the Exchange may 17 15 U.S.C. 78f(b)(5).
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![Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices 25861
protection of investors rather than respondents will be afforded due C. Self-Regulatory Organization’s
allowing disruptive quoting and trading process in connection with the Statement on Comments on the
activity to occur for several years. The suspension proceedings. Proposed Rule Change Received From
Exchange believes that the pattern of Finally, the Exchange believes that Members, Participants, or Others
disruptive and allegedly manipulative amending Rule 8313 to permit release to No written comments were solicited
quoting and trading activity was the public of suspension notices and or received with respect to the proposed
widespread across multiple exchanges, orders issued pursuant to proposed Rule rule change.
and the Exchange, FINRA, and other 9560 furthers the objectives of Section
SROs identified clear patterns of the III. Date of Effectiveness of the
6(b)(5) of the Act 21 by providing greater
behavior in 2007 and 2008 in the Proposed Rule Change and Timing for
clarity, consistency, and transparency
equities markets.18 The Exchange Commission Action
regarding the release of disciplinary
believes that this proposal will provide
complaints, decisions and other The Exchange has filed the proposed
the Exchange with additional means to
information to the public. The Exchange rule change pursuant to Section
enforce against such behavior in an
expedited manner while providing also believes that the proposed rule 19(b)(3)(A)(iii) of the Act 22 and Rule
member organizations or covered person change promotes greater transparency to 19b–4(f)(6) thereunder.23 Because the
with the necessary due process. The the Exchange’s disciplinary process by proposed rule change does not: (i)
Exchange believes that its proposal is providing greater access to information Significantly affect the protection of
consistent with the Act because it regarding its disciplinary actions and investors or the public interest; (ii)
provides the Exchange with the ability valuable guidance and information to impose any significant burden on
to remove impediments to and perfect persons subject to the Exchange’s competition; and (iii) become operative
the mechanism of a free and open jurisdiction, regulators, and the prior to 30 days from the date on which
market and a national market system, investing public. it was filed, or such shorter time as the
and, in general to protect investors and Commission may designate, if
B. Self-Regulatory Organization’s consistent with the protection of
the public interest from such ongoing Statement on Burden on Competition
behavior. investors and the public interest, the
The Exchange believes that the The Exchange does not believe that proposed rule change has become
proposal is also consistent with Section the proposed rule change will impose effective pursuant to Section 19(b)(3)(A)
6(b)(7) of the Act,19 which requires that any burden on competition not of the Act and Rule 19b–4(f)(6)(iii)
the rules of an exchange ‘‘provide a fair necessary or appropriate in furtherance thereunder.
procedure for the disciplining of of the purposes of the Act. To the A proposed rule change filed under
members and persons associated with contrary, the Exchange believes that Rule 19b–4(f)(6) 24 normally does not
members . . . and the prohibition or each self-regulatory organization should become operative prior to 30 days after
limitation by the exchange of any be empowered to regulate trading the date of the filing. However, pursuant
person with respect to access to services occurring on their [sic] market to Rule 19b–4(f)(6)(iii),25 the
offered by the exchange or a member consistent with the Act and without Commission may designate a shorter
thereof.’’ Finally, the Exchange also regard to competitive issues. The time if such action is consistent with the
believes the proposal is consistent with protection of investors and the public
Exchange is requesting authority to take
Sections 6(d)(1) and 6(d)(2) of the Act,20 interest.
appropriate action if necessary for the
which require that the rules of an protection of investors, other member At any time within 60 days of the
exchange with respect to a disciplinary organizations or covered persons, and filing of such proposed rule change, the
proceeding or proceeding that would the Exchange. The Exchange also Commission summarily may
limit or prohibit access to or believes that it is important for all temporarily suspend such rule change if
membership in the exchange require the it appears to the Commission that such
exchanges to be able to take similar
exchange to: Provide adequate and action is necessary or appropriate in the
action to enforce its [sic] rules against
specific notice of the charges brought public interest, for the protection of
manipulative conduct thereby leaving
against a member or person associated investors, or otherwise in furtherance of
no exchange prey to such conduct. The
with a member, provide an opportunity the purposes of the Act. If the
Exchange does not believe that the
to defend against such charges, keep a Commission takes such action, the
proposed rule change imposes an undue
record, and provide details regarding Commission shall institute proceedings
burden on competition, rather this
the findings and applicable sanctions in under Section 19(b)(2)(B) 26 of the Act to
process will provide the Exchange with
the event a determination to impose a determine whether the proposed rule
necessary means to enforce against
disciplinary sanction is made. The change should be approved or
violations of manipulative quoting and
Exchange believes that each of these disapproved.
trading activity in an expedited manner,
requirements is addressed by the notice while providing member organizations IV. Solicitation of Comments
and due process provisions included or covered persons with the necessary
within proposed Rule 9560. Interested persons are invited to
due process. Finally, the proposed rule submit written data, views and
Importantly, as noted above, the change is designed to enhance the
Exchange will use the authority arguments concerning the foregoing,
Exchange’s rules governing the release including whether the proposed rule
proposed in this filing only in clear and of disciplinary complaints, decisions
asabaliauskas on DSKBBXCHB2PROD with NOTICES
egregious cases when necessary to change is consistent with the Act.
and other information to the public, Comments may be submitted by any of
protect investors, other member thereby providing greater clarity and
organizations or covered persons and the following methods:
consistency and resulting in less
the Exchange, and even in such cases, burdensome and more efficient 22 15 U.S.C. 78s(b)(3)(A)(iii).
18 See
regulatory compliance and facilitating 23 17 CFR 240.19b–4(f)(6).
Section 3 herein, the Purpose section, for
examples of conduct referred to herein. performance of regulatory functions. 24 17 CFR 240.19b–4(f)(6).
19 15 U.S.C. 78f(b)(7). 25 17 CFR 240.19b–4(f)(6)(iii).
20 15 U.S.C. 78f(d)(1). 21 15 U.S.C. 78f(b)(5). 26 15 U.S.C. 78s(b)(2)(B).
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![25862 Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices
Electronic Comments SECURITIES AND EXCHANGE connection with TRACE-Eligible
COMMISSION Securities.3 FINRA is proposing to
• Use the Commission’s Internet amend Rule 7730 to make available a
comment form (http://www.sec.gov/ [Release No. 34–80805; File No. SR–FINRA–
2017–015]
new End-of-Day TRACE Transaction
rules/sro.shtml); or File to provide interested parties with a
• Send an email to rule-comments@ Self-Regulatory Organizations; simpler means of receiving all of the
sec.gov. Please include File Number SR– Financial Industry Regulatory transaction information disseminated
NYSE–2017–21 on the subject line. Authority, Inc.; Notice of Filing of a each trading day as part of Real-Time
Proposed Rule Change To Amend TRACE transaction data.4
Paper Comments FINRA Rule 7730 To Make Available a The data elements to be included in
New End-of-Day TRACE Transaction the proposed End-of-Day TRACE
• Send paper comments in triplicate Transaction File would be the same as
to Secretary, Securities and Exchange File
those disseminated in Real-Time
Commission, 100 F Street NE., May 30, 2017. TRACE transaction data, and the
Washington, DC 20549–1090. Pursuant to Section 19(b)(1) of the proposed End-of-Day TRACE
All submissions should refer to File Securities Exchange Act of 1934 Transaction File would be separately
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 available for each data set for which
Number SR–NYSE–2017–21. This file
notice is hereby given that on May 18, Real-Time TRACE transaction data is
number should be included on the
2017, Financial Industry Regulatory available (i.e., the Corporate Bond Data
subject line if email is used. To help the Authority, Inc. (‘‘FINRA’’) filed with the Set, Agency Data Set, SP Data Set, and
Commission process and review your Securities and Exchange Commission Rule 144A Data Set). Subscribers to the
comments more efficiently, please use (‘‘SEC’’ or ‘‘Commission’’) the proposed End-of-Day TRACE Transaction File
only one method. The Commission will rule change as described in Items I, II, would access the product daily after the
post all comments on the Commission’s and III below, which Items have been TRACE system closes.5
Internet Web site (http://www.sec.gov/ prepared by FINRA. The Commission is If the Commission approves the
rules/sro.shtml). Copies of the publishing this notice to solicit proposed rule change, FINRA will
submission, all subsequent comments on the proposed rule change announce the effective date of the
amendments, all written statements from interested persons. proposed rule change in a Regulatory
with respect to the proposed rule Notice. The effective date will be no
I. Self-Regulatory Organization’s
change that are filed with the later than 365 days following SEC
Statement of the Terms of Substance of
Commission, and all written approval.
the Proposed Rule Change
communications relating to the 2. Statutory Basis
proposed rule change between the FINRA is proposing to amend FINRA
Rule 7730 to make available a new End- FINRA believes that the proposed rule
Commission and any person, other than
of-Day TRACE Transaction File. change is consistent with the provisions
those that may be withheld from the The text of the proposed rule change of Section 15A(b)(6) of the Act,6 which
public in accordance with the is available on FINRA’s Web site at requires, among other things, that
provisions of 5 U.S.C. 552, will be http://www.finra.org, at the principal FINRA rules must be designed to
available for Web site viewing and office of FINRA and at the prevent fraudulent and manipulative
printing in the Commission’s Public Commission’s Public Reference Room. acts and practices, to promote just and
Reference Room, 100 F Street NE., equitable principles of trade, and, in
Washington, DC 20549, on official II. Self-Regulatory Organization’s
business days between the hours of Statement of the Purpose of, and 3 Rule 6710 (Definitions) provides that a ‘‘TRACE-
10:00 a.m. and 3:00 p.m. Copies of the Statutory Basis for, the Proposed Rule Eligible Security’’ is a debt security that is United
Change States (‘‘U.S.’’) dollar-denominated and issued by a
filing also will be available for
U.S. or foreign private issuer, and, if a ‘‘restricted
inspection and copying at the principal In its filing with the Commission, security’’ as defined in Securities Act Rule
office of the Exchange. All comments FINRA included statements concerning 144(a)(3), sold pursuant to Securities Act Rule
received will be posted without change; the purpose of and basis for the 144A; or is a debt security that is U.S. dollar-
proposed rule change and discussed any denominated and issued or guaranteed by an
the Commission does not edit personal Agency as defined in paragraph (k) or a
identifying information from comments it received on the proposed Government-Sponsored Enterprise as defined in
submissions. You should submit only rule change. The text of these statements paragraph (n); or a U.S. Treasury Security as
information that you wish to make may be examined at the places specified defined in paragraph (p). ‘‘TRACE-Eligible
in Item IV below. FINRA has prepared Security’’ does not include a debt security that is
available publicly. All submissions issued by a foreign sovereign or a Money Market
summaries, set forth in sections A, B,
should refer to File Number SR–NYSE– Instrument as defined in paragraph (o).
and C below, of the most significant 4 FINRA currently makes available a Real-Time
2017–21 and should be submitted on or aspects of such statements. TRACE transaction data product, which provides
before June 26, 2017. subscribers with access to all disseminated
A. Self-Regulatory Organization’s transactions as they are reported throughout the
For the Commission, by the Division of
Statement of the Purpose of, and trading day. Real-time data is delivered via a
Trading and Markets, pursuant to delegated NASDAQ Multicast feed. To receive the feed, firms
Statutory Basis for, the Proposed Rule
authority.27 must connect either directly to NASDAQ, via an
Change extranet connection, or through a retransmission
asabaliauskas on DSKBBXCHB2PROD with NOTICES
Eduardo A. Aleman,
1. Purpose vendor. Some market participants have indicated
Assistant Secretary. that a simpler alternative that allows them to
[FR Doc. 2017–11502 Filed 6–2–17; 8:45 am] Rule 7730 (Trade Reporting and receive transaction information once a day in an
Compliance Engine (TRACE)), among end-of-day file would be useful.
BILLING CODE 8011–01–P 5 FINRA intends to establish a fee for the End-of-
other things, sets forth the TRACE data
Day TRACE Transaction File prior to the effective
products offered by FINRA in date of the instant proposed rule change. The fee
will be established pursuant to a separate rule
1 15 U.S.C. 78s(b)(1). filing.
27 17 CFR 200.30–3(a)(12). 2 17 CFR 240.19b–4. 6 15 U.S.C. 78o–3(b)(6).
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Document Created: 2018-11-14 10:00:42
Document Modified: 2018-11-14 10:00:42
| 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 | 82 FR 25856 |
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