Self-Regulatory Organizations; NASDAQ OMX BX LLC; Order Approving a Proposed Rule Change Relating to Permanent Approval of the BX and NES Inbound Routing Relationship, 16462-16464 [2011-6785]

Download as PDF jlentini on DSKJ8SOYB1PROD with NOTICES 16462 Federal Register / Vol. 76, No. 56 / Wednesday, March 23, 2011 / Notices ‘‘Registration of securities information processors: form of application and amendments’’. On September 23, 1975, the Commission adopted Rule 11Ab2–1 and Form SIP under the Securities Exchange Act of 1934 (‘‘Act’’) (15 U.S.C. 78a et seq.) to establish the procedures by which Securities Information Processor (‘‘SIP’’) files and amends their SIP registration statements.1 Under Regulation NMS Rule 11Ab2–1was redesignated as Rule 609.2 The information filed with the Commission pursuant to Rule 609 and Form SIP is designed to provide the Commission with the information necessary to make the required findings under the Act before granting the SIP’s application for registration. In addition, the requirement that a SIP file an amendment to correct any inaccurate information is designed to assure that the Commission has current, accurate information with respect to the SIP. This information is also made available to members of the public. Only exclusive SIPs are required to register with the Commission. An exclusive SIP is a SIP that engages on an exclusive basis on behalf of any national securities exchange or registered securities association, or any national securities exchange or registered securities association which engages on an exclusive basis on its own behalf, in collecting, processing, or preparing for distribution or publication, any information with respect to (i) transactions or quotations on or effective or made by means of any facility of such exchange or (ii) quotations distributed or published by means of any electronic quotation system operated by such association. The Federal securities laws require that before the commission may approve the registration of an exclusive SIP, it must make certain mandatory findings. It takes a SIP applicant approximately 400 hours to prepare documents which include sufficient information to enable the Commission to make those findings. Currently, there are only two exclusive SIPs registered with the Commission; The Securities Information Automation Corporation (‘‘SIAC’’) and The Nasdaq Stock Market, LLC (‘‘Nasdaq’’). SIAC and Nasdaq are required to keep the information on file with the Commission current, which entails filing a form SIP annually to update information. 1 See Securities Exchange Act Release No. 11673 (September 23, 1975), 40 FR 45422 (October 2, 1975). 2 See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005). VerDate Mar<15>2010 16:46 Mar 22, 2011 Jkt 223001 Accordingly, the annual reporting and recordkeeping burden for Rule 609 and Form SIP is 400 hours; the burden of information collection is estimated to involve approximately 1 respondent application for registration making 1 response per year. This annual reporting and recordkeeping burden does not include the burden hours or cost of amending a Form SIP because the Commission has already overstated the compliance burdens by assuming that the Commission will receive one initial registration pursuant to Rule 609 on Form SIP a year. Written comments are invited on: (a) Whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; (b) the accuracy of the agency’s estimate of the burden of the collection of information; (c) ways to enhance the quality, utility, and clarity of the information collected; and (d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology. Consideration will be given to comments and suggestions submitted in writing within 60 days of this publication. Please direct your written comments to: Thomas Bayer, Chief Information Officer, Securities and Exchange Commission, c/o Remi Pavlik-Simon, 6432 General Green Way, Alexandria, Virginia 22312 or send an e-mail to: PRA_Mailbox@sec.gov. Dated: March 17, 2011. Cathy H. Ahn, Deputy Secretary. information contained in HELI’s public filings with the Commission concerning, among other things, the company’s cash balances and accounts receivable. The company has failed to disclose that the company’s independent auditor has resigned due to accounting irregularities involving (a) discrepancies between HELI’s accounting records for cash balances and official bank statements obtained by the auditors from the company’s bank, (b) discrepancies concerning the existence and location of company customers, and (c) the possibility that accounting records could have been falsified. Due to these irregularities, the company’s auditor has resigned from its engagement to audit the company’s consolidated financial statements for the year ended December 31, 2010, and has withdrawn its audit opinion issued June 15, 2010 relating to the audit of the company’s consolidated financial statements as of December 31, 2009 and 2008. 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 company. Therefore, it is ordered, pursuant to Section 12(k) of the Securities Exchange Act of 1934, that trading in the abovelisted company is suspended for the period from 9:30 a.m. EDT, March 21, 2011, through 11:59 p.m. EDT, on April 1, 2011. By the Commission. Elizabeth M. Murphy, Secretary. [FR Doc. 2011–6943 Filed 3–21–11; 4:15 pm] BILLING CODE 8011–01–P [FR Doc. 2011–6809 Filed 3–22–11; 8:45 am] SECURITIES AND EXCHANGE COMMISSION BILLING CODE 8011–01–P [Release No. 34–64090; File No. SR–BX– 2011–007] SECURITIES AND EXCHANGE COMMISSION In the Matter of Heli Electronics Corp., Order of Suspension of Trading Self-Regulatory Organizations; NASDAQ OMX BX LLC; Order Approving a Proposed Rule Change Relating to Permanent Approval of the BX and NES Inbound Routing Relationship March 21, 2011. March 17, 2011. [File No. 500–1] It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Heli Electronics Corp. (‘‘HELI’’), a Nevada corporation with headquarters and operations in the People’s Republic of China, which trades in the over-thecounter market under the symbol ‘‘HELI.’’ Questions have arisen regarding the accuracy and completeness of PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 I. Introduction On January 28, 2011, NASDAQ OMX BX LLC (‘‘BX’’ or ‘‘Exchange’’) 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 1 15 2 17 E:\FR\FM\23MRN1.SGM U.S.C. 78s(b)(1). CFR 240.19b–4. 23MRN1 Federal Register / Vol. 76, No. 56 / Wednesday, March 23, 2011 / Notices change requesting permanent approval of the Exchange’s pilot program to permit the Exchange to accept inbound orders that Nasdaq Execution Services, LLC (‘‘NES’’) routes in its capacity as a facility of The NASDAQ Stock Market LLC (‘‘Nasdaq’’), with certain obligations and conditions. The proposed rule change was published for comment in the Federal Register on February 14, 2011.3 The Commission received no comment letters regarding the proposed rule change. This order approves the proposed rule change. jlentini on DSKJ8SOYB1PROD with NOTICES II. Background BX Equity Rule 2140(a) prohibits the Exchange or any entity with which it is affiliated from acquiring or maintaining an ownership interest in a member in the absence of an effective filing under Section 19(b) of the Act.4 NES is a broker-dealer that is a member of the Exchange, and currently provides to Nasdaq members optional routing services to other market centers. NES is owned by The NASDAQ OMX Group, Inc. (‘‘NASDAQ OMX’’), which also owns three registered securities exchanges—Nasdaq, the Exchange, and NASDAQ OMX PHLX LLC.5 Thus, NES is an affiliate of each of these exchanges. Absent an effective filing, BX Equity Rule 2140(a) would prohibit NES from being a member of the Exchange. On August 7, 2008, in connection with the acquisition of the Exchange by NASDAQ OMX, the Commission, approved an affiliation between the Exchange and NES for the limited purpose of permitting NES to provide routing services for Nasdaq for orders that first attempt to access liquidity on Nasdaq’s system before routing to the Exchange, subject to certain other limitations and conditions.6 At the time of NASDAQ OMX’s acquisition of the Exchange, the Exchange was not trading equity securities.7 On December 23, 2008, in connection with the Exchange’s resumption of equity trading, the Commission approved a modification to the conditions for the affiliation between NES and the Exchange, to permit the Exchange to receive orders routed by NES in its capacity as a 3 See Securities Exchange Act Release No. 63859 (February 7, 2011), 76 FR 8391 (‘‘Notice’’). 4 15 U.S.C. 78s(b). 5 See Securities Exchange Act Release No. 58324 (August 7, 2008), 73 FR 46936 (August 12, 2008) (SR–BSE–2008–02; SR–BSE–2008–23; SR–BSE– 2008–25; SR–BSECC–2008–01) (‘‘BSE Approval Order’’). See also Securities Exchange Act Release No. 58179 (July 17, 2008), 73 FR 42874 (July 23, 2008) (order approving NASDAQ OMX’s acquisition of Phlx.) 6 See BSE Approval Order, supra note 5. 7 See BSE Approval Order, supra note 5, 73 FR at 46944, n.117. VerDate Mar<15>2010 16:46 Mar 22, 2011 Jkt 223001 facility of Nasdaq (including ‘‘Directed Orders’’),8 on a one-year pilot basis.9 The Exchange is now proposing to make such approval permanent.10 III. Discussion and Commission Findings After careful review, 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.11 Specifically, the Commission finds that the proposed rule change is consistent with Section 6(b)(1) of the Act,12 which requires, among other things, that a national securities exchange be so organized and have the capacity to carry out the purposes of the Act, and to comply and enforce compliance by its members and persons associated with its members, with the provisions of the Act, the rules and regulation thereunder, and the rules of the Exchange. Further, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,13 which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices; to promote just and equitable principles of trade; to foster cooperation and coordination with persons engaged in 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. Section 6(b)(5) also requires that the rules of an exchange not be designed to permit unfair discrimination among customers, issuers, brokers, or dealers. NES operates as a facility of Nasdaq that provides outbound routing from Nasdaq to other market centers, subject to certain conditions.14 NES’s operation as a facility providing outbound routing services for Nasdaq is subject to the 8 Nasdaq Rule 4751(f)(9) defines Directed Orders as immediate-or-cancel orders that are directed to an exchange other than Nasdaq without checking the Nasdaq book. 9 See Securities Exchange Act Release No. 59154 (December 23, 2008), 73 FR 80468 (December 31, 2008) (SR–BSE–2008–48) (‘‘BSE Inbound Routing Order’’). 10 See Notice, supra note 3. 11 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). 12 15 U.S.C. 78f(b)(1). 13 15 U.S.C. 78f(b)(5). 14 See Nasdaq Rule 4758. See also Notice, supra note 3, 76 FR at 8301, n.5. PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 16463 conditions that: (1) NES is operated and regulated as a facility of Nasdaq; (2) NES only provides outbound routing services unless otherwise approved by the Commission; (3) the designated examining authority of NES is a selfregulatory organization unaffiliated with Nasdaq; and (4) the use of NES for outbound routing is available only to Nasdaq members and the use of NES remains optional.15 The operation of NES as a facility of Nasdaq providing outbound routing services from that exchange will be subject to Nasdaq oversight, as well as Commission oversight. Nasdaq will be responsible for ensuring that NES’s outbound routing function is operated consistent with Section 6 of the Act and Nasdaq rules. In addition, Nasdaq must file with the Commission rule changes and fees relating to NES’s outbound routing function. Recognizing that the Commission has previously expressed concern regarding the potential for conflicts of interest in instances where a member firm is affiliated with an exchange of which it is a member, the Exchange previously proposed, and the Commission approved, limitations and conditions on NES’s affiliation with the Exchange.16 Also recognizing that the Commission has expressed concern regarding the potential for conflicts of interest in instances where a member firm is affiliated with an exchange to which it is routing orders, the Exchange previously proposed, and the Commission approved,17 NES’s affiliation with the Exchange to permit the Exchange to accept inbound orders that NES routes in its capacity as a facility of Nasdaq, subject to the following limitations and conditions, which the Exchange states it has met: 18 • First, the Exchange and FINRA will enter into a Regulatory Contract, as well as an agreement pursuant to Rule 17d– 2 under the Act (‘‘17d–2 Agreement’’).19 Pursuant to the Regulatory Contract and the 17d–2 Agreement, FINRA will be allocated regulatory responsibilities to review NES’s compliance with certain Exchange rules.20 Pursuant to the Regulatory Contract, however, BX 15 Id. See also BSE Inbound Routing Order, supra note 9, 73 FR at 80475. 16 See BSE Approval Order, supra note 5, 73 FR at 46944. 17 See BSE Inbound Routing Order, supra note 9, 73 FR at 80475. 18 See Notice, supra note 3, 73 FR at 8391–8392. 19 17 CFR 240.17d–2. 20 The Exchange also states that NES is subject to independent oversight by FINRA, its Designated Examining Authority, for compliance with financial responsibility requirements. See Notice, supra note 3, 76 FR at 8391, n.9. E:\FR\FM\23MRN1.SGM 23MRN1 16464 Federal Register / Vol. 76, No. 56 / Wednesday, March 23, 2011 / Notices jlentini on DSKJ8SOYB1PROD with NOTICES retains ultimate responsibility for enforcing its rules with respect to NES. • Second, FINRA will monitor NES for compliance with the Exchange’s trading rules, and will collect and maintain certain related information.21 • Third, FINRA will provide a report to the Exchange’s chief regulatory officer (‘‘CRO’’), on a quarterly basis, that: (i) Quantifies all alerts (of which FINRA is aware) that identify NES as a participant that has potentially violated Commission or Exchange rules, and (ii) lists all investigations that identify NES as a participant that has potentially violated Commission or Exchange rules.22 • Fourth, the Exchange has adopted BX Equity Rule 2140(c), which requires NASDAQ OMX, as the holding company owning both the Exchange and NES, to establish and maintain procedures and internal controls reasonably designed to ensure that NES does not develop or implement changes to its system, based on non-public information obtained regarding planned changes to the Exchange’s systems as a result of its affiliation with the Exchange, until such information is available generally to similarly situated Exchange members, in connection with the provision of inbound order routing to the Exchange.23 • Fifth, routing of orders from NES to the Exchange, in NES’s capacity as a facility of Nasdaq, was authorized for a pilot period of twelve months.24 The Exchange believes that by meeting the above-listed conditions it has set up mechanisms that protect the independence of the Exchange’s regulatory responsibility with respect to NES, and has demonstrated that NES cannot use any information advantage it may have because of its affiliation with the Exchange.25 In the past, the Commission has expressed concern that the affiliation of 21 Pursuant to the Regulatory Contract, both FINRA and the Exchange will collect and maintain all alerts, complaints, investigations and enforcement actions in which NES (in its capacity as a facility of Nasdaq routing orders to the Exchange) is identified as a participant that has potentially violated applicable Commission or Exchange rules. The Exchange and FINRA will retain these records in an easily accessible manner in order to facilitate any potential review conducted by the Commission’s Office of Compliance Inspections and Examinations. See Notice, supra note 3, 76 FR at 8391, n.10 22 See Notice, supra note 3, 76 FR at 8392. 23 See BX Equity Rule 2140(c). See also Notice, supra note 3, 76 FR at 8392. 24 See Notice, supra note 3, 76 FR at 8392. The Commission notes that the original pilot period of twelve months was approved and began on December 23, 2008, but was extended several times. See Notice, supra note 3, 76 FR at 8391, n.6 and accompanying text. 25 See Notice, supra note 3, 76 FR at 8392. VerDate Mar<15>2010 16:46 Mar 22, 2011 Jkt 223001 an exchange with one of its members raises potential conflicts of interest, and the potential for unfair competitive advantage.26 Although the Commission continues to be concerned about potential unfair competition and conflicts of interest between an exchange’s self-regulatory obligations and its commercial interest when the exchange is affiliated with one of its members, for the reasons discussed below, the Commission believes that it is consistent with the Act to permit NES to provide inbound routing to the Exchange on a permanent basis instead of a pilot basis, subject to the other conditions described above. The Exchange has proposed four ongoing conditions applicable to NES’s routing activities, which are enumerated above. The Commission believes that these conditions mitigate its concerns about potential conflicts of interest and unfair competitive advantage. In particular, the Commission believes that FINRA’s oversight of NES,27 combined with FINRA’s monitoring of NES’s compliance with the equity trading rules and quarterly reporting to the Exchange’s CRO, will help to protect the independence of the Exchange’s regulatory responsibilities with respect to NES. The Commission also believes that BX Equity Rule 2140(c) is designed to ensure that NES cannot use any information advantage it may have because of its affiliation with the Exchange. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,28 that the proposed rule change (SR–BX–2011– 007) be, and hereby is, approved. 26 See, e.g., Securities Exchange Act Release Nos. 54170 (July 18, 2006), 71 FR 42149 (July 25, 2006) (SR–NASDAQ–2006–006) (order approving Nasdaq’s proposal to adopt Nasdaq Rule 2140, restricting affiliations between Nasdaq and its members); 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006) (SR–NYSE–2005–77) (order approving the combination of the New York Stock Exchange, Inc. and Archipelago Holdings, Inc.); 58673 (September 29, 2008), 73 FR 57707 (October 8, 2008) (SR–Amex–2008–62) (order approving the combination of NYSE Euronext and the American Stock Exchange LLC); 59135 (December 22, 2008), 73 FR 79954 (December 30, 2008) (SR–ISE–2009– 85) (order approving the purchase by ISE Holdings of an ownership interest in DirectEdge Holdings LLC); and 59281 (January 22, 2009), 74 FR 5014 (January 28, 2009) (SR–NYSE–2008–120) (order approving a joint venture between NYSE and BIDS Holdings L.P.). 27 This oversight will be accomplished through the 17d–2 Agreement between FINRA and the Exchange and the Regulatory Contract. 28 15 U.S.C. 78s(b)(2). PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.29 Cathy H. Ahn, Deputy Secretary. [FR Doc. 2011–6785 Filed 3–22–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–64091; File No. SR–ISE– 2011–04] Self-Regulatory Organizations; International Securities Exchange, LLC; Order Approving a Proposed Rule Change To Establish New Classes of Market Makers for Index Options March 17, 2011. I. Introduction On January 12, 2011, the International Securities Exchange, LLC (‘‘ISE’’ or ‘‘Exchange’’) 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 amend its rules to establish two new classes of market makers for index options traded on the Exchange. The proposed rule change was published for comment in the Federal Register on January 31, 2011.3 The Commission received no comments regarding the proposal. This order approves the proposed rule change. II. Description of the Proposal The Exchange proposed to amend its rules to establish the following new classes of market makers for certain index options traded on the Exchange: Index Options Primary Market Makers (‘‘IXPMM’’) 4 and Index Options Competitive Market Makers (‘‘IXCMM’’),5 collectively referred to as IXMMs. The Exchange’s proposal to separate out and introduce a new class of market maker trading licenses that are specific to index options is intended to allow an opportunity for additional market 29 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 63761 (January 25, 2011), 76 FR 5412 (‘‘Notice’’). 4 An IXPMM is defined in new ISE Rule 2013(a) as a primary market maker in Eligible Index Options traded on the Exchange pursuant to new ISE Rule 2013. 5 An IXCMM is defined in new ISE Rule 2013(a) as a competitive market maker in Eligible Index Options traded on the Exchange pursuant to new ISE Rule 2013. 1 15 E:\FR\FM\23MRN1.SGM 23MRN1

Agencies

[Federal Register Volume 76, Number 56 (Wednesday, March 23, 2011)]
[Notices]
[Pages 16462-16464]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-6785]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64090; File No. SR-BX-2011-007]


Self-Regulatory Organizations; NASDAQ OMX BX LLC; Order Approving 
a Proposed Rule Change Relating to Permanent Approval of the BX and NES 
Inbound Routing Relationship

March 17, 2011.

I. Introduction

    On January 28, 2011, NASDAQ OMX BX LLC (``BX'' or ``Exchange'') 
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

[[Page 16463]]

change requesting permanent approval of the Exchange's pilot program to 
permit the Exchange to accept inbound orders that Nasdaq Execution 
Services, LLC (``NES'') routes in its capacity as a facility of The 
NASDAQ Stock Market LLC (``Nasdaq''), with certain obligations and 
conditions. The proposed rule change was published for comment in the 
Federal Register on February 14, 2011.\3\ The Commission received no 
comment letters regarding the proposed rule change. This order approves 
the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 63859 (February 7, 
2011), 76 FR 8391 (``Notice'').
---------------------------------------------------------------------------

II. Background

    BX Equity Rule 2140(a) prohibits the Exchange or any entity with 
which it is affiliated from acquiring or maintaining an ownership 
interest in a member in the absence of an effective filing under 
Section 19(b) of the Act.\4\ NES is a broker-dealer that is a member of 
the Exchange, and currently provides to Nasdaq members optional routing 
services to other market centers. NES is owned by The NASDAQ OMX Group, 
Inc. (``NASDAQ OMX''), which also owns three registered securities 
exchanges--Nasdaq, the Exchange, and NASDAQ OMX PHLX LLC.\5\ Thus, NES 
is an affiliate of each of these exchanges. Absent an effective filing, 
BX Equity Rule 2140(a) would prohibit NES from being a member of the 
Exchange.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78s(b).
    \5\ See Securities Exchange Act Release No. 58324 (August 7, 
2008), 73 FR 46936 (August 12, 2008) (SR-BSE-2008-02; SR-BSE-2008-
23; SR-BSE-2008-25; SR-BSECC-2008-01) (``BSE Approval Order''). See 
also Securities Exchange Act Release No. 58179 (July 17, 2008), 73 
FR 42874 (July 23, 2008) (order approving NASDAQ OMX's acquisition 
of Phlx.)
---------------------------------------------------------------------------

    On August 7, 2008, in connection with the acquisition of the 
Exchange by NASDAQ OMX, the Commission, approved an affiliation between 
the Exchange and NES for the limited purpose of permitting NES to 
provide routing services for Nasdaq for orders that first attempt to 
access liquidity on Nasdaq's system before routing to the Exchange, 
subject to certain other limitations and conditions.\6\ At the time of 
NASDAQ OMX's acquisition of the Exchange, the Exchange was not trading 
equity securities.\7\ On December 23, 2008, in connection with the 
Exchange's resumption of equity trading, the Commission approved a 
modification to the conditions for the affiliation between NES and the 
Exchange, to permit the Exchange to receive orders routed by NES in its 
capacity as a facility of Nasdaq (including ``Directed Orders''),\8\ on 
a one-year pilot basis.\9\ The Exchange is now proposing to make such 
approval permanent.\10\
---------------------------------------------------------------------------

    \6\ See BSE Approval Order, supra note 5.
    \7\ See BSE Approval Order, supra note 5, 73 FR at 46944, n.117.
    \8\ Nasdaq Rule 4751(f)(9) defines Directed Orders as immediate-
or-cancel orders that are directed to an exchange other than Nasdaq 
without checking the Nasdaq book.
    \9\ See Securities Exchange Act Release No. 59154 (December 23, 
2008), 73 FR 80468 (December 31, 2008) (SR-BSE-2008-48) (``BSE 
Inbound Routing Order'').
    \10\ See Notice, supra note 3.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review, 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.\11\ Specifically, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(1) of the Act,\12\ which 
requires, among other things, that a national securities exchange be so 
organized and have the capacity to carry out the purposes of the Act, 
and to comply and enforce compliance by its members and persons 
associated with its members, with the provisions of the Act, the rules 
and regulation thereunder, and the rules of the Exchange. Further, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\13\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices; to promote just and 
equitable principles of trade; to foster cooperation and coordination 
with persons engaged in 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. Section 6(b)(5) also 
requires that the rules of an exchange not be designed to permit unfair 
discrimination among customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \11\ 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).
    \12\ 15 U.S.C. 78f(b)(1).
    \13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    NES operates as a facility of Nasdaq that provides outbound routing 
from Nasdaq to other market centers, subject to certain conditions.\14\ 
NES's operation as a facility providing outbound routing services for 
Nasdaq is subject to the conditions that: (1) NES is operated and 
regulated as a facility of Nasdaq; (2) NES only provides outbound 
routing services unless otherwise approved by the Commission; (3) the 
designated examining authority of NES is a self-regulatory organization 
unaffiliated with Nasdaq; and (4) the use of NES for outbound routing 
is available only to Nasdaq members and the use of NES remains 
optional.\15\
---------------------------------------------------------------------------

    \14\ See Nasdaq Rule 4758. See also Notice, supra note 3, 76 FR 
at 8301, n.5.
    \15\ Id. See also BSE Inbound Routing Order, supra note 9, 73 FR 
at 80475.
---------------------------------------------------------------------------

    The operation of NES as a facility of Nasdaq providing outbound 
routing services from that exchange will be subject to Nasdaq 
oversight, as well as Commission oversight. Nasdaq will be responsible 
for ensuring that NES's outbound routing function is operated 
consistent with Section 6 of the Act and Nasdaq rules. In addition, 
Nasdaq must file with the Commission rule changes and fees relating to 
NES's outbound routing function.
    Recognizing that the Commission has previously expressed concern 
regarding the potential for conflicts of interest in instances where a 
member firm is affiliated with an exchange of which it is a member, the 
Exchange previously proposed, and the Commission approved, limitations 
and conditions on NES's affiliation with the Exchange.\16\ Also 
recognizing that the Commission has expressed concern regarding the 
potential for conflicts of interest in instances where a member firm is 
affiliated with an exchange to which it is routing orders, the Exchange 
previously proposed, and the Commission approved,\17\ NES's affiliation 
with the Exchange to permit the Exchange to accept inbound orders that 
NES routes in its capacity as a facility of Nasdaq, subject to the 
following limitations and conditions, which the Exchange states it has 
met: \18\
---------------------------------------------------------------------------

    \16\ See BSE Approval Order, supra note 5, 73 FR at 46944.
    \17\ See BSE Inbound Routing Order, supra note 9, 73 FR at 
80475.
    \18\ See Notice, supra note 3, 73 FR at 8391-8392.
---------------------------------------------------------------------------

     First, the Exchange and FINRA will enter into a Regulatory 
Contract, as well as an agreement pursuant to Rule 17d-2 under the Act 
(``17d-2 Agreement'').\19\ Pursuant to the Regulatory Contract and the 
17d-2 Agreement, FINRA will be allocated regulatory responsibilities to 
review NES's compliance with certain Exchange rules.\20\ Pursuant to 
the Regulatory Contract, however, BX

[[Page 16464]]

retains ultimate responsibility for enforcing its rules with respect to 
NES.
---------------------------------------------------------------------------

    \19\ 17 CFR 240.17d-2.
    \20\ The Exchange also states that NES is subject to independent 
oversight by FINRA, its Designated Examining Authority, for 
compliance with financial responsibility requirements. See Notice, 
supra note 3, 76 FR at 8391, n.9.
---------------------------------------------------------------------------

     Second, FINRA will monitor NES for compliance with the 
Exchange's trading rules, and will collect and maintain certain related 
information.\21\
---------------------------------------------------------------------------

    \21\ Pursuant to the Regulatory Contract, both FINRA and the 
Exchange will collect and maintain all alerts, complaints, 
investigations and enforcement actions in which NES (in its capacity 
as a facility of Nasdaq routing orders to the Exchange) is 
identified as a participant that has potentially violated applicable 
Commission or Exchange rules. The Exchange and FINRA will retain 
these records in an easily accessible manner in order to facilitate 
any potential review conducted by the Commission's Office of 
Compliance Inspections and Examinations. See Notice, supra note 3, 
76 FR at 8391, n.10
---------------------------------------------------------------------------

     Third, FINRA will provide a report to the Exchange's chief 
regulatory officer (``CRO''), on a quarterly basis, that: (i) 
Quantifies all alerts (of which FINRA is aware) that identify NES as a 
participant that has potentially violated Commission or Exchange rules, 
and (ii) lists all investigations that identify NES as a participant 
that has potentially violated Commission or Exchange rules.\22\
---------------------------------------------------------------------------

    \22\ See Notice, supra note 3, 76 FR at 8392.
---------------------------------------------------------------------------

     Fourth, the Exchange has adopted BX Equity Rule 2140(c), 
which requires NASDAQ OMX, as the holding company owning both the 
Exchange and NES, to establish and maintain procedures and internal 
controls reasonably designed to ensure that NES does not develop or 
implement changes to its system, based on non-public information 
obtained regarding planned changes to the Exchange's systems as a 
result of its affiliation with the Exchange, until such information is 
available generally to similarly situated Exchange members, in 
connection with the provision of inbound order routing to the 
Exchange.\23\
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    \23\ See BX Equity Rule 2140(c). See also Notice, supra note 3, 
76 FR at 8392.
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     Fifth, routing of orders from NES to the Exchange, in 
NES's capacity as a facility of Nasdaq, was authorized for a pilot 
period of twelve months.\24\
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    \24\ See Notice, supra note 3, 76 FR at 8392. The Commission 
notes that the original pilot period of twelve months was approved 
and began on December 23, 2008, but was extended several times. See 
Notice, supra note 3, 76 FR at 8391, n.6 and accompanying text.
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    The Exchange believes that by meeting the above-listed conditions 
it has set up mechanisms that protect the independence of the 
Exchange's regulatory responsibility with respect to NES, and has 
demonstrated that NES cannot use any information advantage it may have 
because of its affiliation with the Exchange.\25\
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    \25\ See Notice, supra note 3, 76 FR at 8392.
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    In the past, the Commission has expressed concern that the 
affiliation of an exchange with one of its members raises potential 
conflicts of interest, and the potential for unfair competitive 
advantage.\26\ Although the Commission continues to be concerned about 
potential unfair competition and conflicts of interest between an 
exchange's self-regulatory obligations and its commercial interest when 
the exchange is affiliated with one of its members, for the reasons 
discussed below, the Commission believes that it is consistent with the 
Act to permit NES to provide inbound routing to the Exchange on a 
permanent basis instead of a pilot basis, subject to the other 
conditions described above.
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    \26\ See, e.g., Securities Exchange Act Release Nos. 54170 (July 
18, 2006), 71 FR 42149 (July 25, 2006) (SR-NASDAQ-2006-006) (order 
approving Nasdaq's proposal to adopt Nasdaq Rule 2140, restricting 
affiliations between Nasdaq and its members); 53382 (February 27, 
2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) (order 
approving the combination of the New York Stock Exchange, Inc. and 
Archipelago Holdings, Inc.); 58673 (September 29, 2008), 73 FR 57707 
(October 8, 2008) (SR-Amex-2008-62) (order approving the combination 
of NYSE Euronext and the American Stock Exchange LLC); 59135 
(December 22, 2008), 73 FR 79954 (December 30, 2008) (SR-ISE-2009-
85) (order approving the purchase by ISE Holdings of an ownership 
interest in DirectEdge Holdings LLC); and 59281 (January 22, 2009), 
74 FR 5014 (January 28, 2009) (SR-NYSE-2008-120) (order approving a 
joint venture between NYSE and BIDS Holdings L.P.).
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    The Exchange has proposed four ongoing conditions applicable to 
NES's routing activities, which are enumerated above. The Commission 
believes that these conditions mitigate its concerns about potential 
conflicts of interest and unfair competitive advantage. In particular, 
the Commission believes that FINRA's oversight of NES,\27\ combined 
with FINRA's monitoring of NES's compliance with the equity trading 
rules and quarterly reporting to the Exchange's CRO, will help to 
protect the independence of the Exchange's regulatory responsibilities 
with respect to NES. The Commission also believes that BX Equity Rule 
2140(c) is designed to ensure that NES cannot use any information 
advantage it may have because of its affiliation with the Exchange.
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    \27\ This oversight will be accomplished through the 17d-2 
Agreement between FINRA and the Exchange and the Regulatory 
Contract.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\28\ that the proposed rule change (SR-BX-2011-007) be, and hereby 
is, approved.
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    \28\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-6785 Filed 3-22-11; 8:45 am]
BILLING CODE 8011-01-P