83 FR 31806 - Self-Regulatory Organizations: Investors Exchange LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 11.420 Concerning the Order Audit Trail System Requirements To Make Conforming and Technical Changes

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 131 (July 9, 2018)

[Federal Register Volume 83, Number 131 (Monday, July 9, 2018)]
[Notices]
[Pages 31806-31808]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-14551]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83586; File No. SR-IEX-2018-12]


Self-Regulatory Organizations: Investors Exchange LLC; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Rule 11.420 Concerning the Order Audit Trail System Requirements To 
Make Conforming and Technical Changes

July 2, 2018.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on June 21, 2018, the Investors Exchange LLC (``IEX'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I 
and II below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Pursuant to the provisions of Section 19(b)(1) under the Act,\4\ 
and Rule 19b-4 thereunder,\5\ the Exchange is filing with the 
Commission a proposed rule change to amend Rule 11.420 concerning the 
Order Audit Trail System (``OATS'') requirements to make conforming and 
technical changes. The Exchange has designated this rule change as 
``non-controversial'' under Section 19(b)(3)(A) of the Act \6\ and 
provided the Commission with the notice required by Rule 19b-4(f)(6) 
thereunder.\7\
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    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CFR 240.19b-4.
    \6\ 15 U.S.C. 78s(b)(3)(A).
    \7\ 17 CFR 240.19b-4.
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    The text of the proposed rule change is available at the Exchange's 
website at www.iextrading.com, at the principal office of the Exchange, 
and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange is proposing to make three changes to Rule 11.420 
related to OATS reporting requirements to (1) amend Rule 11.420(a)(13) 
to permit members to route orders to two Reporting Members for a 
defined period of time provided certain conditions are met without 
losing the exception from the definition of ``Reporting Member'' in 
conformance to comparable provisions of the Financial Industry 
Regulatory Authority (``FINRA'') Rule 7410; (2) amend rule citations in 
Rule 11.420(c) to correct [sic] citation to FINRA Rule 7430 to FINRA 
Rule 4590; and (3) amend the rule reference in Rule 11.420(g) to 
correct the reference to FINRA Rule 7470A to FINRA Rule 7470. Each 
proposed change is described below.
First Change
    IEX Rule 11.420 imposes an obligation on Exchange Members to record 
in electronic form and report to FINRA on a daily basis certain

[[Page 31807]]

information with respect to orders originated, received, transmitted, 
modified, cancelled or executed by Exchange Members in securities 
traded on IEX. FINRA's OATS captures this order information and 
integrates it with quote and transaction information to create a time-
sequenced record of orders, quotes and transactions. This information 
is used by FINRA staff to conduct surveillance and investigations of 
IEX Members (and members of FINRA and certain other national securities 
exchanges) for potential violation of Exchange rules (or rules of 
another national securities exchange in the case of a member of such 
exchange), federal securities laws, and FINRA rules.
    In general, IEX Rule 11.420 applies to any IEX Member that is a 
``Reporting Member,'' which is defined in IEX Rule 11.420(a)(13) as a 
Member that receives or originates an order and has an obligation to 
record and report information under IEX Rule 11.420(d) and 11.420(e). 
However, under Rule 11.420(a)(13)(A) a Member is not considered a 
Reporting Member in connection with an order if the following four 
criteria are met:
     The Member engages in non-discretionary order routing 
process, pursuant to which it immediately routes, by electronic or 
other means, all of its orders to a single receiving Reporting Member;
     the Member does not direct and does not maintain control 
over subsequent routing or execution by the receiving Reporting Member;
     the receiving Reporting Member records and reports all 
information required under IEX Rules 11.420(d) and 11.420(e) with 
respect to the order; and
     the Member has a written agreement with the receiving 
Reporting Member specifying the respective functions and 
responsibilities of each party to effect full compliance with the 
requirements of IEX Rules 11.420(d) and 11.420(e).
    On May 12, 2014, FINRA amended FINRA Rule 7410(o)(1)(A) to allow a 
member to route its orders to two receiving Reporting Members, if two 
conditions were met.\8\ First, the orders are routed by the member to 
each receiving Reporting Member on a predetermined schedule approved by 
FINRA. Second, the FINRA member's orders are routed to two receiving 
Reporting Members pursuant to the schedule for a time period not to 
exceed one year. The rule change permits FINRA members to continue to 
rely on the exception from the definition of Reporting Member if, for a 
limited time, the member routes orders to two different Reporting 
Members, provided the criteria are met. FINRA noted in adopting the 
change that the rule was intended to accommodate introducing firms that 
transition to a different clearing firm over time and, during the 
transition, route their orders two different clearing firms, both of 
which report the introducing firm's information to OATS during the 
transition time.\9\ The Nasdaq Stock Market LLC (``Nasdaq'') recently 
amended its rules to conform to this FINRA rule change.\10\ The 
Exchange believes that this additional limited exception is appropriate 
for its Members, which likewise may encounter a transition to a 
clearing firm whereby it [sic] would no longer be eligible for the 
exception to the definition of Reporting Member. Accordingly, the 
Exchange is proposing to amend Rule 11.420(a)(13).
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    \8\ See Securities Exchange Act Release No. 72191 (May 20, 
2014), 79 FR 30219 (May 27, 2014) (SR-FINRA-2014-024).
    \9\ Id. At 30220.
    \10\ See Nasdaq Rule 7410A(o)(1)(A)(ii). See also Securities 
Exchange Act Release No. 83115 (April 26, 2018), 83 FR 19384 (May 2, 
2018) (SR-NASDAQ-2018-030).
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Second Change
    The Exchange is proposing to correct a rule citation in Rule 
11.420(c), which specifies the requirements for synchronization of 
Member business clocks, and states that IEX Members shall comply with 
FINRA Rule 7430 as if such Rule were part of IEX's Rules. There is no 
FINRA Rule 7430, but rather the appropriate FINRA rule to cite to is 
FINRA Rule 4590 ``Synchronization of Member Business Clocks.'' The 
Exchange also notes that Nasdaq recently made a comparable change to 
Nasdaq Rule 7430A.\11\ Accordingly, the Exchange proposes to correct 
the erroneous citation in Rule 11.420(c).
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    \11\ See supra note 8.
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Third Change
    The Exchange is proposing to correct a rule citation in Rule 
11.420(g), which provides that IEX may grant an exemption to the OATS 
order recording and data transmission requirements to a Member under 
specified circumstances. The title to the rule subsection incorrectly 
references FINRA Rule 7470A. There is no FINRA Rule 7470A, but rather 
the appropriate FINRA rule to reference is FINRA Rule 7470 ``Exemption 
to the Order Recording and Data Transmission Requirement.'' 
Accordingly, the Exchange proposes to correct the erroneous reference 
in Rule 11.420(g).
2. Statutory Basis
    IEX believes that the proposed rule change is consistent with the 
provisions of Section 6(b) \12\ of the Act in general, and furthers the 
objectives of Section 6(b)(5) of the Act \13\ in particular, in that it 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest by harmonizing the Exchange's OATS rules with those of 
FINRA, on which they are based. Consequently, the proposed changes will 
conform Exchange rules to changes made to corresponding FINRA rules, 
thus promoting application of consistent regulatory standards with 
respect to rules that FINRA enforces pursuant to its regulatory 
services agreement with the Exchange. With respect to the proposed 
amendment to Rule 11.420(a)(13)(A), the exemption will provide Exchange 
members the same flexibility to transition to a new clearing firm that 
FINRA members enjoy. The rule is intended to accommodate introducing 
firms that transition to a different clearing firm over time and, 
during the transition, route their orders to two different clearing 
firms, both of which report the introducing firm's information to OATS 
during the transition time. Further, the change will also align the 
Exchange rulebook with FINRA's in this regard, thereby eliminating 
potential complexity from FINRA's work under a regulatory services 
agreement with the Exchange.
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    \12\ 15 U.S.C. 78f.
    \13\ 15 U.S.C. 78f(b)(5).
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    With respect to the technical corrections to Rules 11.420(c) and 
11.420(g), the Exchange believes that these changes are consistent with 
the Act because they will prevent investor confusion that may be caused 
by incorrect rule citations in the Rules.

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

    IEX does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed changes align the 
Exchange's rules with those of FINRA, which will assist it in its 
oversight work done pursuant to a regulatory services agreement, and 
makes [sic] technical corrections to the rules. Consequently, the 
Exchange does not believe that the

[[Page 31808]]

proposed changes implicate competition at all.

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

    Written comments were neither solicited nor received.

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

    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 for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate, it has become effective pursuant to Section 
19(b)(3)(A) of the Act \14\ and Rule 19b-4(f)(6) thereunder.\15\
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \16\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \17\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay so that 
the proposal may become operative upon filing. The Commission does not 
believe that any new or novel issues are raised by the proposal; the 
proposal aligns IEX's rule with the rule of Nasdaq and FINRA. The 
Commission believes the waiver of the operative delay is consistent 
with the protection of investors and the public interest. Therefore, 
the Commission hereby waives the operative delay and designates the 
proposal operative upon filing.\18\
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    \16\ Id.
    \17\ 17 CFR 240.19b-4(f)(6)(iii).
    \18\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-IEX-2018-12 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-IEX-2018-12. This file 
number should be included in the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (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 website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549. Copies of the filing will also be available for inspection and 
copying at the IEX's principal office and on its internet website at 
www.iextrading.com. All comments received will be posted without 
change. Persons submitting comments are cautioned that we do not redact 
or edit personal identifying information from comment submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-IEX-2018-12 
and should be submitted on or before July 30, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-14551 Filed 7-6-18; 8:45 am]
 BILLING CODE P