Self-Regulatory Organizations; the NASDAQ Stock Market LLC; Order Approving Proposed Rule Change, as Modified By Amendment No. 1 Thereto, Amending Nasdaq's Membership Application Rules, 70632-70634 [E7-24045]
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70632
Federal Register / Vol. 72, No. 238 / Wednesday, December 12, 2007 / Notices
mstockstill on PROD1PC66 with NOTICES
that the proposed generic listing
standards for Commodity-Linked
Securities, in addition to the proposed
conforming changes to the generic
listing standards applicable to all
Linked Securities and Equity IndexLinked Securities, should fulfill the
intended objective of Rule 19b–4(e) and
allow securities that satisfy the
proposed generic listing standards to
commence trading without the need for
public comment and Commission
approval.35
The Commission notes that any
Linked Securities approved for listing
and trading would be subject to the
FINRA’s surveillance procedures to
monitor the trading in such securities.
The Exchange has represented that, to
the extent applicable, NASDAQ and/or
FINRA will be able to obtain trading and
beneficial holder information from other
primary trading markets either pursuant
to information sharing agreements with
such markets or because such markets
are members or affiliate members of ISG.
The Exchange has represented that it
will distribute, as appropriate, an
Information Circular to members
describing the product, the particular
structure of the product, and the
corresponding risks of trading Linked
Securities, including the risks involved
in trading such securities during
markets sessions other than NASDAQ’s
Regular Market Session, when an
updated index or Reference Asset value,
or indicative value, if required, is not
calculated or publicly disseminated.36
In addition, the Information Circular
will set forth the Exchange’s suitability
generic listing standards for Equity Index-Linked
Securities, Commodity-Linked Securities, and
Currency-Linked Securities). NASDAQ’s proposal
also takes into account certain modifications
recently made by other national securities
exchanges to the various types of Linked Securities,
as applicable. See, e.g., 107A of the American Stock
Exchange LLC Company Guide (reflecting
exceptions to the minimum public distribution
requirements for certain types of securities,
including Linked Securities); Securities Exchange
Act Release Nos. 56879 (December 3, 2007) (SR–
NYSEArca–2007–110) (approving certain proposed
changes to the initial listing and trading standards
for Equity Index-Linked Securities); 56838
(November 26, 2007), 72 FR 67774 (November 30,
2007) (SR–NYSEArca–2007–118) (approving certain
modifications made to the requirements relating to
the indexes underlying Equity Index-Linked
Securities); and 56525 (September 25, 2007), 72 FR
56114 (October 2, 2007) (SR–NYSE–2007–76)
(approving certain exceptions to the requirement
relating to pricing information of components
comprising Commodity-Linked Securities and
Currency-Linked Securities).
35 The Commission notes that the failure of a
particular product or index to comply with the
proposed generic listing standards under Rule 19b–
4(e), however, would not preclude the Exchange
from submitting a separate filing pursuant to
Section 19(b)(2), requesting Commission approval
to list and trade a particular index-linked product.
36 See supra note 13 and accompanying text.
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requirements with respect to
recommendations in transactions in
Linked Securities to customers and the
registration statement or prospectus
delivery requirements. The Information
Circular will also note that the
Exchange’s equity trading rules will be
applicable to the trading of Linked
Securities.
Acceleration
The Commission finds good cause for
approving the proposed rule change, as
modified by Amendment Nos. 1, 2, and
3 thereto, before the 30th day after the
date of publication of notice of filing
thereof in the Federal Register. The
Commission notes that the Exchange’s
proposed conforming changes to the
generic listing standards that apply to
all Linked Securities, proposed changes
to the generic listing standards for
Equity Index-Linked Securities, and the
proposed generic listing standards for
Commodity-Linked Securities are based
on previously approved listing
standards for such securities.37 The
Commission is presently not aware of
any regulatory issue that should cause it
to revisit that finding or would preclude
the trading of such securities on the
Exchange. Therefore, accelerating
approval of this proposal should benefit
investors by creating, without undue
delay, additional competition in the
market for Linked Securities, subject to
the standards and representations
discussed herein. Therefore, the
Commission finds good cause,
consistent with section 19(b)(2) of the
Act,38 to approve the proposed rule
change on an accelerated basis.
V. Conclusion
It is therefore ordered, pursuant to
section 19(b)(2) of the Act,39 that the
proposed rule change (SR–NASDAQ–
2007–071), as modified by Amendment
Nos. 1, 2, and 3 thereto, be, and it
hereby is, approved on an accelerated
basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.40
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–23973 Filed 12–11–07; 8:45 am]
BILLING CODE 8011–01–P
37 See
38 15
supra notes 4 and 34.
U.S.C. 78s(b)(2).
39 Id.
40 17
PO 00000
CFR 200.30–3(a)(12).
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–56917; File No. SR–
NASDAQ–2007–085]
Self-Regulatory Organizations; the
NASDAQ Stock Market LLC; Order
Approving Proposed Rule Change, as
Modified By Amendment No. 1 Thereto,
Amending Nasdaq’s Membership
Application Rules
December 6, 2007.
I. Introduction
On October 30, 2007, The NASDAQ
Stock Market LLC (‘‘Nasdaq’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to modify Nasdaq’s membership
application procedures. The proposed
rule change was published for comment
in the Federal Register on November 6,
2007.3 On December 4, 2007, Nasdaq
filed Amendment No. 1 to the proposed
rule change.4 The Commission received
no comment letters on the proposed rule
change. This order approves the
proposed rule change, as modified by
Amendment No. 1 thereto.
II. Description of the Proposal
Nasdaq is proposing to amend its
1000 Series rules governing its
membership application process to
tailor the rules to proprietary trading
firms. Under the proposed rule, a
‘‘proprietary trading firm’’ is defined as
an applicant: (1) That is not required to
become a member of the Financial
Industry Regulatory Authority
(‘‘FINRA’’) by section 15(b)(8) of the
Act 5 but is a member of another
registered securities exchange not
registered solely under section 6(g) of
the Act; (2) whose source of funds or
proposed source of funds to be used for
trading are the applicant’s own capital,
traded through the applicant’s own
accounts; (3) that does not, and will not
have ‘‘customers’’ 6; and (4) whose
principals and representatives acting or
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
Securities Exchange Act Release No. 56722
(October 31, 2007), 72 FR 62709 (‘‘Notice’’).
4 In Amendment No. 1, Nasdaq corrected
typographical errors and clarified that in Rule
1013(a)(1), an applicant should file an amendment
to its membership application no later than 15 days
after the applicant ‘‘knew or should have known’’
about facts and circumstances that gave rise to the
need for the amendment. Because Amendment No.
1 is technical in nature, it is not subject to notice
and comment.
5 15 U.S.C. 78o(b)(8).
6 The term ‘‘customer’’ does not include a broker
or dealer. See Nasdaq Rule 0120(g).
2 17
3 See
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Federal Register / Vol. 72, No. 238 / Wednesday, December 12, 2007 / Notices
to be acting in the capacity of a trader
must be owners of, employees of, or
contractors to the applicant.7
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A. Required Information in the
Application
Under the new application process,
an applicant would be required to
submit certain information in its
application.8 This information includes
the following:
• A copy of the applicant’s current
Form BD;
• an original Nasdaq-approved
fingerprint card for each Associated
Person who will be subject to Rule 17f–
2 under the Act and for whom a
fingerprint card has not been filed with
another SRO;
• Nasdaq’s application fee;
• a description of the applicant’s
proposed trading activities on Nasdaq;
• a copy of the applicant’s most
recent audited financial statements and
a description of any material changes in
the applicant’s financial condition since
the date of the financial statements;
• an organizational chart;
• the intended location of the
applicant’s principal place of business
and all other offices, if any, whether or
not such offices would be required to be
registered under the Nasdaq Rules, and
the names of the persons who will be in
charge of each office; 9
• a description of the
communications and operational
systems the applicant will employ to
conduct business and the plans and
procedures the applicant will employ to
ensure business continuity;
• a copy of any decision or order by
a federal or state authority or SRO
taking permanent or temporary adverse
action with respect to a registration or
licensing determination regarding the
applicant or an Associated Person;
• a statement indicating whether the
applicant is currently or has recently
been the subject of any investigation or
disciplinary proceeding;
• a statement indicating whether any
person listed on Schedule A of the
applicant’s Form BD (i.e., the direct
owners and executive officers of the
applicant) is currently or has recently
been the subject of any investigation or
disciplinary proceeding;
• a copy of any contract or agreement
with another broker-dealer, a bank, a
clearing entity, a service bureau or a
similar entity to provide the applicant
7 See
proposed Nasdaq Rule 1011(o).
proposed Nasdaq Rules 1013(a)(1)(A)–(V). A
more detailed description of the required
information is described in the Notice, supra note
3.
9 Nasdaq believes that most proprietary trading
firms will only have one office.
8 See
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with services regarding the execution or
clearance and settlement of transactions
effected on Nasdaq;
• if the applicant proposes to make
markets on Nasdaq, a description of the
source and amount of applicant’s capital
to support its market making activities
on Nasdaq, and the source of any
additional capital that may become
necessary;
• a description of the financial
controls to be employed by the
applicant with respect to Nasdaq Rule
3011, which governs anti-money
laundering controls;
• a copy of the applicant’s written
supervisory procedures with respect to
the applicant’s proposed trading
activities on Nasdaq;
• a list of the persons conducting the
applicant’s market making and other
trading activities, and a list of the
persons responsible for such persons’
supervision, together with the CRD
number (if applicable) or a copy of Form
U4 for each such person;
• unless previously provided to
FINRA, a FINRA Entitlement Program
Agreement and Terms of Use and an
Account Administration Entitlement
Form;
• a copy of the applicant’s most
recent ‘‘FOCUS Report’’ (Form X–17A–
5) filed with the Commission;
• all examination reports and
corresponding responses regarding the
applicant for the previous two years
from the SROs of which it is a member;
• An agreement to comply with the
federal securities laws, the rules and
regulations thereunder, the Nasdaq
Rules, and all rulings, orders, directions,
and decisions issued and sanctions
imposed under the Nasdaq Rules;
• An agreement to pay such dues,
assessments, and other charges; and
• Other reasonable information with
respect to the applicant as Nasdaq may
require.
Applicants must keep their
application current by submitting
amendments if facts and circumstances
change.10 Nasdaq proposes to amend
Rule 1013(a)(1) to require applicants to
file amendments with Nasdaq no later
than 15 business days after the
applicant or Nasdaq member knew or
should have known about the facts or
circumstances giving rise to the need for
the amendment. Nasdaq also amended
Rule 1013(a)(1) to add that an applicant
must promptly notify the Nasdaq
Membership Department
(‘‘Department’’) 11 of any material
adverse change in financial condition.
10 See
Nasdaq Rule 1013(a)(1).
term includes FINRA staff acting on
Nasdaq’s behalf.
11 The
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70633
B. Membership Admission Standard
Nasdaq proposes to amend the
admission standard in Rule 1014.
Currently, the Department must make
specific findings in order to admit an
applicant as a Nasdaq member. The
proposed rule would allow the
Department to approve an application
unless there is a basis for denying or
conditioning approval.12 The proposed
rule further provides that the
Department may deny (or condition)
approval of an applicant for the same
reasons that the Commission may deny
or revoke a broker-dealer’s registration
and for those reasons required or
allowed under the Act. The proposed
rule lists specific bases upon which the
Department may deny (or condition)
approval of an applicant which
include: 13 (1) inability of the applicant
to satisfactorily demonstrate the
capacity to adhere to applicable Nasdaq
and Commission policies, rules, and
regulations, including, those concerning
record-keeping, reporting, finance, and
trading procedures; (2) past rule
violations by the applicant and a
reasonable likelihood that the applicant
will again engage in acts or practices
that violate any Nasdaq or Commission
policies, rules, or regulations; (3)
behavior in which the applicant
engaged and the existence of a
reasonable likelihood that the applicant
will again engage in, acts or practices
inconsistent with just and equitable
principles of trade; (4) factors indicative
of financial difficulties, such as not
being in compliance with the
Commission’s net capital rule or having
financial difficulties involving an
amount that is more than 5% of the
applicant’s net worth; (5) the applicant
is the subject of a current or recent
bankruptcy proceeding; (6) the
applicant has an established pattern of
failure to pay just debts; (7) failure to
have required governmental and SRO
registrations; or (8) inability to
demonstrate reasonably adequate
systems capability and capacity.
The proposed rule would provide the
Department with the discretion to
conduct a membership interview if it
determines an interview is necessary to
clarify aspects of an application.14 The
proposed rule change also reduces the
time allotted for various aspects of
review, both for initial applications and
for changes of ownership, control and
12 A similar change would be made in Nasdaq
Rule 1017(g)(1)(A), providing that an application for
a material change in business operations will be
approved unless there is a basis for denying it
under the standards in Rule 1014.
13 See proposed Nasdaq Rule 1014(a)(2).
14 See proposed Nasdaq Rule 1013(b)(1).
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70634
Federal Register / Vol. 72, No. 238 / Wednesday, December 12, 2007 / Notices
business operations under Nasdaq Rule
1017.
C. Material Change in Business
Operations
Currently, Nasdaq Rule 1017(a)
provides that if there is a material
change in business operations, the
member will be required to file an
application for approval that describes
in detail the change in ownership,
control, or business operations and
include a business plan, pro forma
financials, an organizational chart, and
written supervisory procedures
reflecting the change. The proposed rule
change amends the definition of
‘‘material change in business
operations’’ in Nasdaq Rule 1011(g) to
include ‘‘adding business activities that
would cause a proprietary trading firm
no longer to meet the definition of that
term. * * *’’ If a proprietary trading
firm seeks to expand its activities to
include dealings with customers, the
member would be required to undergo
an assessment and obtain approval of
this change under Nasdaq Rule 1017.
If a firm is required to become a
FINRA member due to a change in
ownership, control, or business
operations, the amended rule provides
that the Department is not required to
take action on an application for
approval under Rule 1017 until FINRA
has acted on the application under its
rule or the firm has become a FINRA
member, as applicable.15
mstockstill on PROD1PC66 with NOTICES
E. Other Changes
In addition, Nasdaq proposes to (1)
amend Rule 1021 to provide that a
proprietary trading firm with 25 or
fewer registered representatives is
required to have only one, rather than
two registered principals; (2) eliminate
the requirement that traders for
proprietary trading firms register as
equity traders under Nasdaq Rule
1032(f); (3) amend Rule 1150 to require
that a firm’s executive representative
under Nasdaq rules be the same as its
executive representative under FINRA
rules; and (4) amend Nasdaq Rule 1130
to provide that the names and addresses
of executive representatives will not be
available to members or the general
public. Finally, the proposed rule
change also makes conforming changes
to provisions of Nasdaq rules 1014,
1015, and 1017 that refer to the
standards for admission in Nasdaq Rule
1014.
15 See
proposed Nasdaq Rule 1017(g)(4).
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III. Discussion and Commission
Findings
After careful consideration, the
Commission finds that the proposed
rule change, as amended, is consistent
with the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
exchange 16 and, in particular, the
requirements of section 6 of the Act.17
Specifically, the Commission finds that
the proposed rule change is consistent
with section 6(b)(5) of the Act,18 which
requires, among other things, that the
rules of a national securities exchange
be designed to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, and processing information
with respect to, and facilitating
transactions in securities, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
The Commission has reviewed the
provisions of the proposed rule change
and believes that they are consistent
with the requirements of the Act. In
particular, the Commission believes that
the proposed rule under which Nasdaq
may deny or condition membership is
reasonable and consistent with section
6(b)(5) of the Act in that it promotes just
and equitable principles of trade and, in
general, serves to protect investors and
the public interest, and is also
consistent with the grounds upon which
an exchange may deny or condition
membership under section 6(c)(3) of the
Act. The circumstances described in the
proposed rule under which the
Exchange may deny or condition
membership address situations in which
an applicant has failed to demonstrate
the ability to comply with the financial
and regulatory responsibilities
necessary for Exchange membership.
The Commission notes that these bases
for denial of membership are similar to
those of NYSE Arca, Inc. (‘‘NYSE Arca’’)
and the International Securities
Exchange, LLC (‘‘ISE’’) which were
approved by the Commission.19 The
Commission also notes that an applicant
16 In approving this proposed rule change the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
17 15 U.S.C. 78f.
18 15 U.S.C. 78f(b)(5).
19 See Securities Exchange Act Release Nos.
42455 (February 24, 2000), 65 FR 11388 (March 2,
2000); and 49718 (May 17, 2004), 69 FR 29611 (May
24, 2004). See also ISE Rule 302 (Denial of and
Conditions of Becoming a Member); NYSE Arca
Equities Rule 2.4 (Denial of or Conditions to ETPs).
PO 00000
Frm 00076
Fmt 4703
Sfmt 4703
who has been denied membership
would always have the right to appeal
that decision.20
In addition, the Commission believes
that the proposal to amend the current
membership application requirements
which focus on a member’s relationship
with its customers is appropriate
because a proprietary trading firm, by
definition, does not handle customer
orders. Because Nasdaq’s rules provide
that all applicants must already be a
member either of FINRA, if they transact
business with the public, or of another
national securities exchange, which acts
as an Examining Authority for purposes
of Rule 15c3–1 under the Act,21 the
Commission believes the level of
information required in the amended
membership application is reasonable.
As stated in the Nasdaq rules, if a
Nasdaq member undergoes a material
change in ownership, control, or
business operations, the member will be
required to file an application for
approval and may need to register as a
member of FINRA. Further, based on
Nasdaq’s representation that the
proposal to reduce time allotted to
review applications (for both initial
applications and for changes of
ownership, control and business
operations) is due to centralizing the
review of applications as well as the less
complex nature of the applicant firms
(i.e., proprietary trading firms and
members of other SROs), the
Commission believes that the reduction
in review time is reasonable.
IV. Conclusion
It is therefore ordered, pursuant to
section 19(b)(2) of the Act,22 that the
proposed rule change (File No. SR–
NASDAQ–2007–085), as modified by
Amendment No. 1 thereto, be, and it
hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–24045 Filed 12–11–07; 8:45 am]
BILLING CODE 8011–01–P
20 See
15 U.S.C. 78s(f).
CFR 240.15c3–1.
22 15 U.S.C. 78s(b)(2).
23 17 CFR 200.30–3(a)(12).
21 17
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Agencies
[Federal Register Volume 72, Number 238 (Wednesday, December 12, 2007)]
[Notices]
[Pages 70632-70634]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-24045]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-56917; File No. SR-NASDAQ-2007-085]
Self-Regulatory Organizations; the NASDAQ Stock Market LLC; Order
Approving Proposed Rule Change, as Modified By Amendment No. 1 Thereto,
Amending Nasdaq's Membership Application Rules
December 6, 2007.
I. Introduction
On October 30, 2007, The NASDAQ Stock Market LLC (``Nasdaq'') filed
with the Securities and Exchange Commission (``Commission''), pursuant
to section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'')
\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to modify
Nasdaq's membership application procedures. The proposed rule change
was published for comment in the Federal Register on November 6,
2007.\3\ On December 4, 2007, Nasdaq filed Amendment No. 1 to the
proposed rule change.\4\ The Commission received no comment letters on
the proposed rule change. This order approves the proposed rule change,
as modified by Amendment No. 1 thereto.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 56722 (October 31,
2007), 72 FR 62709 (``Notice'').
\4\ In Amendment No. 1, Nasdaq corrected typographical errors
and clarified that in Rule 1013(a)(1), an applicant should file an
amendment to its membership application no later than 15 days after
the applicant ``knew or should have known'' about facts and
circumstances that gave rise to the need for the amendment. Because
Amendment No. 1 is technical in nature, it is not subject to notice
and comment.
---------------------------------------------------------------------------
II. Description of the Proposal
Nasdaq is proposing to amend its 1000 Series rules governing its
membership application process to tailor the rules to proprietary
trading firms. Under the proposed rule, a ``proprietary trading firm''
is defined as an applicant: (1) That is not required to become a member
of the Financial Industry Regulatory Authority (``FINRA'') by section
15(b)(8) of the Act \5\ but is a member of another registered
securities exchange not registered solely under section 6(g) of the
Act; (2) whose source of funds or proposed source of funds to be used
for trading are the applicant's own capital, traded through the
applicant's own accounts; (3) that does not, and will not have
``customers'' \6\; and (4) whose principals and representatives acting
or
[[Page 70633]]
to be acting in the capacity of a trader must be owners of, employees
of, or contractors to the applicant.\7\
---------------------------------------------------------------------------
\5\ 15 U.S.C. 78o(b)(8).
\6\ The term ``customer'' does not include a broker or dealer.
See Nasdaq Rule 0120(g).
\7\ See proposed Nasdaq Rule 1011(o).
---------------------------------------------------------------------------
A. Required Information in the Application
Under the new application process, an applicant would be required
to submit certain information in its application.\8\ This information
includes the following:
---------------------------------------------------------------------------
\8\ See proposed Nasdaq Rules 1013(a)(1)(A)-(V). A more detailed
description of the required information is described in the Notice,
supra note 3.
---------------------------------------------------------------------------
A copy of the applicant's current Form BD;
an original Nasdaq-approved fingerprint card for each
Associated Person who will be subject to Rule 17f-2 under the Act and
for whom a fingerprint card has not been filed with another SRO;
Nasdaq's application fee;
a description of the applicant's proposed trading
activities on Nasdaq;
a copy of the applicant's most recent audited financial
statements and a description of any material changes in the applicant's
financial condition since the date of the financial statements;
an organizational chart;
the intended location of the applicant's principal place
of business and all other offices, if any, whether or not such offices
would be required to be registered under the Nasdaq Rules, and the
names of the persons who will be in charge of each office; \9\
---------------------------------------------------------------------------
\9\ Nasdaq believes that most proprietary trading firms will
only have one office.
---------------------------------------------------------------------------
a description of the communications and operational
systems the applicant will employ to conduct business and the plans and
procedures the applicant will employ to ensure business continuity;
a copy of any decision or order by a federal or state
authority or SRO taking permanent or temporary adverse action with
respect to a registration or licensing determination regarding the
applicant or an Associated Person;
a statement indicating whether the applicant is currently
or has recently been the subject of any investigation or disciplinary
proceeding;
a statement indicating whether any person listed on
Schedule A of the applicant's Form BD (i.e., the direct owners and
executive officers of the applicant) is currently or has recently been
the subject of any investigation or disciplinary proceeding;
a copy of any contract or agreement with another broker-
dealer, a bank, a clearing entity, a service bureau or a similar entity
to provide the applicant with services regarding the execution or
clearance and settlement of transactions effected on Nasdaq;
if the applicant proposes to make markets on Nasdaq, a
description of the source and amount of applicant's capital to support
its market making activities on Nasdaq, and the source of any
additional capital that may become necessary;
a description of the financial controls to be employed by
the applicant with respect to Nasdaq Rule 3011, which governs anti-
money laundering controls;
a copy of the applicant's written supervisory procedures
with respect to the applicant's proposed trading activities on Nasdaq;
a list of the persons conducting the applicant's market
making and other trading activities, and a list of the persons
responsible for such persons' supervision, together with the CRD number
(if applicable) or a copy of Form U4 for each such person;
unless previously provided to FINRA, a FINRA Entitlement
Program Agreement and Terms of Use and an Account Administration
Entitlement Form;
a copy of the applicant's most recent ``FOCUS Report''
(Form X-17A-5) filed with the Commission;
all examination reports and corresponding responses
regarding the applicant for the previous two years from the SROs of
which it is a member;
An agreement to comply with the federal securities laws,
the rules and regulations thereunder, the Nasdaq Rules, and all
rulings, orders, directions, and decisions issued and sanctions imposed
under the Nasdaq Rules;
An agreement to pay such dues, assessments, and other
charges; and
Other reasonable information with respect to the applicant
as Nasdaq may require.
Applicants must keep their application current by submitting
amendments if facts and circumstances change.\10\ Nasdaq proposes to
amend Rule 1013(a)(1) to require applicants to file amendments with
Nasdaq no later than 15 business days after the applicant or Nasdaq
member knew or should have known about the facts or circumstances
giving rise to the need for the amendment. Nasdaq also amended Rule
1013(a)(1) to add that an applicant must promptly notify the Nasdaq
Membership Department (``Department'') \11\ of any material adverse
change in financial condition.
---------------------------------------------------------------------------
\10\ See Nasdaq Rule 1013(a)(1).
\11\ The term includes FINRA staff acting on Nasdaq's behalf.
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B. Membership Admission Standard
Nasdaq proposes to amend the admission standard in Rule 1014.
Currently, the Department must make specific findings in order to admit
an applicant as a Nasdaq member. The proposed rule would allow the
Department to approve an application unless there is a basis for
denying or conditioning approval.\12\ The proposed rule further
provides that the Department may deny (or condition) approval of an
applicant for the same reasons that the Commission may deny or revoke a
broker-dealer's registration and for those reasons required or allowed
under the Act. The proposed rule lists specific bases upon which the
Department may deny (or condition) approval of an applicant which
include: \13\ (1) inability of the applicant to satisfactorily
demonstrate the capacity to adhere to applicable Nasdaq and Commission
policies, rules, and regulations, including, those concerning record-
keeping, reporting, finance, and trading procedures; (2) past rule
violations by the applicant and a reasonable likelihood that the
applicant will again engage in acts or practices that violate any
Nasdaq or Commission policies, rules, or regulations; (3) behavior in
which the applicant engaged and the existence of a reasonable
likelihood that the applicant will again engage in, acts or practices
inconsistent with just and equitable principles of trade; (4) factors
indicative of financial difficulties, such as not being in compliance
with the Commission's net capital rule or having financial difficulties
involving an amount that is more than 5% of the applicant's net worth;
(5) the applicant is the subject of a current or recent bankruptcy
proceeding; (6) the applicant has an established pattern of failure to
pay just debts; (7) failure to have required governmental and SRO
registrations; or (8) inability to demonstrate reasonably adequate
systems capability and capacity.
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\12\ A similar change would be made in Nasdaq Rule
1017(g)(1)(A), providing that an application for a material change
in business operations will be approved unless there is a basis for
denying it under the standards in Rule 1014.
\13\ See proposed Nasdaq Rule 1014(a)(2).
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The proposed rule would provide the Department with the discretion
to conduct a membership interview if it determines an interview is
necessary to clarify aspects of an application.\14\ The proposed rule
change also reduces the time allotted for various aspects of review,
both for initial applications and for changes of ownership, control and
[[Page 70634]]
business operations under Nasdaq Rule 1017.
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\14\ See proposed Nasdaq Rule 1013(b)(1).
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C. Material Change in Business Operations
Currently, Nasdaq Rule 1017(a) provides that if there is a material
change in business operations, the member will be required to file an
application for approval that describes in detail the change in
ownership, control, or business operations and include a business plan,
pro forma financials, an organizational chart, and written supervisory
procedures reflecting the change. The proposed rule change amends the
definition of ``material change in business operations'' in Nasdaq Rule
1011(g) to include ``adding business activities that would cause a
proprietary trading firm no longer to meet the definition of that term.
* * *'' If a proprietary trading firm seeks to expand its activities to
include dealings with customers, the member would be required to
undergo an assessment and obtain approval of this change under Nasdaq
Rule 1017.
If a firm is required to become a FINRA member due to a change in
ownership, control, or business operations, the amended rule provides
that the Department is not required to take action on an application
for approval under Rule 1017 until FINRA has acted on the application
under its rule or the firm has become a FINRA member, as
applicable.\15\
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\15\ See proposed Nasdaq Rule 1017(g)(4).
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E. Other Changes
In addition, Nasdaq proposes to (1) amend Rule 1021 to provide that
a proprietary trading firm with 25 or fewer registered representatives
is required to have only one, rather than two registered principals;
(2) eliminate the requirement that traders for proprietary trading
firms register as equity traders under Nasdaq Rule 1032(f); (3) amend
Rule 1150 to require that a firm's executive representative under
Nasdaq rules be the same as its executive representative under FINRA
rules; and (4) amend Nasdaq Rule 1130 to provide that the names and
addresses of executive representatives will not be available to members
or the general public. Finally, the proposed rule change also makes
conforming changes to provisions of Nasdaq rules 1014, 1015, and 1017
that refer to the standards for admission in Nasdaq Rule 1014.
III. Discussion and Commission Findings
After careful consideration, the Commission finds that the proposed
rule change, as amended, is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to a national
securities exchange \16\ and, in particular, the requirements of
section 6 of the Act.\17\ Specifically, the Commission finds that the
proposed rule change is consistent with section 6(b)(5) of the Act,\18\
which requires, among other things, that the rules of a national
securities exchange be designed to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, and processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
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\16\ In approving this proposed rule change the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\17\ 15 U.S.C. 78f.
\18\ 15 U.S.C. 78f(b)(5).
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The Commission has reviewed the provisions of the proposed rule
change and believes that they are consistent with the requirements of
the Act. In particular, the Commission believes that the proposed rule
under which Nasdaq may deny or condition membership is reasonable and
consistent with section 6(b)(5) of the Act in that it promotes just and
equitable principles of trade and, in general, serves to protect
investors and the public interest, and is also consistent with the
grounds upon which an exchange may deny or condition membership under
section 6(c)(3) of the Act. The circumstances described in the proposed
rule under which the Exchange may deny or condition membership address
situations in which an applicant has failed to demonstrate the ability
to comply with the financial and regulatory responsibilities necessary
for Exchange membership. The Commission notes that these bases for
denial of membership are similar to those of NYSE Arca, Inc. (``NYSE
Arca'') and the International Securities Exchange, LLC (``ISE'') which
were approved by the Commission.\19\ The Commission also notes that an
applicant who has been denied membership would always have the right to
appeal that decision.\20\
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\19\ See Securities Exchange Act Release Nos. 42455 (February
24, 2000), 65 FR 11388 (March 2, 2000); and 49718 (May 17, 2004), 69
FR 29611 (May 24, 2004). See also ISE Rule 302 (Denial of and
Conditions of Becoming a Member); NYSE Arca Equities Rule 2.4
(Denial of or Conditions to ETPs).
\20\ See 15 U.S.C. 78s(f).
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In addition, the Commission believes that the proposal to amend the
current membership application requirements which focus on a member's
relationship with its customers is appropriate because a proprietary
trading firm, by definition, does not handle customer orders. Because
Nasdaq's rules provide that all applicants must already be a member
either of FINRA, if they transact business with the public, or of
another national securities exchange, which acts as an Examining
Authority for purposes of Rule 15c3-1 under the Act,\21\ the Commission
believes the level of information required in the amended membership
application is reasonable. As stated in the Nasdaq rules, if a Nasdaq
member undergoes a material change in ownership, control, or business
operations, the member will be required to file an application for
approval and may need to register as a member of FINRA. Further, based
on Nasdaq's representation that the proposal to reduce time allotted to
review applications (for both initial applications and for changes of
ownership, control and business operations) is due to centralizing the
review of applications as well as the less complex nature of the
applicant firms (i.e., proprietary trading firms and members of other
SROs), the Commission believes that the reduction in review time is
reasonable.
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\21\ 17 CFR 240.15c3-1.
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IV. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\22\ that the proposed rule change (File No. SR-NASDAQ-2007-085),
as modified by Amendment No. 1 thereto, be, and it hereby is, approved.
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\22\ 15 U.S.C. 78s(b)(2).
\23\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets, pursuant
to delegated authority.\23\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-24045 Filed 12-11-07; 8:45 am]
BILLING CODE 8011-01-P