Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change To Amend BATS Rule 5.5, Entitled “Information Barrier Procedures,” and To Add New BATS Rule 12.13, Entitled “Trading Ahead of Research Reports”, 9455-9459 [2010-4230]

Download as PDF Federal Register / Vol. 75, No. 40 / Tuesday, March 2, 2010 / Notices Inc.) because it has not filed any periodic reports since the period ended September 30, 2000. The Commission is of the opinion that the public interest and the protection of investors require a suspension of trading in the securities of the above-listed companies. Therefore, it is ordered, pursuant to Section 12(k) of the Securities Exchange Act of 1934, that trading in the securities of the above-listed companies is suspended for the period from 9:30 a.m. EST on February 26, 2010, through 11:59 p.m. EST on March 11, 2010. added, deleted or postponed, please contact: The Office of the Secretary at (202) 551–5400. Dated: February 25, 2010. Elizabeth M. Murphy, Secretary. [FR Doc. 2010–4333 Filed 2–26–10; 11:15 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [File No. 500–1] U.S. Biomedical Corp., (f/k/a United Textiles & Toys, Inc.), U.S. Environmental Solutions, Inc. (n/k/a EnviroResolutions, Inc.), USA Bridge Construction of N.Y., Inc., USA Broadband, Inc., USA Uranium Corp., and Utopia Marketing, Inc. (n/k/a Daytonabrands, Inc.); Order of Suspension of Trading WReier-Aviles on DSKGBLS3C1PROD with NOTICES It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of U.S. Biomedical Corp. (f/k/a United Textiles & Toys, Inc.) because it has not filed any periodic reports since the period ended December 31, 2002. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of U.S. Environmental Solutions, Inc. (n/k/a EnviroResolutions, Inc.) because it has not filed any periodic reports since the period ended March 31, 1996. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of USA Bridge Construction of N.Y., Inc. because it has not filed any periodic reports since the period ended September 30, 1998. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of USA Broadband, Inc. because it has not filed any periodic reports since the period ended December 31, 2003. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of USA Uranium Corp. because it has not filed any periodic reports since the period ended February 29, 2008. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Utopia Marketing, Inc. (n/k/a Daytonabrands, 15:07 Mar 01, 2010 [FR Doc. 2010–4375 Filed 2–26–10; 4:15 pm] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–61574; File No. SR–BATS– 2010–003] February 26, 2010. VerDate Nov<24>2008 By the Commission. Jill M. Peterson, Assistant Secretary. Jkt 220001 Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change To Amend BATS Rule 5.5, Entitled ‘‘Information Barrier Procedures,’’ and To Add New BATS Rule 12.13, Entitled ‘‘Trading Ahead of Research Reports’’ February 23, 2010. 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 February 11, 2010, BATS Exchange, Inc. (‘‘BATS’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by BATS. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons and is approving the proposed rule change on an accelerated basis. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange is proposing to amend BATS Rule 5.5, entitled ‘‘Information Barrier Procedures,’’ to modify the Exchange’s rule regarding information barrier procedures required of certain Exchange Members. The Exchange is also proposing to add new Exchange Rule 12.13, entitled ‘‘Trading Ahead of Research Reports.’’ 1 15 2 17 PO 00000 U.S.C. 78s(b)(1). CFR 240.19b–4. Frm 00076 Fmt 4703 The text of the proposed rule change is available at the Exchange’s Web site at https://www.batstrading.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 Exchange 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 statements may be examined at the places specified in Item III 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 to eliminate the requirements of BATS Rule 5.5 that require a Member 3 that trades for its own account or that has a specialist or market maker operation on another market (defined in BATS Rule 5.5(a) as a ‘‘specialist’’) to establish and maintain certain specifically prescribed information barrier procedures and to file such procedures with the Exchange. At the same time, the Exchange proposes to amend BATS Rule 5.5 to more closely mirror the rules of other self-regulatory organizations that create certain obligations for all Member firms related to the prevention of the misuse of material, non-public information. Finally, the Exchange proposes to add new BATS Rule 12.13, which: (i) Prohibits Members from trading ahead of research reports, and (ii) requires each Member to establish, maintain and enforce procedures regarding the flow of information between research department personnel and trading department personnel. (i) All Members Must Maintain Policies Concerning the Misuse of Material NonPublic Information Presently, the Exchange requires that each Member establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material, non-public information, which includes review of employee and proprietary trading, memorialization and documentation of 3 See Sfmt 4703 9455 E:\FR\FM\02MRN1.SGM BATS Rule 1.5(n). 02MRN1 9456 Federal Register / Vol. 75, No. 40 / Tuesday, March 2, 2010 / Notices WReier-Aviles on DSKGBLS3C1PROD with NOTICES procedures, substantive supervision of interdepartmental communications by the Member’s compliance department and procedures concerning proprietary trading when the firm is in possession of material, non-public information.4 The Exchange also has specific rules prohibiting Members from disadvantaging their customers or other market participants by improperly capitalizing on the Members’ access to or receipt of material, non-public information. For example, the Exchange prohibits a Member from trading ahead of its customer’s limit orders.5 (ii) Proposed Amendments to General Standards and Deletion of Specific Information Barrier Procedures As noted above, the Exchange currently maintains a general standard for all Members to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information, including certain specific procedures. The Exchange also currently requires specific information barrier procedures for Members that meet the definition in BATS Rule 5.5(a) of a ‘‘specialist’’ and requires such firms to file their information barrier procedures with the Exchange. The Exchange proposes amending the language that imposes the general standard of preventing the misuse of material, non-public information and adding additional language to provide clarity regarding the minimum policies and procedures a Member must implement to comply with such general standards. As described in further detail below, the Exchange also proposes deleting the specific information barrier procedures required to be maintained by Exchange Members that meet the definition of ‘‘specialist.’’ Under the proposal, amended BATS Rule 5.5 would provide flexibility to a BATS Member to develop and maintain procedures and controls to prevent the misuse of material, non-public information that are effective and appropriate to that Member. The Exchange proposes adding Interpretation and Policy .01 to BATS Rule 5.5 that would provide examples of conduct that would constitute the misuse of material, non-public information.6 Proposed Interpretation 4 See BATS Rule 5.5(a). BATS Rule 12.6. 6 Such examples include: (a) Trading in any securities issued by a corporation, or in any related securities or related options or other derivative securities, while in possession of material, nonpublic information concerning that issuer; or (b) Trading in a security or related options or other derivative securities, while in possession of 5 See VerDate Nov<24>2008 15:07 Mar 01, 2010 Jkt 220001 and Policy .02 to BATS Rule 5.5 would set forth specific policies and procedures that would be required of Members.7 However, as made clear by the proposed Interpretation and Policy, such policies and procedures would not in all cases, satisfy the requirements and intent of amended BATS Rule 5.5; the adequacy of each Member’s policies and procedures would depend upon the nature of such Member’s business. The Exchange proposes to eliminate, in their entirety, the requirements set forth in BATS Rule 5.5 that require certain members to maintain and file with the Exchange specifically prescribed information barrier procedures. This proposal is consistent with the change recently approved by the Commission for NYSE Arca Equities, Inc. (‘‘NYSE Arca’’), which allowed the elimination of a specific information barrier requirement previously contained in NYSE Arca rules.8 This proposal is also consistent with the approach currently employed by the Nasdaq Stock Market, L.L.C. (‘‘Nasdaq’’), which does not generally require its members to establish or maintain information barriers. If the deletion of the requirement to maintain and file with the Exchange certain prescribed information barrier procedures is approved, the only specific information barrier requirement material non-public information concerning imminent transactions in the security or related securities; or (c) Disclosing to another person or entity any material, non-public information involving a corporation whose shares are publicly traded or an imminent transaction in an underlying security or related securities for the purpose of facilitating the possible misuse of such material, non-public information. 7 The specific policies and procedures required, at a minimum, would include: (a) All associated persons of the Member must be advised in writing of the prohibition against the misuse of material, non-public information; and (b) All associated persons of the Member must sign attestations affirming their awareness of, and agreement to abide by the aforementioned prohibitions. These signed attestations must be maintained for at least three years, the first two years in an easily accessible place; and (c) Each Member must receive and retain copies of trade confirmations and monthly account statements for each account in which an associated person: Has a direct or indirect financial interest or makes investment decisions. The activity in such brokerage accounts should be reviewed at least quarterly by the Member for the purpose of detecting the possible misuse of material, non-public information; and (d) All associated persons must disclose to the Member whether they, or any person in whose account they have a direct or indirect financial interest, or make investment decisions, are an officer, director or 10% shareholder in a company whose shares are publicly traded. Any transaction in the stock (or option thereon) of such company shall be reviewed to determine whether the transaction may have involved a misuse of material non-public information. 8 Securities Exchange Act Release No. 60604 (September 1, 2009), 74 FR 46272 (September 8, 2009) (SR–NYSEArca–2009–78). PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 of the Exchange will be the requirement described below, under proposed Rule 12.13, to maintain policies and procedures reasonably designed to restrict or limit the information flow between those with knowledge of the content or timing of a research report and trading department personnel. However, the Exchange does not intend to indicate that information barriers may not be necessary for Members in other contexts. To the contrary, information barrier procedures may be a necessary or effective means to manage conflicts of interest or to prevent communications of material non-public information between certain individuals or groups.9 Further, as described above, under proposed Interpretation and Policy .02, the adequacy of each Member’s policies and procedures will depend upon the nature of each Member’s business. (iii) Proposed Addition of BATS Rule 12.13 In an attempt to achieve additional consistency with certain other market centers, the Exchange further proposes to add new BATS Rule 12.13, prohibiting Members from establishing, increasing, decreasing or liquidating an inventory position in a security or a derivative of such security based on non-public advance knowledge of the content or timing of a research report in that security. Similar to FINRA Rule 5280 and NYSE Arca Rule 6.7, the Exchange also proposes to require Members to establish, maintain and enforce procedures reasonably designed to restrict or limit the information flow 9 The Exchange represents that it will issue a Regulatory Circular to its Members notifying such Members of this proposal and addressing related regulatory topics. For instance, the Regulatory Circular will reinforce the requirement that Members of the Exchange maintain policies and procedures that are reasonably designed to assure compliance with applicable securities laws, rules, regulations and statements of policy promulgated thereunder and the Exchange’s rules, including those relating to the misuse of material non-public information. In addition, the Exchange represents that the Regulatory Circular will include the following guidance: ‘‘Pursuant to the proposed rule change, Members may utilize a flexible, principlesbased approach to modify their policies and procedures as appropriate to reflect changes to their business model, business activities, or to the securities market itself. A Member should be proactive in assuring that its policies and procedures reflect the current state of its business and continue to be reasonably designed to achieve compliance with applicable federal securities law and regulations, and with applicable Exchange rules. While information barriers are not specifically required under the proposal, a Member’s business model or business activities may dictate that an information barrier or a functional separation be part of the appropriate set of policies and procedures that would be reasonably designed to achieve compliance with applicable securities law and regulations, and with applicable Exchange rules.’’ E:\FR\FM\02MRN1.SGM 02MRN1 Federal Register / Vol. 75, No. 40 / Tuesday, March 2, 2010 / Notices between research department personnel and trading department personnel, so as to prevent trading department personnel from utilizing non-public advance knowledge of the issuance or content of a research report. WReier-Aviles on DSKGBLS3C1PROD with NOTICES (iv) Members Retain Responsibility for Compliance By prohibiting the misuse of material, non-public information, the Exchange believes it has appropriately defined the behavior that its participants must avoid. However, the Exchange also believes that prescribing the form that these policies and procedures must take is unnecessarily burdensome. By defining certain prohibited behavior (e.g., BATS Rule 12.6) the Exchange has placed its participants on notice as to their specific compliance burdens with respect to preventing the misuse of material, non-public information. Further, BATS Rule 5.1 requires each Member to establish, maintain and enforce written procedures that enable such Member to supervise the activities of associated persons of the Member and to assure their compliance with applicable securities laws and regulations, and with BATS Rules. Pursuant to this proposed rule change, Members may utilize a flexible, principles-based approach to modify their policies and procedures as appropriate to reflect changes to their business model, business activities, or to the securities market itself. A Member should be proactive in assuring that its policies and procedures reflect the current state of its business and continue to be reasonably designed to achieve compliance with applicable federal securities law and regulations, and with applicable Exchange rules. In addition, in the context of approving a similar proposal by NYSE Arca, the Commission stated that, ‘‘while information barriers are not specifically required under the proposal, a [firm’s] business model or business activities may dictate that an information barrier or a functional separation be part of the appropriate set of policies and procedures that would be reasonably designed to achieve compliance with applicable securities law and regulations, and with applicable Exchange rules.’’ 10 (v) Comparison to Framework Employed by Nasdaq and NYSE Arca By amending its rules in accordance with this proposal, the Exchange reinforces a regulatory structure that 10 See Securities Exchange Act Release No. 60604 (September 1, 2009), 74 FR at 46275 (September 8, 2009) (SR–NYSEArca–2009–78). VerDate Nov<24>2008 15:07 Mar 01, 2010 Jkt 220001 clearly identifies prohibited conduct (e.g., misuse of material, non-public information) without further requiring Members to establish and maintain specific compliance mechanisms (e.g., information barriers). For example, Nasdaq prohibits the misuse of material, non-public information but does not generally require that its members establish and maintain information barriers,11 and NYSE Arca recently eliminated a requirement applicable to NYSE Arca market makers specifically requiring information barriers. In conjunction with such amendment, NYSE Arca adopted NYSE Arca Rule 6.7, a rule that the Exchange has mirrored with its proposal of BATS Rule 12.13. Finally, similar to BATS Rule 5.1, Nasdaq Rule 3010 and NYSE Arca Rule 6.18 require the members of Nasdaq and NYSE Arca, respectively, to establish and maintain systems to supervise the activities of associated persons that are reasonably designed to achieve compliance with applicable federal securities laws and regulations, and the applicable rules of the exchange. The Exchange believes that the approach proposed herein is consistent with Nasdaq and NYSE Arca’s respective structures. First, like Nasdaq and NYSE Arca, market makers registered with BATS and other firms that are Members of BATS that trade for their own accounts do not have any advantages regarding relevant trading information provided by the Exchange, either at, or prior to, the point of ` execution vis-a-vis other market participants. Second, BATS has similar requirements to Nasdaq and NYSE Arca concerning the maintenance of a supervisory system and written supervisory procedures. The Exchange notes that FINRA and BATS have previously acknowledged, pursuant to the provisions of Rule 17d–2 under the Securities Exchange Act of 1934 (‘‘17d– 2 Agreement’’), that, collectively, BATS Rules 5.1, 5.2, 5.3 and 5.4 are substantially similar to FINRA’s NASD Rule 3010, which Nasdaq and NYSE Arca rules incorporate by reference. For instance, BATS Rule 5.4 is similar to Rule 3010(c), which requires each FINRA member to conduct an annual review of the businesses in which it engages and to conduct annual office inspections including the ‘‘periodic examination of customer accounts to detect and prevent irregularities or abuses.’’ Although the Exchange has not incorporated Rule 3010(c) into its Rules by reference, Rule 3010(c) would apply to all broker-dealers that engage in a 11 See Nasdaq Rules 2110–2, 2110–3, and 2110– 4. PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 9457 customer business, because such firms are required to be members of FINRA.12 Also, although not as detailed as Rule 3010(c) with respect to the requirements of the inspection, BATS Rule 5.4 is nearly identical in that it requires BATS Members to ‘‘review the activities of each office, which shall include the periodic examination of customer accounts to detect and prevent irregularities or abuses.’’ Based on the foregoing, it is appropriate for the Exchange to establish a similar approach with respect to information barriers employed by Nasdaq and NYSE Arca.13 (vi) Conclusion: Flexibility and Accountability Eliminating substantial portions of BATS Rule 5.5, and adding to the general standards set forth therein to prohibit the misuse of material, nonpublic information, as proposed by this filing, offers Exchange participants both certainty and flexibility. BATS Members are on notice as to their obligations to maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information. Like Nasdaq and NYSE Arca participants, BATS Members will now be afforded the same flexibility to maintain compliance mechanisms of their own design. The Exchange believes that this approach fosters a fair and orderly marketplace without being overly burdensome upon its Members. 2. Statutory Basis The rule change proposed in this submission is consistent with the requirements of the Act and the rules and regulations thereunder that are applicable to a national securities exchange, and, in particular, with the requirements of Section 6(b) of the Act.14 Specifically, the proposed change is consistent with Section 6(b)(5) of the Act,15 because it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and remove impediments to, and perfect the mechanism of, a free and open market and a national market system. Eliminating portions of BATS Rule 5.5 that prescribe specific procedures and information barriers that must be maintained by certain Member firms, 12 See 15 U.S.C. 78o(b)(8); see also 17 CFR 240.15b9–1(a). 13 BATS notes that its current examination procedure regarding its review for appropriate supervisory systems and procedures will remain in place. 14 15 U.S.C. 78f(b). 15 15 U.S.C. 78f(b)(5). E:\FR\FM\02MRN1.SGM 02MRN1 9458 Federal Register / Vol. 75, No. 40 / Tuesday, March 2, 2010 / Notices while establishing more clarity regarding the minimum procedures that must be maintained by any Member, consistent with other self-regulatory organizations, should eliminate unnecessary regulatory burdens while at the same time retaining an appropriate mechanism designed to ensure that material, non-public information continues to be protected. In particular, the proposed rule change will reduce the burdens on certain Members that are currently required to maintain, and file with the Exchange, specified information barriers. The Exchange believes that the proposed changes will make compliance obligations with respect to prevention of the misuse of material, non-public information more clear to Exchange Members. The amended rule structure will be more consistent with that of other exchanges and will nonetheless continue to ensure protection of investors through existing regulations relevant to misuse of material, non-public information that apply to Exchange Members through the applicability and enforcement of relevant provisions of the Act, including Section 15(f); 16 rules imposed by other self-regulatory organizations; a joint industry effort to surveil for potential insider trading violations through a Rule 17d–2 Agreement17 and Regulatory Services Agreements between all selfregulatory organizations that trade equity securities; and through the Exchange’s examination program. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change imposes any burden on competition. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others The Exchange has neither solicited nor received written comments on the proposed rule change. WReier-Aviles on DSKGBLS3C1PROD with NOTICES III. 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: 16 15 U.S.C. 78o(f). Securities Exchange Act Release 58806 (October 17, 2008), 73 FR 63216 (October 23, 2008); Securities Exchange Act Release No. 58536 (September 12, 2008), 73 FR 54646 (September 22, 2008). Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–BATS–2010–003 on the subject line. Commission believes that the proposal is consistent with Section 6(b)(5) 19 in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, to remove Paper Comments impediments to and perfect the • Send paper comments in triplicate mechanism of a free and open market to Elizabeth M. Murphy, Secretary, and a national market system, and, in Securities and Exchange Commission, general, to protect investors and the Station Place, 100 F Street, NE., public interest. Washington, DC 20549–1090. The Exchange is proposing to amend BATS Rule 5.5 to replace the All submissions should refer to File specifically prescribed information Number SR–BATS–2010–003. This file barrier requirement with a more number should be included on the subject line if e-mail is used. To help the principles-based approach that would permit a Member to develop and apply Commission process and review your its own policies and procedures to, comments more efficiently, please use only one method. The Commission will among other things, prohibit the misuse post all comments on the Commission’s of material nonpublic information. BATS Rule 5.5 addresses concerns Internet Web site (https://www.sec.gov/ arising from the potential for the sharing rules/sro.shtml). Copies of the of material non-public information submission, all subsequent between a Member’s market making amendments, all written statements activities and other business activities of with respect to the proposed rule the Member or its affiliates. For change that are filed with the instance, one such concern is that the Commission, and all written Member or affiliate engaging in other communications relating to the business activities might use non-public proposed rule change between the Commission and any person, other than information that was acquired by the Member through its role as a market those that may be withheld from the maker. Another concern is that the public in accordance with the Member might use material non-public provisions of 5 U.S.C. 552, will be information received from the entity available for Web site viewing and engaging in other business activities, printing in the Commission’s Public such as trading based on a change in the Reference Room, 100 F Street, NE., firm’s buy or sell recommendation.20 Washington, DC 20549, on official While amended BATS Rule 5.5 will business days between the hours of 10 no longer specify policies and a.m. and 3 p.m. Copies of such filing also will be available for inspection and procedures a Member must establish, copying at the principal office of BATS. the proposal will require that the policies and procedures be reasonably All comments received will be posted designed to ensure compliance with without change; the Commission does applicable Federal securities law and not edit personal identifying regulations, and with Exchange rules. information from submissions. You The Commission believes that, with should submit only information that you wish to make publicly available. All adequate oversight by the Exchange of its members, elimination of prescriptive submissions should refer to File information barrier requirements should Number SR–BATS–2010–003 and should be submitted on or before March not reduce the effectiveness of BATS rules requiring Members to establish 23, 2010. and maintain systems to supervise the IV. Commission’s Findings and Order activities of Members, and written Granting Accelerated Approval of the procedures that are reasonably designed Proposed Rule Change to comply with applicable securities After careful consideration, the laws and Exchange rules, including the Commission finds that the proposed prohibition on misuse of material rule change is consistent with the nonpublic information. requirements of the Act and the rules Specifically, amended BATS Rule 5.5 and regulations thereunder applicable to will require Members to establish, a national securities exchange.18 The 19 15 17 See VerDate Nov<24>2008 15:07 Mar 01, 2010 Jkt 220001 18 In approving this rule change, the Commission notes that it has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 U.S.C. 78f(b)(5). Securities Exchange Act Release No. 58328 (August 7, 2008), 73 FR 48260 (August 18, 2008) (SR–NYSE–2008–45) (articulating concerns in the context of approving changes to NYSE Rule 98). 20 See E:\FR\FM\02MRN1.SGM 02MRN1 WReier-Aviles on DSKGBLS3C1PROD with NOTICES Federal Register / Vol. 75, No. 40 / Tuesday, March 2, 2010 / Notices maintain and enforce written procedures reasonably designed to prevent the misuse of material nonpublic information by the Member or persons associated with the Member. The misuse of material non-public information includes trading in a security or related securities or options or other derivative securities, while in possession of material non-public information concerning the issuer, or while in possession of material nonpublic information concerning imminent transactions in the security or related securities.21 The Exchange also proposes to add BATS Rule 12.13, which will prohibit a Member from establishing, increasing, decreasing or liquidating an inventory position in a security or derivative of that security based on advance non-public knowledge of the content or timing of a research report concerning that security. Further, BATS Rules 5.1, 5.2, 5.3 and 5.4, which relate to a Member’s responsibilities or obligations related to conduct or supervision, will continue to apply. For example, BATS Rule 5.1 requires BATS Members to ‘‘establish, maintain and enforce written procedures which will enable it to supervise properly the activities of associated persons of the Member and to assure their compliance with applicable securities laws, rules, regulations and statements of policy promulgated thereunder, with the rules of the designated self-regulatory organization, where appropriate, and with Exchange Rules.’’ In addition, BATS Rule 5.4 requires BATS Members to ‘‘review the activities of each office, which shall include the periodic examination of customer accounts to detect and prevent irregularities or abuses.’’ These rules thus provide additional clarification that the supervisory systems and internal inspections of Members must be reasonably designed to achieve compliance with applicable securities laws and regulations and with applicable BATS rules, including those relating to the misuse of material nonpublic information. Pursuant to this proposal rule change, Members may utilize the flexible, principles-based approach to modify their policies and procedures as appropriate to reflect changes to their business model, business activities, or to the securities market itself. A Member should be proactive in assuring that its policies and procedures reflect the current state of its business and continue to be reasonably designed to achieve compliance with applicable federal securities law and regulations, 21 See BATS Rule 5.5, Commentary .01. VerDate Nov<24>2008 15:07 Mar 01, 2010 Jkt 220001 and with applicable Exchange rules. In addition, the Commission notes that, while information barriers are not specifically required under the proposal, a Member’s business model or business activities may dictate that an information barrier or a functional separation be part of the appropriate set of policies and procedures that would be reasonably designed to achieve compliance with applicable securities law and regulations, and with applicable Exchange rules. In this regard, the Exchange included in Interpretation and Policy .02 to amended BATS Rule 5.5 a statement that the adequacy of each Member’s policies and procedures relating to the misuse of material non-public information will depend upon the nature of such Member’s business. The Commission believes that the regulatory approach in this proposed rule change is substantially similar to the regulatory approach of Nasdaq and NYSE Arca. In particular, the BATS approach, like the Nasdaq and NYSE Arca approach, (i) enumerates the conduct that is prohibited by its members, including the potential misuse of material non-public information and (ii) provides for the policies and procedures that must be reasonably designed to ensure compliance with the same. In addition, the Commission notes that the Exchange has represented that its current examination procedure for the review of appropriate supervisory systems and procedures will remain in place. The Commission also finds good cause, pursuant to Section 19(b)(2) of the Act,22 for approving the proposed rule change prior to the 30th day after the date of publication of notice in the Federal Register. Although this proposed rule change does not require that Members maintain specificallyprescribed information barriers, it will continue to mandate that Members establish and maintain a set of policies and procedures reasonably designed to achieve compliance with applicable securities law and regulations, and with applicable Exchange rules. As such, the Exchange is adopting an approach that is substantially similar to the approach currently employed by Nasdaq and NYSE Arca.23 V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,24 that the proposed rule change (SR–BATS–2010– 003) be, and it hereby is, approved on an accelerated basis. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.25 Florence E. Harmon, Deputy Secretary. [FR Doc. 2010–4230 Filed 3–1–10; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–61575; File No. SR–FINRA– 2010–007] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend the By-Laws of NASD Dispute Resolution February 23, 2010. 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 Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) (f/k/a National Association of Securities Dealers, Inc. (‘‘NASD’’)) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) on January 22, 2010, the proposed rule change as described in Items I, II, and III below, which Items have been substantially prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing to amend the ByLaws of NASD Dispute Resolution.3 The text of the proposed rule change is available on FINRA’s Web site at https://www.finra.org, at the principal office of FINRA 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, FINRA included statements concerning 24 15 22 15 U.S.C. 78s(b)(2). 23 See Securities Exchange Act Release No. 53128 (Jan. 13, 2006), 71 FR 3550 (January 23, 2006) (adopting Nasdaq IM–2110–2; IM–2110–3; IM– 2110–4, and Rule 3010); 60604 (September 1, 2009), 74 FR 46272 (September 8, 2009) (SR–NYSEArca– 2009–78). PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 9459 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 If this proposed rule change is approved by the Commission, the By-Laws of NASD Dispute Resolution will be redesignated as the ‘‘By-Laws of FINRA Dispute Resolution.’’ 25 17 1 15 E:\FR\FM\02MRN1.SGM 02MRN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 75, Number 40 (Tuesday, March 2, 2010)]
[Notices]
[Pages 9455-9459]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-4230]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61574; File No. SR-BATS-2010-003]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing and Order Granting Accelerated Approval of Proposed Rule Change 
To Amend BATS Rule 5.5, Entitled ``Information Barrier Procedures,'' 
and To Add New BATS Rule 12.13, Entitled ``Trading Ahead of Research 
Reports''

February 23, 2010.
    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 February 11, 2010, BATS Exchange, Inc. (``BATS'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by BATS. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons and is approving the proposed rule change on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to amend BATS Rule 5.5, entitled 
``Information Barrier Procedures,'' to modify the Exchange's rule 
regarding information barrier procedures required of certain Exchange 
Members. The Exchange is also proposing to add new Exchange Rule 12.13, 
entitled ``Trading Ahead of Research Reports.''
    The text of the proposed rule change is available at the Exchange's 
Web site at https://www.batstrading.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 Exchange 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 statements may be examined at the places specified in 
Item III 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 to eliminate the requirements of BATS Rule 
5.5 that require a Member \3\ that trades for its own account or that 
has a specialist or market maker operation on another market (defined 
in BATS Rule 5.5(a) as a ``specialist'') to establish and maintain 
certain specifically prescribed information barrier procedures and to 
file such procedures with the Exchange. At the same time, the Exchange 
proposes to amend BATS Rule 5.5 to more closely mirror the rules of 
other self-regulatory organizations that create certain obligations for 
all Member firms related to the prevention of the misuse of material, 
non-public information. Finally, the Exchange proposes to add new BATS 
Rule 12.13, which: (i) Prohibits Members from trading ahead of research 
reports, and (ii) requires each Member to establish, maintain and 
enforce procedures regarding the flow of information between research 
department personnel and trading department personnel.
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    \3\ See BATS Rule 1.5(n).
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(i) All Members Must Maintain Policies Concerning the Misuse of 
Material Non-Public Information
    Presently, the Exchange requires that each Member establish, 
maintain and enforce written policies and procedures reasonably 
designed to prevent the misuse of material, non-public information, 
which includes review of employee and proprietary trading, 
memorialization and documentation of

[[Page 9456]]

procedures, substantive supervision of interdepartmental communications 
by the Member's compliance department and procedures concerning 
proprietary trading when the firm is in possession of material, non-
public information.\4\ The Exchange also has specific rules prohibiting 
Members from disadvantaging their customers or other market 
participants by improperly capitalizing on the Members' access to or 
receipt of material, non-public information. For example, the Exchange 
prohibits a Member from trading ahead of its customer's limit 
orders.\5\
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    \4\ See BATS Rule 5.5(a).
    \5\ See BATS Rule 12.6.
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(ii) Proposed Amendments to General Standards and Deletion of Specific 
Information Barrier Procedures
    As noted above, the Exchange currently maintains a general standard 
for all Members to establish, maintain and enforce written policies and 
procedures reasonably designed to prevent the misuse of material, non-
public information, including certain specific procedures. The Exchange 
also currently requires specific information barrier procedures for 
Members that meet the definition in BATS Rule 5.5(a) of a 
``specialist'' and requires such firms to file their information 
barrier procedures with the Exchange. The Exchange proposes amending 
the language that imposes the general standard of preventing the misuse 
of material, non-public information and adding additional language to 
provide clarity regarding the minimum policies and procedures a Member 
must implement to comply with such general standards. As described in 
further detail below, the Exchange also proposes deleting the specific 
information barrier procedures required to be maintained by Exchange 
Members that meet the definition of ``specialist.''
    Under the proposal, amended BATS Rule 5.5 would provide flexibility 
to a BATS Member to develop and maintain procedures and controls to 
prevent the misuse of material, non-public information that are 
effective and appropriate to that Member. The Exchange proposes adding 
Interpretation and Policy .01 to BATS Rule 5.5 that would provide 
examples of conduct that would constitute the misuse of material, non-
public information.\6\ Proposed Interpretation and Policy .02 to BATS 
Rule 5.5 would set forth specific policies and procedures that would be 
required of Members.\7\ However, as made clear by the proposed 
Interpretation and Policy, such policies and procedures would not in 
all cases, satisfy the requirements and intent of amended BATS Rule 
5.5; the adequacy of each Member's policies and procedures would depend 
upon the nature of such Member's business.
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    \6\ Such examples include: (a) Trading in any securities issued 
by a corporation, or in any related securities or related options or 
other derivative securities, while in possession of material, non-
public information concerning that issuer; or (b) Trading in a 
security or related options or other derivative securities, while in 
possession of material non-public information concerning imminent 
transactions in the security or related securities; or (c) 
Disclosing to another person or entity any material, non-public 
information involving a corporation whose shares are publicly traded 
or an imminent transaction in an underlying security or related 
securities for the purpose of facilitating the possible misuse of 
such material, non-public information.
    \7\ The specific policies and procedures required, at a minimum, 
would include: (a) All associated persons of the Member must be 
advised in writing of the prohibition against the misuse of 
material, non-public information; and (b) All associated persons of 
the Member must sign attestations affirming their awareness of, and 
agreement to abide by the aforementioned prohibitions. These signed 
attestations must be maintained for at least three years, the first 
two years in an easily accessible place; and (c) Each Member must 
receive and retain copies of trade confirmations and monthly account 
statements for each account in which an associated person: Has a 
direct or indirect financial interest or makes investment decisions. 
The activity in such brokerage accounts should be reviewed at least 
quarterly by the Member for the purpose of detecting the possible 
misuse of material, non-public information; and (d) All associated 
persons must disclose to the Member whether they, or any person in 
whose account they have a direct or indirect financial interest, or 
make investment decisions, are an officer, director or 10% 
shareholder in a company whose shares are publicly traded. Any 
transaction in the stock (or option thereon) of such company shall 
be reviewed to determine whether the transaction may have involved a 
misuse of material non-public information.
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    The Exchange proposes to eliminate, in their entirety, the 
requirements set forth in BATS Rule 5.5 that require certain members to 
maintain and file with the Exchange specifically prescribed information 
barrier procedures. This proposal is consistent with the change 
recently approved by the Commission for NYSE Arca Equities, Inc. 
(``NYSE Arca''), which allowed the elimination of a specific 
information barrier requirement previously contained in NYSE Arca 
rules.\8\ This proposal is also consistent with the approach currently 
employed by the Nasdaq Stock Market, L.L.C. (``Nasdaq''), which does 
not generally require its members to establish or maintain information 
barriers.
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    \8\ Securities Exchange Act Release No. 60604 (September 1, 
2009), 74 FR 46272 (September 8, 2009) (SR-NYSEArca-2009-78).
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    If the deletion of the requirement to maintain and file with the 
Exchange certain prescribed information barrier procedures is approved, 
the only specific information barrier requirement of the Exchange will 
be the requirement described below, under proposed Rule 12.13, to 
maintain policies and procedures reasonably designed to restrict or 
limit the information flow between those with knowledge of the content 
or timing of a research report and trading department personnel. 
However, the Exchange does not intend to indicate that information 
barriers may not be necessary for Members in other contexts. To the 
contrary, information barrier procedures may be a necessary or 
effective means to manage conflicts of interest or to prevent 
communications of material non-public information between certain 
individuals or groups.\9\ Further, as described above, under proposed 
Interpretation and Policy .02, the adequacy of each Member's policies 
and procedures will depend upon the nature of each Member's business.
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    \9\ The Exchange represents that it will issue a Regulatory 
Circular to its Members notifying such Members of this proposal and 
addressing related regulatory topics. For instance, the Regulatory 
Circular will reinforce the requirement that Members of the Exchange 
maintain policies and procedures that are reasonably designed to 
assure compliance with applicable securities laws, rules, 
regulations and statements of policy promulgated thereunder and the 
Exchange's rules, including those relating to the misuse of material 
non-public information. In addition, the Exchange represents that 
the Regulatory Circular will include the following guidance: 
``Pursuant to the proposed rule change, Members may utilize a 
flexible, principles-based approach to modify their policies and 
procedures as appropriate to reflect changes to their business 
model, business activities, or to the securities market itself. A 
Member should be proactive in assuring that its policies and 
procedures reflect the current state of its business and continue to 
be reasonably designed to achieve compliance with applicable federal 
securities law and regulations, and with applicable Exchange rules. 
While information barriers are not specifically required under the 
proposal, a Member's business model or business activities may 
dictate that an information barrier or a functional separation be 
part of the appropriate set of policies and procedures that would be 
reasonably designed to achieve compliance with applicable securities 
law and regulations, and with applicable Exchange rules.''
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(iii) Proposed Addition of BATS Rule 12.13
    In an attempt to achieve additional consistency with certain other 
market centers, the Exchange further proposes to add new BATS Rule 
12.13, prohibiting Members from establishing, increasing, decreasing or 
liquidating an inventory position in a security or a derivative of such 
security based on non-public advance knowledge of the content or timing 
of a research report in that security. Similar to FINRA Rule 5280 and 
NYSE Arca Rule 6.7, the Exchange also proposes to require Members to 
establish, maintain and enforce procedures reasonably designed to 
restrict or limit the information flow

[[Page 9457]]

between research department personnel and trading department personnel, 
so as to prevent trading department personnel from utilizing non-public 
advance knowledge of the issuance or content of a research report.
(iv) Members Retain Responsibility for Compliance
    By prohibiting the misuse of material, non-public information, the 
Exchange believes it has appropriately defined the behavior that its 
participants must avoid. However, the Exchange also believes that 
prescribing the form that these policies and procedures must take is 
unnecessarily burdensome. By defining certain prohibited behavior 
(e.g., BATS Rule 12.6) the Exchange has placed its participants on 
notice as to their specific compliance burdens with respect to 
preventing the misuse of material, non-public information. Further, 
BATS Rule 5.1 requires each Member to establish, maintain and enforce 
written procedures that enable such Member to supervise the activities 
of associated persons of the Member and to assure their compliance with 
applicable securities laws and regulations, and with BATS Rules. 
Pursuant to this proposed rule change, Members may utilize a flexible, 
principles-based approach to modify their policies and procedures as 
appropriate to reflect changes to their business model, business 
activities, or to the securities market itself. A Member should be 
proactive in assuring that its policies and procedures reflect the 
current state of its business and continue to be reasonably designed to 
achieve compliance with applicable federal securities law and 
regulations, and with applicable Exchange rules. In addition, in the 
context of approving a similar proposal by NYSE Arca, the Commission 
stated that, ``while information barriers are not specifically required 
under the proposal, a [firm's] business model or business activities 
may dictate that an information barrier or a functional separation be 
part of the appropriate set of policies and procedures that would be 
reasonably designed to achieve compliance with applicable securities 
law and regulations, and with applicable Exchange rules.'' \10\
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    \10\ See Securities Exchange Act Release No. 60604 (September 1, 
2009), 74 FR at 46275 (September 8, 2009) (SR-NYSEArca-2009-78).
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(v) Comparison to Framework Employed by Nasdaq and NYSE Arca
    By amending its rules in accordance with this proposal, the 
Exchange reinforces a regulatory structure that clearly identifies 
prohibited conduct (e.g., misuse of material, non-public information) 
without further requiring Members to establish and maintain specific 
compliance mechanisms (e.g., information barriers). For example, Nasdaq 
prohibits the misuse of material, non-public information but does not 
generally require that its members establish and maintain information 
barriers,\11\ and NYSE Arca recently eliminated a requirement 
applicable to NYSE Arca market makers specifically requiring 
information barriers. In conjunction with such amendment, NYSE Arca 
adopted NYSE Arca Rule 6.7, a rule that the Exchange has mirrored with 
its proposal of BATS Rule 12.13. Finally, similar to BATS Rule 5.1, 
Nasdaq Rule 3010 and NYSE Arca Rule 6.18 require the members of Nasdaq 
and NYSE Arca, respectively, to establish and maintain systems to 
supervise the activities of associated persons that are reasonably 
designed to achieve compliance with applicable federal securities laws 
and regulations, and the applicable rules of the exchange.
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    \11\ See Nasdaq Rules 2110-2, 2110-3, and 2110-4.
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    The Exchange believes that the approach proposed herein is 
consistent with Nasdaq and NYSE Arca's respective structures. First, 
like Nasdaq and NYSE Arca, market makers registered with BATS and other 
firms that are Members of BATS that trade for their own accounts do not 
have any advantages regarding relevant trading information provided by 
the Exchange, either at, or prior to, the point of execution vis-
[agrave]-vis other market participants. Second, BATS has similar 
requirements to Nasdaq and NYSE Arca concerning the maintenance of a 
supervisory system and written supervisory procedures. The Exchange 
notes that FINRA and BATS have previously acknowledged, pursuant to the 
provisions of Rule 17d-2 under the Securities Exchange Act of 1934 
(``17d-2 Agreement''), that, collectively, BATS Rules 5.1, 5.2, 5.3 and 
5.4 are substantially similar to FINRA's NASD Rule 3010, which Nasdaq 
and NYSE Arca rules incorporate by reference. For instance, BATS Rule 
5.4 is similar to Rule 3010(c), which requires each FINRA member to 
conduct an annual review of the businesses in which it engages and to 
conduct annual office inspections including the ``periodic examination 
of customer accounts to detect and prevent irregularities or abuses.'' 
Although the Exchange has not incorporated Rule 3010(c) into its Rules 
by reference, Rule 3010(c) would apply to all broker-dealers that 
engage in a customer business, because such firms are required to be 
members of FINRA.\12\ Also, although not as detailed as Rule 3010(c) 
with respect to the requirements of the inspection, BATS Rule 5.4 is 
nearly identical in that it requires BATS Members to ``review the 
activities of each office, which shall include the periodic examination 
of customer accounts to detect and prevent irregularities or abuses.''
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    \12\ See 15 U.S.C. 78o(b)(8); see also 17 CFR 240.15b9-1(a).
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    Based on the foregoing, it is appropriate for the Exchange to 
establish a similar approach with respect to information barriers 
employed by Nasdaq and NYSE Arca.\13\
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    \13\ BATS notes that its current examination procedure regarding 
its review for appropriate supervisory systems and procedures will 
remain in place.
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(vi) Conclusion: Flexibility and Accountability
    Eliminating substantial portions of BATS Rule 5.5, and adding to 
the general standards set forth therein to prohibit the misuse of 
material, non-public information, as proposed by this filing, offers 
Exchange participants both certainty and flexibility. BATS Members are 
on notice as to their obligations to maintain and enforce written 
policies and procedures reasonably designed to prevent the misuse of 
material, non-public information. Like Nasdaq and NYSE Arca 
participants, BATS Members will now be afforded the same flexibility to 
maintain compliance mechanisms of their own design. The Exchange 
believes that this approach fosters a fair and orderly marketplace 
without being overly burdensome upon its Members.
2. Statutory Basis
    The rule change proposed in this submission is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities exchange, and, in particular, 
with the requirements of Section 6(b) of the Act.\14\ Specifically, the 
proposed change is consistent with Section 6(b)(5) of the Act,\15\ 
because it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, and 
remove impediments to, and perfect the mechanism of, a free and open 
market and a national market system. Eliminating portions of BATS Rule 
5.5 that prescribe specific procedures and information barriers that 
must be maintained by certain Member firms,

[[Page 9458]]

while establishing more clarity regarding the minimum procedures that 
must be maintained by any Member, consistent with other self-regulatory 
organizations, should eliminate unnecessary regulatory burdens while at 
the same time retaining an appropriate mechanism designed to ensure 
that material, non-public information continues to be protected. In 
particular, the proposed rule change will reduce the burdens on certain 
Members that are currently required to maintain, and file with the 
Exchange, specified information barriers. The Exchange believes that 
the proposed changes will make compliance obligations with respect to 
prevention of the misuse of material, non-public information more clear 
to Exchange Members. The amended rule structure will be more consistent 
with that of other exchanges and will nonetheless continue to ensure 
protection of investors through existing regulations relevant to misuse 
of material, non-public information that apply to Exchange Members 
through the applicability and enforcement of relevant provisions of the 
Act, including Section 15(f); \16\ rules imposed by other self-
regulatory organizations; a joint industry effort to surveil for 
potential insider trading violations through a Rule 17d-2 Agreement\17\ 
and Regulatory Services Agreements between all self-regulatory 
organizations that trade equity securities; and through the Exchange's 
examination program.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ 15 U.S.C. 78o(f).
    \17\ See Securities Exchange Act Release 58806 (October 17, 
2008), 73 FR 63216 (October 23, 2008); Securities Exchange Act 
Release No. 58536 (September 12, 2008), 73 FR 54646 (September 22, 
2008).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change imposes 
any burden on competition.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. 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 (https://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-BATS-2010-003 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-BATS-2010-003. This file 
number should be included on the subject line if e-mail 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 (https://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 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of BATS. 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 publicly available. All 
submissions should refer to File Number SR-BATS-2010-003 and should be 
submitted on or before March 23, 2010.

IV. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange.\18\ The Commission believes that the proposal is consistent 
with Section 6(b)(5) \19\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in 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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    \18\ In approving this rule change, the Commission notes that it 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \19\ 15 U.S.C. 78f(b)(5).
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    The Exchange is proposing to amend BATS Rule 5.5 to replace the 
specifically prescribed information barrier requirement with a more 
principles-based approach that would permit a Member to develop and 
apply its own policies and procedures to, among other things, prohibit 
the misuse of material nonpublic information. BATS Rule 5.5 addresses 
concerns arising from the potential for the sharing of material non-
public information between a Member's market making activities and 
other business activities of the Member or its affiliates. For 
instance, one such concern is that the Member or affiliate engaging in 
other business activities might use non-public information that was 
acquired by the Member through its role as a market maker. Another 
concern is that the Member might use material non-public information 
received from the entity engaging in other business activities, such as 
trading based on a change in the firm's buy or sell recommendation.\20\
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    \20\ See Securities Exchange Act Release No. 58328 (August 7, 
2008), 73 FR 48260 (August 18, 2008) (SR-NYSE-2008-45) (articulating 
concerns in the context of approving changes to NYSE Rule 98).
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    While amended BATS Rule 5.5 will no longer specify policies and 
procedures a Member must establish, the proposal will require that the 
policies and procedures be reasonably designed to ensure compliance 
with applicable Federal securities law and regulations, and with 
Exchange rules. The Commission believes that, with adequate oversight 
by the Exchange of its members, elimination of prescriptive information 
barrier requirements should not reduce the effectiveness of BATS rules 
requiring Members to establish and maintain systems to supervise the 
activities of Members, and written procedures that are reasonably 
designed to comply with applicable securities laws and Exchange rules, 
including the prohibition on misuse of material nonpublic information.
    Specifically, amended BATS Rule 5.5 will require Members to 
establish,

[[Page 9459]]

maintain and enforce written procedures reasonably designed to prevent 
the misuse of material non-public information by the Member or persons 
associated with the Member. The misuse of material non-public 
information includes trading in a security or related securities or 
options or other derivative securities, while in possession of material 
non-public information concerning the issuer, or while in possession of 
material non-public information concerning imminent transactions in the 
security or related securities.\21\ The Exchange also proposes to add 
BATS Rule 12.13, which will prohibit a Member from establishing, 
increasing, decreasing or liquidating an inventory position in a 
security or derivative of that security based on advance non-public 
knowledge of the content or timing of a research report concerning that 
security.
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    \21\ See BATS Rule 5.5, Commentary .01.
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    Further, BATS Rules 5.1, 5.2, 5.3 and 5.4, which relate to a 
Member's responsibilities or obligations related to conduct or 
supervision, will continue to apply. For example, BATS Rule 5.1 
requires BATS Members to ``establish, maintain and enforce written 
procedures which will enable it to supervise properly the activities of 
associated persons of the Member and to assure their compliance with 
applicable securities laws, rules, regulations and statements of policy 
promulgated thereunder, with the rules of the designated self-
regulatory organization, where appropriate, and with Exchange Rules.'' 
In addition, BATS Rule 5.4 requires BATS Members to ``review the 
activities of each office, which shall include the periodic examination 
of customer accounts to detect and prevent irregularities or abuses.'' 
These rules thus provide additional clarification that the supervisory 
systems and internal inspections of Members must be reasonably designed 
to achieve compliance with applicable securities laws and regulations 
and with applicable BATS rules, including those relating to the misuse 
of material non-public information.
    Pursuant to this proposal rule change, Members may utilize the 
flexible, principles-based approach to modify their policies and 
procedures as appropriate to reflect changes to their business model, 
business activities, or to the securities market itself. A Member 
should be proactive in assuring that its policies and procedures 
reflect the current state of its business and continue to be reasonably 
designed to achieve compliance with applicable federal securities law 
and regulations, and with applicable Exchange rules. In addition, the 
Commission notes that, while information barriers are not specifically 
required under the proposal, a Member's business model or business 
activities may dictate that an information barrier or a functional 
separation be part of the appropriate set of policies and procedures 
that would be reasonably designed to achieve compliance with applicable 
securities law and regulations, and with applicable Exchange rules. In 
this regard, the Exchange included in Interpretation and Policy .02 to 
amended BATS Rule 5.5 a statement that the adequacy of each Member's 
policies and procedures relating to the misuse of material non-public 
information will depend upon the nature of such Member's business.
    The Commission believes that the regulatory approach in this 
proposed rule change is substantially similar to the regulatory 
approach of Nasdaq and NYSE Arca. In particular, the BATS approach, 
like the Nasdaq and NYSE Arca approach, (i) enumerates the conduct that 
is prohibited by its members, including the potential misuse of 
material non-public information and (ii) provides for the policies and 
procedures that must be reasonably designed to ensure compliance with 
the same. In addition, the Commission notes that the Exchange has 
represented that its current examination procedure for the review of 
appropriate supervisory systems and procedures will remain in place.
    The Commission also finds good cause, pursuant to Section 19(b)(2) 
of the Act,\22\ for approving the proposed rule change prior to the 
30th day after the date of publication of notice in the Federal 
Register. Although this proposed rule change does not require that 
Members maintain specifically-prescribed information barriers, it will 
continue to mandate that Members establish and maintain a set of 
policies and procedures reasonably designed to achieve compliance with 
applicable securities law and regulations, and with applicable Exchange 
rules. As such, the Exchange is adopting an approach that is 
substantially similar to the approach currently employed by Nasdaq and 
NYSE Arca.\23\
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    \22\ 15 U.S.C. 78s(b)(2).
    \23\ See Securities Exchange Act Release No. 53128 (Jan. 13, 
2006), 71 FR 3550 (January 23, 2006) (adopting Nasdaq IM-2110-2; IM-
2110-3; IM-2110-4, and Rule 3010); 60604 (September 1, 2009), 74 FR 
46272 (September 8, 2009) (SR-NYSEArca-2009-78).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (SR-BATS-2010-003) be, and it 
hereby is, approved on an accelerated basis.
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    \24\ 15 U.S.C. 78s(b)(2).
    \25\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-4230 Filed 3-1-10; 8:45 am]
BILLING CODE 8011-01-P

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