Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by NASDAQ OMX BX, Inc. Relating to Fidelity Bonds, 8307-8310 [2012-3333]

Download as PDF Federal Register / Vol. 77, No. 30 / Tuesday, February 14, 2012 / Notices processing of complex orders. The Commission believes that such a provision will clarify application of Exchange rules and processes for CBOE Trading Permit Holders and investors. The Exchange further proposes to modify the priority algorithms applicable to the FLEX electronic book and to the FLEX electronic RFQ process. The Commission believes that the proposed changes will simplify the allocation algorithms for FLEX Traders and investors. Under the proposal, allocation will be based on price-time priority, subject to public customer and non-TPH broker-dealer priority and, if applicable, any applicable entitlement priority. The Commission believes that the priority and allocation rules are reasonable and consistent with the Act and applies a more consistent allocation algorithm across these FLEX electronic processes.18 Moreover, the proposed changes regarding public customer priority/non-TPH broker-dealer priority and price-time priority have previously been found consistent with the Act.19 The Commission received one comment letter regarding the proposed rule change.20 The comment suggested that there be an additional phase, the Decision Phase, in the RFQ process. During this Decision Phase, the initiator of an RFQ would have a brief period of time, during which no changes of any type to market quotes would be permitted, in order to decide to trade or cancel their RFQ.21 According to the Exchange, it previously proposed an mstockstill on DSK4VPTVN1PROD with NOTICES 18 The Commission also believes that the amended priority and allocation rules for electronic FLEX trading are consistent with Section 11(a) of the Act. 15 U.S.C. 78k(a) Section 11(a)(1) prohibits a member of a national securities exchange from effecting transactions on that exchange for its own account, the account of an associated person, or an account over which it or its associated person exercises discretion unless an exception applies. The Commission believes, however, that neither a Submitting Trading Permit Holder who trades against an electronic RFQ Market nor any other FLEX Trader who itself submits an RFQ Quote electronically qualifies for the ‘‘effect-versus execute’’ exception to Section 11(a). 17 CFR 240.11a2–2(T). Nevertheless, the Commission believes that other exceptions may apply. FLEX Market-Makers qualify for the market-maker exception. With respect to non-market-maker members, the new System appears reasonably designed to cause RFQ Quotes constituting the RFQ Market and the RFQ Order that trades against the RFQ Market to yield to non-member interest, consistent with the ‘‘G’’ exception. See 15 U.S.C. 78k(a)(1)(G) (setting forth all requirements for the ‘‘G’’ exception). 19 See e.g., Securities Exchange Act Release Nos. 51822 (June 10, 2005), 70 FR 35321 (June 17, 2005) (SR–CBOE–2004–87) (Adopting rules pertaining to priority and allocation of trades for index options) and 56792 (November 15, 2007), 72 FR 65776 (November 23, 2007) (SR–CBOE–2006–99) (Adopting rules providing for the trading of FLEX Options on an electronic platform). 20 See supra note 4. 21 Id. VerDate Mar<15>2010 21:57 Feb 13, 2012 Jkt 226001 8307 RFQ process with a ‘‘locked up RFQ Market,’’ similar to the one suggested in the comment letter, during the Reaction Phase. However the Exchange amended the process to allow FLEX Quotes and FLEX Orders to be entered, modified or cancelled during the Reaction Phase.22 The Exchange stated that the amendment was the result of feedback received concerning the risk of market movements that might occur during the ‘‘locked up RFQ Market.’’ 23 The Commission agrees with the Exchange that the five-minute RFQ Reaction Period should be sufficient time for the Submitting Trading Permit Holder to determine whether to trade against the RFQ Market while at the same time not exposing those who respond to an RFQ to any unreasonable risks of market movements that may occur during the RFQ Reaction Period. change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,24 that the proposed rule change (File No. SR– CBOE–2011–122), as amended by Amendment No. 1, be, and hereby is, approved. 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 IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.25 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–3328 Filed 2–13–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–66359; File No. SR–BX– 2012–008] Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by NASDAQ OMX BX, Inc. Relating to Fidelity Bonds February 8, 2012. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1, and Rule 19b–4 2 thereunder, notice is hereby given that on February 1, 2012, NASDAQ OMX BX, Inc. (‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule 22 See Securities Exchange Act Release No. 56792, supra note 19. 23 See SR–CBOE–2006–99 Amendment No. 2, https://www.cboe.com/publish/RuleFilingsSEC/SRCBOE-2006-099.a2.pdf. 24 15 U.S.C. 78s(b)(2). 25 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Exchange Rule 3020 to reflect recent changes to a corresponding rule of the Financial Industry Regulatory Authority (‘‘FINRA’’). The text of the proposed rule change is available on the Exchange’s Web site at https://www.nasdaqtrader.com/ micro.aspx?id=BXRulefilings, at the principal office of the Exchange, and at the Commission’s Public Reference Room. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Many of BX’s rules are based on rules of FINRA (formerly the National Association of Securities Dealers (‘‘NASD’’)). Beginning in 2008, FINRA embarked on an extended process of moving rules formerly designated as ‘‘NASD Rules’’ into a consolidated FINRA rulebook. In most cases, FINRA has renumbered these rules, and in some cases has substantively amended them. Accordingly the Exchange also has initiated a process of modifying its rulebook to ensure that the Exchange rules corresponding to FINRA/NASD rules continue to mirror them as closely as practicable. This proposed rule change concerns BX Rule 3020 entitled ‘‘Fidelity Bonds,’’ which follows and incorporates by reference former NASD Rule 3020.3 3 The purpose of the fidelity bond is to protect a member against certain types of losses, including, E:\FR\FM\14FEN1.SGM Continued 14FEN1 8308 Federal Register / Vol. 77, No. 30 / Tuesday, February 14, 2012 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES FINRA recently amended its rules to adopt former NASD Rule 3020, relating to Fidelity Bonds, with certain changes, into the consolidated FINRA rulebook as FINRA Rule 4360.4 Exchange Rule 3020 provides that a ‘‘A member designated to the Exchange for oversight pursuant to SEC Rule 17d–1 shall comply with NASD Rule 3020 as if such Rule were part of the Rules of the Exchange.’’ The Exchange proposes to amend this text to reference new FINRA Rule 4360, which replaced NASD Rule 3020. NASD Rule 3020(a) generally provides that each member required to join the Securities Investor Protection Corporation (‘‘SIPC’’) that has employees and that is not a member in good standing of one of the enumerated national securities exchanges must maintain fidelity bond coverage. FINRA Rule 4360 requires each member that is required to join SIPC to maintain blanket fidelity bond coverage with specified amounts of coverage based on the member’s net capital requirement, with certain exceptions. NASD Rule 3020(a)(1) requires members to maintain a blanket fidelity bond in a form substantially similar to the standard form of Brokers Blanket Bond promulgated by the Surety Association of America. New FINRA Rule 4360 requires members to maintain fidelity bond coverage that provides for per loss coverage without an aggregate limit of liability. Also, pursuant to FINRA Rule 4360, a member’s fidelity bond must provide against loss and have Insuring Agreements covering at least the following: Fidelity, on premises, in transit, forgery and alteration, securities and counterfeit currency. The rule change modified the descriptive headings for these Insuring Agreements, in part, from NASD Rule 3020(a)(1) and NYSE Rule 319(d) to align them with the headings in the current bond forms available to broker-dealers. FINRA Rule 4360 also eliminates the specific coverage provisions in NASD Rule 3020(a)(4) and (a)(5), and NYSE Rule 319(d)(ii)(B) and (C), and (e)(ii)(B) and (C), that permit less than 100 percent of coverage for certain Insuring Agreements (i.e., fraudulent trading and securities forgery) to require that coverage for all Insuring Agreements be but not limited to, those caused by the malfeasance of its officers and employees, and the effect of such losses on the member’s capital. 4 See Securities Exchange Act Release No. 63961 (February 24, 2011), 76 FR 11542 (March 2, 2011) (SR–FINRA–2010–059) (a rule change to adopt a rule of the National Association of Securities Dealers, Inc. (‘‘NASD’’) as part of the consolidation of the FINRA rulebook). This new rule took into account Incorporated NYSE Rule 319 (Fidelity Bonds) and its Interpretation. VerDate Mar<15>2010 21:57 Feb 13, 2012 Jkt 226001 equal to 100 percent of the firm’s minimum required bond coverage.5 Further, FINRA Rule 4360 requires that a member’s fidelity bond include a cancellation rider providing that the insurer will use its best efforts to promptly notify FINRA in the event the bond is cancelled, terminated or ‘‘substantially modified.’’ Also, the rule change adopted the definition of ‘‘substantially modified’’ in NYSE Rule 319 and would incorporate NYSE Rule 319.12’s standard that a firm must immediately advise FINRA in writing if its fidelity bond is cancelled, terminated or substantially modified.6 FINRA added supplementary material to FINRA Rule 4360 requiring members that do not qualify for a bond with per loss coverage without an aggregate limit of liability to secure alternative coverage. Specifically, a member that does not qualify for blanket fidelity bond coverage as required by FINRA Rule 4360(a)(3) is required to maintain substantially similar fidelity bond coverage in compliance with all other provisions of the rule, provided that the member maintains written correspondence from two insurance providers stating that the member does not qualify for the coverage required by FINRA Rule 4360(a)(3). FINRA Rule 4360 requires each member to maintain, at a minimum, fidelity bond coverage for any person associated with the member, except directors or trustees of a member who are not performing acts within the scope of the usual duties of an officer or employee. As further detailed below, the rule change eliminated the exemption in NASD Rule 3020 for sole stockholders and sole proprietors. The rule change also increased the minimum required fidelity bond coverage for members, while continuing to base the coverage on a member’s net capital requirement. To that end, FINRA Rule 4360 required a member with a net capital requirement that is less than $250,000 to maintain minimum coverage of the greater of 120 percent of the firm’s required net capital under Exchange Act Rule 15c3–1 or $100,000. The increase to $100,000 modifies the present minimum requirement of $25,000. Under the new FINRA Rule 4360, members with a net capital requirement 5 Members may elect to carry additional, optional Insuring Agreements not required by FINRA Rule 4360 for an amount less than 100 percent of the minimum required bond coverage. 6 NYSE Rule 319 defines the term ‘‘substantially modified’’ as any change in the type or amount of fidelity bonding coverage, or in the exclusions to which the bond is subject, or any other change in the bond such that it no longer complies with the requirements of the rule. PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 of at least $250,000 must use a table in the rule to determine their minimum fidelity bond coverage requirement. The table is a modified version of the tables in NASD Rule 3020(a)(3) and NYSE Rule 319(e)(i). The identical NASD and NYSE requirements for members that have a minimum net capital requirement that exceeds $1 million are retained in the new Rule; however, the rule adopts the higher requirements in NYSE Rule 319(e)(i) for a member with a net capital requirement of at least $250,000, but less than $1 million. Under the new rule, the entire amount of a member’s minimum required coverage must be available for covered losses and may not be eroded by the costs an insurer may incur if it chooses to defend a claim. Specifically, any defense costs for covered losses must be in addition to a member’s minimum coverage requirements. A member may include defense costs as part of its fidelity bond coverage, but only to the extent that it does not reduce a member’s minimum required coverage under the rule. Under prior NASD Rule 3020(b), a deductible provision may be included in a member’s bond of up to $5,000 or 10% of the member’s minimum insurance requirement, whichever is greater. If a member desires to maintain coverage in excess of the minimum insurance requirement, then a deductible provision may be included in the bond of up to $5,000 or 10% of the amount of blanket coverage provided in the bond purchased, whichever is greater. The excess of any such deductible amount over the maximum permissible deductible amount based on the member’s minimum required coverage must be deducted from the member’s net worth in the calculation of the member’s net capital for purposes of Exchange Act Rule 15c3–1. Where the member is a subsidiary of another member, the excess may be deducted from the parent’s rather than the subsidiary’s net worth, but only if the parent guarantees the subsidiary’s net capital in writing.7 FINRA Rule 4360 provides for an 7 Under NYSE Rule 319(b), each member organization may self-insure to the extent of $10,000 or 10% of its minimum insurance requirement as fixed by the NYSE, whichever is greater, for each type of coverage required by the rule. Self-insurance in amounts exceeding the above maximum may be permitted by the NYSE provided the member or member organization certifies to the satisfaction of the NYSE that it is unable to obtain greater bonding coverage, and agrees to reduce its self-insurance so as to comply with the above stated limits as soon as possible, and appropriate charges to capital are made pursuant to Exchange Act Rule 15c3–1. This provision also contains identical language to the NASD rule regarding net worth deductions for subsidiaries. E:\FR\FM\14FEN1.SGM 14FEN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 77, No. 30 / Tuesday, February 14, 2012 / Notices allowable deductible amount of up to 25% of the fidelity bond coverage purchased by a member. Any deductible amount elected by the firm that is greater than 10% of the coverage purchased by the member 8 would be deducted from the member’s net worth in the calculation of its net capital for purposes of Exchange Act Rule 15c3–1.9 Like the NASD and NYSE rules, if the member is a subsidiary of another FINRA member, this amount may be deducted from the parent’s rather than the subsidiary’s net worth, but only if the parent guarantees the subsidiary’s net capital in writing. Consistent with NASD Rule 3020(c) and NYSE Rule 319.10, FINRA Rule 4360 requires a member (including a firm that signs a multi-year insurance policy), annually as of the yearly anniversary date of the issuance of the fidelity bond, to review the adequacy of its fidelity bond coverage and make any required adjustments to its coverage, as set forth in the rule. Under FINRA Rule 4360(d), a member’s highest net capital requirement during the preceding 12month period, based on the applicable method of computing net capital (dollar minimum, aggregate indebtedness or alternative standard), is used as the basis for determining the member’s minimum required fidelity bond coverage for the succeeding 12-month period. The ‘‘preceding 12-month period’’ includes the 12-month period that ends 60 days before the yearly anniversary date of a member’s fidelity bond. This would give a firm time to determine its required fidelity bond coverage by the anniversary date of the bond. Further, FINRA Rule 4360 allows a member that has only been in business for one year and elected the aggregate indebtedness ratio for calculating its net capital requirement to use, solely for the purpose of determining the adequacy of its fidelity bond coverage for its second year, the 15 to 1 ratio of aggregate indebtedness to net capital in lieu of the 8 to 1 ratio (required for broker-dealers in their first year of business) to calculate its net capital requirement. Notwithstanding the above, such member would not be permitted to carry less minimum fidelity bond coverage in its second year than it carried in its first year. 8 FINRA notes that a member may elect, subject to availability, a deductible of less than 10 percent of the coverage purchased. 9 NASD Rule 3020 bases the deduction from net worth for an excess deductible on a firm’s minimum required coverage, while FINRA Rule 4360 would base such deduction from net worth on coverage purchased by the member. VerDate Mar<15>2010 21:57 Feb 13, 2012 Jkt 226001 Based in part on NASD Rule 3020(a), FINRA Rule 4360 exempts from the fidelity bond requirements members in good standing with a national securities exchange that maintain a fidelity bond subject to the requirements of such exchange that are equal to or greater than the requirements set forth in Rule 4360. Additionally, consistent with NYSE Rule Interpretation 319/01, FINRA Rule 4360 continues to exempt from the fidelity bond requirements any firm that acts solely as a Designated Market Maker (‘‘DMM’’),10 floor broker or registered floor trader and does not conduct business with the public. FINRA Rule 4360 does not maintain the exemption in NASD Rule 3020(e) for a one-person firm.11 Historically, a sole proprietor or sole stockholder member was excluded from the fidelity bond requirements based upon the assumption that such firms were oneperson shops and, therefore, could not obtain coverage for their own acts. FINRA has determined that sole proprietors and sole stockholder firms can and often do acquire fidelity bond coverage, even though it is currently not required, since all claims (irrespective of firm size) are likely to be paid or denied on a facts-and-circumstances basis. Also, certain coverage areas of the fidelity bond benefit a one-person shop (e.g., those covering customer property lost in transit). The Exchange also proposes to delete text [sic] the following text from Exchange Rule 3020, ‘‘FINRA is in the process of consolidating certain NASD rules into a new FINRA rulebook. If the provisions of NASD Rule 3020 are transferred into the FINRA rulebook, then Equity Rule 3020 shall be construed to require Exchange members designated to the Exchange for oversight pursuant to SEC Rule 17d–1 to comply with the FINRA rule corresponding to NASD Rule 3010 (regardless of whether such rule is renumbered or amended) as if such rule were part of the Rules of the Exchange.’’ The text is not necessary as the Exchange is proposing to update the text to reflect the current FINRA Rule. 10 See Exchange Act Release No. 58845 (Oct. 24, 2008), 73 FR 64379 (Oct. 29, 2008) (Order Approving File No. SR–NYSE–2008–46). In this rule filing, the role of the specialist was altered in certain respects and the term ‘‘specialist’’ was replaced with the term ‘‘Designated Market Maker.’’ 11 A one-person member (that is, a firm owned by a sole proprietor or stockholder that has no other associated persons, registered or unregistered) has no ‘‘employees’’ for purposes of NASD Rule 3020, and therefore such a firm currently is not subject to the fidelity bonding requirements. Conversely, a firm owned by a sole proprietor or stockholder that has other associated persons has ‘‘employees’’ for purposes of NASD Rule 3020, and currently is, and will continue to be, subject to the fidelity bonding requirements. PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 8309 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act 12 in general, and furthers the objectives of Section 6(b)(5) of the Act 13 in particular, in that it is designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general to protect investors and the public interest, by updating and clarifying the requirements governing fidelity bonds. The Exchange believes that the proposed requirements of Rule 4360, including, but not limited to, requiring each member that is required to join SIPC to maintain blanket fidelity bond coverage, increasing the minimum requirement fidelity bond coverage and maintaining a fidelity bond that provides for per loss coverage without an aggregate limit of liability promotes investor protection by protecting firms from unforeseen losses. The proposed amendments will conform BX Rule 3020 to recent changes made to a corresponding FINRA rule, to promote application of consistent regulatory standards. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received from Members, Participants, or Others No written comments were either solicited or received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The Commission believes that BX members are currently subject to FINRA Rule 4360 because of the text of the rule as written. Because the foregoing proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days after the date of the filing, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the 12 15 13 15 E:\FR\FM\14FEN1.SGM U.S.C. 78f(b). U.S.C. 78f(b)(5). 14FEN1 8310 Federal Register / Vol. 77, No. 30 / Tuesday, February 14, 2012 / Notices Act 14 and Rule 19b–4(f)(6) 15 thereunder. The Exchange has requested that the Commission waive the 30-day operative delay. The Commission believes that waiver of the operative delay is consistent with the protection of investors and the public interest because the proposed rule change presents no novel issues, and the BX members are currently subject to FINRA Rule 4360. Therefore, the Commission designates the proposal operative upon filing.16 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– BX–2012–008 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–BX–2012–008. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the 14 15 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). In addition, Rule 19b– 4(f)(6) requires a self-regulatory organization to give the Commission written notice of its intent to file the proposed rule change at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has satisfied this requirement. 16 For purposes only of waiving the 30-day operative delay, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). mstockstill on DSK4VPTVN1PROD with NOTICES 15 17 VerDate Mar<15>2010 21:57 Feb 13, 2012 Jkt 226001 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 the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–BX– 2012–008 and should be submitted on or before March 6, 2012. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.17 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–3333 Filed 2–13–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–66358; File No. SR–BATS– 2012–006] Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Related to Fees for Use of BATS Exchange, Inc. February 8, 2012. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on February 1, 2012, BATS Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BATS’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Exchange has designated the proposed rule change as one establishing or changing a member due, fee, or other charge imposed by the Exchange under 17 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 Section 19(b)(3)(A)(ii) of the Act 3 and Rule 19b–4(f)(2) thereunder,4 which renders the proposed rule change effective upon filing with the Commission. 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 The Exchange proposes [sic] amend the fee schedule applicable to Members 5 and non-members of the Exchange pursuant to BATS Rules 15.1(a) and (c). Changes will become operative on February 1, 2012. 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 IV below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to modify the ‘‘Options Pricing’’ section of its fee schedule to change pricing with respect to orders routed to NASDAQ OMX PHLX LLC (‘‘PHLX’’). PHLX has recently introduced increases to its rates to remove liquidity in specified symbols 6 identified by the Exchange as 3 15 U.S.C. 78s(b)(3)(A)(ii). CFR 240.19b–4(f)(2). 5 A Member is any registered broker or dealer that has been admitted to membership in the Exchange. 6 See Securities Exchange Act Release No. 66100 (January 4, 2012), 77 FR 1532 (January 10, 2012) (SR–Phlx–2011–185) (notice of filing and immediate effectiveness of proposal to modify fees, including an increase to the Customer Fee for Removing Liquidity from $0.29 per contract to $0.31 per contract); Securities Exchange Act Release No. 65940 (December 12, 2011), 76 FR 78322 (December 16, 2011) (SR–Phlx–2011–162) (notice of filing and immediate effectiveness of proposal to modify fees, including an increase to the Customer 4 17 E:\FR\FM\14FEN1.SGM 14FEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 77, Number 30 (Tuesday, February 14, 2012)]
[Notices]
[Pages 8307-8310]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-3333]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66359; File No. SR-BX-2012-008]

Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change by NASDAQ
OMX BX, Inc. Relating to Fidelity Bonds

February 8, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given
that on February 1, 2012, NASDAQ OMX BX, Inc. (``Exchange'') filed with
the Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------

\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

The Exchange proposes to amend Exchange Rule 3020 to reflect recent
changes to a corresponding rule of the Financial Industry Regulatory
Authority (``FINRA'').
The text of the proposed rule change is available on the Exchange's
Web site at https://www.nasdaqtrader.com/micro.aspx?id=BXRulefilings, 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 IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.

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

1. Purpose
Many of BX's rules are based on rules of FINRA (formerly the
National Association of Securities Dealers (``NASD'')). Beginning in
2008, FINRA embarked on an extended process of moving rules formerly
designated as ``NASD Rules'' into a consolidated FINRA rulebook. In
most cases, FINRA has renumbered these rules, and in some cases has
substantively amended them. Accordingly the Exchange also has initiated
a process of modifying its rulebook to ensure that the Exchange rules
corresponding to FINRA/NASD rules continue to mirror them as closely as
practicable.
This proposed rule change concerns BX Rule 3020 entitled ``Fidelity
Bonds,'' which follows and incorporates by reference former NASD Rule
3020.\3\

[[Page 8308]]

FINRA recently amended its rules to adopt former NASD Rule 3020,
relating to Fidelity Bonds, with certain changes, into the consolidated
FINRA rulebook as FINRA Rule 4360.\4\ Exchange Rule 3020 provides that
a ``A member designated to the Exchange for oversight pursuant to SEC
Rule 17d-1 shall comply with NASD Rule 3020 as if such Rule were part
of the Rules of the Exchange.'' The Exchange proposes to amend this
text to reference new FINRA Rule 4360, which replaced NASD Rule 3020.
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\3\ The purpose of the fidelity bond is to protect a member
against certain types of losses, including, but not limited to,
those caused by the malfeasance of its officers and employees, and
the effect of such losses on the member's capital.
\4\ See Securities Exchange Act Release No. 63961 (February 24,
2011), 76 FR 11542 (March 2, 2011) (SR-FINRA-2010-059) (a rule
change to adopt a rule of the National Association of Securities
Dealers, Inc. (``NASD'') as part of the consolidation of the FINRA
rulebook). This new rule took into account Incorporated NYSE Rule
319 (Fidelity Bonds) and its Interpretation.
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NASD Rule 3020(a) generally provides that each member required to
join the Securities Investor Protection Corporation (``SIPC'') that has
employees and that is not a member in good standing of one of the
enumerated national securities exchanges must maintain fidelity bond
coverage. FINRA Rule 4360 requires each member that is required to join
SIPC to maintain blanket fidelity bond coverage with specified amounts
of coverage based on the member's net capital requirement, with certain
exceptions. NASD Rule 3020(a)(1) requires members to maintain a blanket
fidelity bond in a form substantially similar to the standard form of
Brokers Blanket Bond promulgated by the Surety Association of America.
New FINRA Rule 4360 requires members to maintain fidelity bond coverage
that provides for per loss coverage without an aggregate limit of
liability. Also, pursuant to FINRA Rule 4360, a member's fidelity bond
must provide against loss and have Insuring Agreements covering at
least the following: Fidelity, on premises, in transit, forgery and
alteration, securities and counterfeit currency. The rule change
modified the descriptive headings for these Insuring Agreements, in
part, from NASD Rule 3020(a)(1) and NYSE Rule 319(d) to align them with
the headings in the current bond forms available to broker-dealers.
FINRA Rule 4360 also eliminates the specific coverage provisions in
NASD Rule 3020(a)(4) and (a)(5), and NYSE Rule 319(d)(ii)(B) and (C),
and (e)(ii)(B) and (C), that permit less than 100 percent of coverage
for certain Insuring Agreements (i.e., fraudulent trading and
securities forgery) to require that coverage for all Insuring
Agreements be equal to 100 percent of the firm's minimum required bond
coverage.\5\
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\5\ Members may elect to carry additional, optional Insuring
Agreements not required by FINRA Rule 4360 for an amount less than
100 percent of the minimum required bond coverage.
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Further, FINRA Rule 4360 requires that a member's fidelity bond
include a cancellation rider providing that the insurer will use its
best efforts to promptly notify FINRA in the event the bond is
cancelled, terminated or ``substantially modified.'' Also, the rule
change adopted the definition of ``substantially modified'' in NYSE
Rule 319 and would incorporate NYSE Rule 319.12's standard that a firm
must immediately advise FINRA in writing if its fidelity bond is
cancelled, terminated or substantially modified.\6\ FINRA added
supplementary material to FINRA Rule 4360 requiring members that do not
qualify for a bond with per loss coverage without an aggregate limit of
liability to secure alternative coverage. Specifically, a member that
does not qualify for blanket fidelity bond coverage as required by
FINRA Rule 4360(a)(3) is required to maintain substantially similar
fidelity bond coverage in compliance with all other provisions of the
rule, provided that the member maintains written correspondence from
two insurance providers stating that the member does not qualify for
the coverage required by FINRA Rule 4360(a)(3).
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\6\ NYSE Rule 319 defines the term ``substantially modified'' as
any change in the type or amount of fidelity bonding coverage, or in
the exclusions to which the bond is subject, or any other change in
the bond such that it no longer complies with the requirements of
the rule.
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FINRA Rule 4360 requires each member to maintain, at a minimum,
fidelity bond coverage for any person associated with the member,
except directors or trustees of a member who are not performing acts
within the scope of the usual duties of an officer or employee. As
further detailed below, the rule change eliminated the exemption in
NASD Rule 3020 for sole stockholders and sole proprietors. The rule
change also increased the minimum required fidelity bond coverage for
members, while continuing to base the coverage on a member's net
capital requirement. To that end, FINRA Rule 4360 required a member
with a net capital requirement that is less than $250,000 to maintain
minimum coverage of the greater of 120 percent of the firm's required
net capital under Exchange Act Rule 15c3-1 or $100,000. The increase to
$100,000 modifies the present minimum requirement of $25,000.
Under the new FINRA Rule 4360, members with a net capital
requirement of at least $250,000 must use a table in the rule to
determine their minimum fidelity bond coverage requirement. The table
is a modified version of the tables in NASD Rule 3020(a)(3) and NYSE
Rule 319(e)(i). The identical NASD and NYSE requirements for members
that have a minimum net capital requirement that exceeds $1 million are
retained in the new Rule; however, the rule adopts the higher
requirements in NYSE Rule 319(e)(i) for a member with a net capital
requirement of at least $250,000, but less than $1 million. Under the
new rule, the entire amount of a member's minimum required coverage
must be available for covered losses and may not be eroded by the costs
an insurer may incur if it chooses to defend a claim. Specifically, any
defense costs for covered losses must be in addition to a member's
minimum coverage requirements. A member may include defense costs as
part of its fidelity bond coverage, but only to the extent that it does
not reduce a member's minimum required coverage under the rule.
Under prior NASD Rule 3020(b), a deductible provision may be
included in a member's bond of up to $5,000 or 10% of the member's
minimum insurance requirement, whichever is greater. If a member
desires to maintain coverage in excess of the minimum insurance
requirement, then a deductible provision may be included in the bond of
up to $5,000 or 10% of the amount of blanket coverage provided in the
bond purchased, whichever is greater. The excess of any such deductible
amount over the maximum permissible deductible amount based on the
member's minimum required coverage must be deducted from the member's
net worth in the calculation of the member's net capital for purposes
of Exchange Act Rule 15c3-1. Where the member is a subsidiary of
another member, the excess may be deducted from the parent's rather
than the subsidiary's net worth, but only if the parent guarantees the
subsidiary's net capital in writing.\7\ FINRA Rule 4360 provides for an

[[Page 8309]]

allowable deductible amount of up to 25% of the fidelity bond coverage
purchased by a member. Any deductible amount elected by the firm that
is greater than 10% of the coverage purchased by the member \8\ would
be deducted from the member's net worth in the calculation of its net
capital for purposes of Exchange Act Rule 15c3-1.\9\ Like the NASD and
NYSE rules, if the member is a subsidiary of another FINRA member, this
amount may be deducted from the parent's rather than the subsidiary's
net worth, but only if the parent guarantees the subsidiary's net
capital in writing.
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\7\ Under NYSE Rule 319(b), each member organization may self-
insure to the extent of $10,000 or 10% of its minimum insurance
requirement as fixed by the NYSE, whichever is greater, for each
type of coverage required by the rule. Self-insurance in amounts
exceeding the above maximum may be permitted by the NYSE provided
the member or member organization certifies to the satisfaction of
the NYSE that it is unable to obtain greater bonding coverage, and
agrees to reduce its self-insurance so as to comply with the above
stated limits as soon as possible, and appropriate charges to
capital are made pursuant to Exchange Act Rule 15c3-1. This
provision also contains identical language to the NASD rule
regarding net worth deductions for subsidiaries.
\8\ FINRA notes that a member may elect, subject to
availability, a deductible of less than 10 percent of the coverage
purchased.
\9\ NASD Rule 3020 bases the deduction from net worth for an
excess deductible on a firm's minimum required coverage, while FINRA
Rule 4360 would base such deduction from net worth on coverage
purchased by the member.
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Consistent with NASD Rule 3020(c) and NYSE Rule 319.10, FINRA Rule
4360 requires a member (including a firm that signs a multi-year
insurance policy), annually as of the yearly anniversary date of the
issuance of the fidelity bond, to review the adequacy of its fidelity
bond coverage and make any required adjustments to its coverage, as set
forth in the rule. Under FINRA Rule 4360(d), a member's highest net
capital requirement during the preceding 12-month period, based on the
applicable method of computing net capital (dollar minimum, aggregate
indebtedness or alternative standard), is used as the basis for
determining the member's minimum required fidelity bond coverage for
the succeeding 12-month period. The ``preceding 12-month period''
includes the 12-month period that ends 60 days before the yearly
anniversary date of a member's fidelity bond. This would give a firm
time to determine its required fidelity bond coverage by the
anniversary date of the bond.
Further, FINRA Rule 4360 allows a member that has only been in
business for one year and elected the aggregate indebtedness ratio for
calculating its net capital requirement to use, solely for the purpose
of determining the adequacy of its fidelity bond coverage for its
second year, the 15 to 1 ratio of aggregate indebtedness to net capital
in lieu of the 8 to 1 ratio (required for broker-dealers in their first
year of business) to calculate its net capital requirement.
Notwithstanding the above, such member would not be permitted to carry
less minimum fidelity bond coverage in its second year than it carried
in its first year.
Based in part on NASD Rule 3020(a), FINRA Rule 4360 exempts from
the fidelity bond requirements members in good standing with a national
securities exchange that maintain a fidelity bond subject to the
requirements of such exchange that are equal to or greater than the
requirements set forth in Rule 4360. Additionally, consistent with NYSE
Rule Interpretation 319/01, FINRA Rule 4360 continues to exempt from
the fidelity bond requirements any firm that acts solely as a
Designated Market Maker (``DMM''),\10\ floor broker or registered floor
trader and does not conduct business with the public. FINRA Rule 4360
does not maintain the exemption in NASD Rule 3020(e) for a one-person
firm.\11\ Historically, a sole proprietor or sole stockholder member
was excluded from the fidelity bond requirements based upon the
assumption that such firms were one-person shops and, therefore, could
not obtain coverage for their own acts. FINRA has determined that sole
proprietors and sole stockholder firms can and often do acquire
fidelity bond coverage, even though it is currently not required, since
all claims (irrespective of firm size) are likely to be paid or denied
on a facts-and-circumstances basis. Also, certain coverage areas of the
fidelity bond benefit a one-person shop (e.g., those covering customer
property lost in transit).
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\10\ See Exchange Act Release No. 58845 (Oct. 24, 2008), 73 FR
64379 (Oct. 29, 2008) (Order Approving File No. SR-NYSE-2008-46). In
this rule filing, the role of the specialist was altered in certain
respects and the term ``specialist'' was replaced with the term
``Designated Market Maker.''
\11\ A one-person member (that is, a firm owned by a sole
proprietor or stockholder that has no other associated persons,
registered or unregistered) has no ``employees'' for purposes of
NASD Rule 3020, and therefore such a firm currently is not subject
to the fidelity bonding requirements. Conversely, a firm owned by a
sole proprietor or stockholder that has other associated persons has
``employees'' for purposes of NASD Rule 3020, and currently is, and
will continue to be, subject to the fidelity bonding requirements.
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The Exchange also proposes to delete text [sic] the following text
from Exchange Rule 3020, ``FINRA is in the process of consolidating
certain NASD rules into a new FINRA rulebook. If the provisions of NASD
Rule 3020 are transferred into the FINRA rulebook, then Equity Rule
3020 shall be construed to require Exchange members designated to the
Exchange for oversight pursuant to SEC Rule 17d-1 to comply with the
FINRA rule corresponding to NASD Rule 3010 (regardless of whether such
rule is renumbered or amended) as if such rule were part of the Rules
of the Exchange.'' The text is not necessary as the Exchange is
proposing to update the text to reflect the current FINRA Rule.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \12\ in general, and furthers the objectives of Section
6(b)(5) of the Act \13\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest, by updating and clarifying the requirements governing
fidelity bonds. The Exchange believes that the proposed requirements of
Rule 4360, including, but not limited to, requiring each member that is
required to join SIPC to maintain blanket fidelity bond coverage,
increasing the minimum requirement fidelity bond coverage and
maintaining a fidelity bond that provides for per loss coverage without
an aggregate limit of liability promotes investor protection by
protecting firms from unforeseen losses. The proposed amendments will
conform BX Rule 3020 to recent changes made to a corresponding FINRA
rule, to promote application of consistent regulatory standards.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.

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

No written comments were either solicited or received.

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

The Commission believes that BX members are currently subject to
FINRA Rule 4360 because of the text of the rule as written. Because the
foregoing proposed rule change does not: (i) Significantly affect the
protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative for 30
days after the date of the filing, or such shorter time as the
Commission may designate, it has become effective pursuant to Section
19(b)(3)(A) of the

[[Page 8310]]

Act \14\ and Rule 19b-4(f)(6) \15\ thereunder.
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\14\ 15 U.S.C. 78s(b)(3)(A).
\15\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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The Exchange has requested that the Commission waive the 30-day
operative delay. The Commission believes that waiver of the operative
delay is consistent with the protection of investors and the public
interest because the proposed rule change presents no novel issues, and
the BX members are currently subject to FINRA Rule 4360. Therefore, the
Commission designates the proposal operative upon filing.\16\
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\16\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------

At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

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

Electronic Comments

Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-BX-2012-008 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BX-2012-008. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (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 the filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-BX-2012-008 and should be
submitted on or before March 6, 2012.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-3333 Filed 2-13-12; 8:45 am]
BILLING CODE 8011-01-P

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