Self-Regulatory Organizations; NYSE MKT LLC; Order Approving Proposed Rule Change Amending Certain Rules That Address Wash Sales in Order To Harmonize the Exchange's Rules With the Rules of New York Stock Exchange LLC and the Financial Industry Regulatory Authority, 79048-79049 [2013-30938]

Download as PDF 79048 Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–71157; File No. SR– NYSEMKT–2013–88] Self-Regulatory Organizations; NYSE MKT LLC; Order Approving Proposed Rule Change Amending Certain Rules That Address Wash Sales in Order To Harmonize the Exchange’s Rules With the Rules of New York Stock Exchange LLC and the Financial Industry Regulatory Authority December 20, 2013. I. Introduction On October 29, 2013, NYSE MKT LLC (‘‘NYSE MKT’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend certain rules that address wash sales in order to harmonize the Exchange’s rules with the rules of New York Stock Exchange LLC (‘‘NYSE’’) and the Financial Industry Regulatory Authority (‘‘FINRA’’). The proposed rule change was published for comment in the Federal Register on November 14, 2013.3 The Commission received no comments on the proposal. This order approves the proposed rule change. tkelley on DSK3SPTVN1PROD with NOTICES II. Description of the Proposal In the filing, the Exchange proposed to amend its wash sale rules to achieve a greater level of internal consistency as well as consistency with FINRA’s and NYSE’s rules. First, the Exchange proposed to eliminate Rule 476(a)(8), instead utilizing Rule 6140—Equities for wash sale disciplinary actions in its equities market, as the Exchange believes that the conduct described in that rule should not be treated as a wash sale violation in all instances. The Exchange stated that it believes that the scienter requirement in Exchange Rule 6140—Equities, NYSE Rule 6140 and FINRA Rule 6140 recognizes that in today’s markets, there can be certain instances of trading activity that may inadvertently and unknowingly result in executions with no change in beneficial ownership, and that such conduct should not always be treated as a wash sale violation if the market participant did not act with purpose—for example, the Exchange noted that activity involving an off-floor market 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 70832 (November 7, 2013), 78 FR 68488 (‘‘Notice’’). 2 17 VerDate Mar<15>2010 23:48 Dec 26, 2013 Jkt 232001 participant’s algorithmic orders that inadvertently execute against themselves due to latency issues could be deemed a violation of the second prong of Rule 476(a)(8). Second, so that there is no change in the scope of equity market participants subject to disciplinary action for wash sales, the Exchange proposed a conforming amendment to Rule 6140(a) and (b)—Equities to provide that the rule applies not only to members and member organizations, but also to principal executives, approved persons, registered or non-registered employees of a member or member organization or persons otherwise subject to the jurisdiction of the Exchange.4 The Exchange also proposed to delete Rule 4,5 marking it ‘‘Reserved.’’ Finally, the Exchange proposed to add substantially the same text of Rule 6140(a) and (b)—Equities to (options) Rule 995NY, in new subparagraphs (e) and (f). As such, the Exchange is extending the substance of the specific wash sale prohibitions in Rule 6140(a) and (b)—Equities to trading on the Exchange’s options market.6 The Exchange stated that locating these provisions in the options rules will give options market participants better notice of this prohibited conduct.7 III. Discussion and Commission Findings The Commission has carefully reviewed the proposed rule change and finds that it is consistent with the requirements of Section 6 of the Act 8 and the rules and regulations 4 These persons were subject to Rule 476(a)(8). 4 in Part 1 of the General Rules provides that ‘‘[n]o member or member organization shall execute or cause to be executed, or participate in an account for which there is executed on the Exchange, the purchase of any security at successively higher prices or the sale of any security at successively lower prices for the purpose of creating or inducing a false, misleading or artificial appearance of activity in such security or for the purpose of unduly or improperly influencing the market price of such security or for the purpose of making a price which does not reflect the true state of the market in such security.’’ Rule 4 applies to both the Exchange’s equities and options markets. 6 The references to a ‘‘designated security’’ in the text of Rule 6140(a) and (b)—Equities would be replaced with ‘‘listed option’’ in proposed Rule 995NY and similarly references to a ‘‘member’’ or ‘‘member organization’’ would be replaced with ‘‘ATP Holder.’’ 7 The Exchange also proposed a technical amendment to move a definition of a term that is used in Rule 995NY(c) to that subparagraph of the rule. Specifically, the definition of the term ‘‘related instrument’’ currently appears at the end of the rule following the designation of subparagraph (d) and the text thereof, although that term is used in subparagraph (c). As such, the Exchange proposed to move the text of the definition of ‘‘related instrument’’ to Rule 995NY(c). 8 15 U.S.C. 78f. 5 Rule PO 00000 Frm 00239 Fmt 4703 Sfmt 4703 thereunder applicable to a national securities exchange.9 In particular, the Commission finds that the proposal is consistent with Section 6(b)(5) of the Act,10 which requires, among other things, that the Exchange’s rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Exchange is deleting Rule 476(a)(8), a rule which the Exchange explained was originally adopted by the NYSE (and subsequently adopted by the Exchange) to address manual, floorbased trading activity. In its place, the Exchange proposes to use Rule 6140— Equities for wash sale disciplinary actions in its equities market. The Exchange stated that Rule 6140— Equities, which has a scienter standard that the second prong of Rule 476(a)(8) lacks, recognizes that certain inadvertent trading activity, such as algorithmic trading, that results unintended executions with no change in beneficial ownership should not always be treated as a wash sale violation. In addition, the Exchange is amending Exchange Rule 6140(a) and (b)—Equities to cover the same persons that Exchange Rule 476(a)(8) covered. Finally, the Exchange is proposing to delete Rule 4, and to add substantially the same text as Rule 6140(a) and (b)— Equities to Exchange Rule 995NY so that the substance of the wash sale prohibitions in Rule 6140(a) and (b)— Equities also applies to trading on the Exchange’s options market. The Commission understands that algorithmic trading can result in inadvertent executions with no change in beneficial ownership.11 The Exchange has represented that the proposed rule change would not result in any material change in the surveillance of potentially violative activity nor any material diminution of the Exchange’s enforcement authority as it may still bring a disciplinary action in cases where a market participant engages in a significant number of trades without a change of beneficial ownership, even if such activity does not per se violate Rule 6140(b)— Equities or proposed Rule 995NY(f) 9 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 10 15 U.S.C. 78f(b)(5). 11 The Commission notes that algorithmic trading resulting in executions with no change in beneficial ownership, even if unintended, raises concerns. E:\FR\FM\27DEN1.SGM 27DEN1 Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices tkelley on DSK3SPTVN1PROD with NOTICES because the participant did not act with ‘‘purpose.’’ The Exchange further represented that such unintended activity could also give rise to other violations, such as a failure to supervise under Rule 342—Equities or Rule 922, or a violation of just and equitable principles of trade or could otherwise constitute unethical activity under Rule 476(a)(6) or Rule 2010—Equities. Accordingly, the Commission expects the Exchange to continue to surveil for potential wash sale activity and to take necessary action as appropriate. The Commission believes that the proposed deletion of Rule 476(a)(8) and Rule 4 promotes harmonization, consistency and clarity with respect to the Exchange’s rules 12 by resolving the current inconsistent scienter standards of Exchange Rule 476(a)(8) and Exchange Rule 4,13 Exchange Rule 6140—Equities, NYSE Rule 6140 and FINRA Rule 6140, as well as extending the breadth of persons covered by Rule 6140—Equities to those persons covered by Rule 476(a)(8). The Commission also believes that the additions to Exchange Rule 995NY to apply the specific provisions of Rule 6140(a) and (b)— Equities to the Exchange’s options market are appropriate because the Exchange’s ATP Holders will be subject to a rule that prohibits wash sales that were designed to create or induce a false or misleading appearance of activity in a designated security. The change will provide clear notice to the ATP Holders of such prohibited activity, as well as make the prohibited activity consistent across both the Exchange’s equities and options markets, as well as across NYSE and FINRA. The Commission believes that the proposed rule change should result in less burdensome and more efficient regulatory compliance for firms that are members of the Exchange, NYSE and FINRA. As such, the Exchange’s rules would continue to protect investors and the public interest. For the foregoing reasons, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act 14 and the rules and regulations thereunder applicable to a national securities exchange. 12 The Exchange stated that it can bring disciplinary actions under Rule 476(a)(8) for conduct that occurred prior to the time the rule is deleted. Thus, the proposed rule change would have no impact on ongoing disciplinary actions involving violations of Rule 476(a)(8). 13 The Exchange noted that Rule 4 is substantially the same as Rule 6140(a)—Equities. 14 15 U.S.C. 78f(b)(5). VerDate Mar<15>2010 23:48 Dec 26, 2013 Jkt 232001 IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Exchange Act,15 that the proposed rule change (SR– NYSEMKT–2013–88) be, and it hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.16 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–30938 Filed 12–26–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–71163; File No. SR– NYSEMKT–2013–104] Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Proposes to Amend Commentary .02 to NYSE Amex Options Rule 960NY in order to Extend the Penny Pilot in Options Classes in Certain Issues Previously Approved by the Securities and Exchange Commission through June 30, 2014 December 20, 2013. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that on December 18, 2013, NYSE MKT LLC (the ‘‘Exchange’’ or ‘‘NYSE MKT’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Commentary .02 to NYSE Amex Options Rule 960NY in order to extend the Penny Pilot in options classes in certain issues (‘‘Pilot Program’’) previously approved by the Securities and Exchange Commission (‘‘Commission’’) through June 30, 2014. The text of the proposed rule change is available on the Exchange’s Web site at www.nyse.com, at the principal office of the Exchange, 15 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C.78s(b)(1). 2 15 U.S.C. 78a. 3 17 CFR 240.19b–4. 16 17 PO 00000 Frm 00240 Fmt 4703 Sfmt 4703 79049 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 self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those 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 the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange hereby proposes to amend Commentary .02 to Exchange Rule 960NY to extend the time period of the Pilot Program,4 which is currently scheduled to expire on December 31, 2013 through June 30, 2014. The Exchange also proposes that the dates to replace issues in the Pilot Program that have been delisted be revised to the second trading day following January 1, 2014.5 This filing does not propose any substantive changes to the Pilot Program: All classes currently participating will remain the same and all minimum increments will remain unchanged. The Exchange believes the benefits to public customers and other market participants who will be able to express their true prices to buy and sell options have been demonstrated to outweigh the increase in quote traffic. 2. Statutory Basis The proposed rule change is consistent with Section 6(b)6 of the Securities Exchange Act of 1934 (the ‘‘Act’’), in general, and furthers the objectives of Section 6(b)(5),7 in 4 See Securities Exchange Act Release No. 69105 (March 11, 2013), 78 FR 16554 (March 15, 2013) (SR–NYSEMKT–2013–17). 5 The month immediately preceding a replacement class’s addition to the Pilot Program (i.e., December) would not be used for purposes of the analysis for determining the replacement class. Thus, a replacement class to be added on the second trading day following January 1, 2014 would be identified based on The Option Clearing Corporation’s trading volume data from June 1, 2013 through November 30, 2013. The Exchange will announce the replacement issues to the Exchange’s membership through a Trader Update. 6 15 U.S.C. 78f(b). 7 15 U.S.C. 78f(b)(5). E:\FR\FM\27DEN1.SGM 27DEN1

Agencies

[Federal Register Volume 78, Number 249 (Friday, December 27, 2013)]
[Notices]
[Pages 79048-79049]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-30938]



[[Page 79048]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71157; File No. SR-NYSEMKT-2013-88]


Self-Regulatory Organizations; NYSE MKT LLC; Order Approving 
Proposed Rule Change Amending Certain Rules That Address Wash Sales in 
Order To Harmonize the Exchange's Rules With the Rules of New York 
Stock Exchange LLC and the Financial Industry Regulatory Authority

December 20, 2013.

I. Introduction

    On October 29, 2013, NYSE MKT LLC (``NYSE MKT'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend certain rules that address wash sales in 
order to harmonize the Exchange's rules with the rules of New York 
Stock Exchange LLC (``NYSE'') and the Financial Industry Regulatory 
Authority (``FINRA''). The proposed rule change was published for 
comment in the Federal Register on November 14, 2013.\3\ The Commission 
received no comments on the proposal. 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. 70832 (November 7, 
2013), 78 FR 68488 (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposal

    In the filing, the Exchange proposed to amend its wash sale rules 
to achieve a greater level of internal consistency as well as 
consistency with FINRA's and NYSE's rules. First, the Exchange proposed 
to eliminate Rule 476(a)(8), instead utilizing Rule 6140--Equities for 
wash sale disciplinary actions in its equities market, as the Exchange 
believes that the conduct described in that rule should not be treated 
as a wash sale violation in all instances. The Exchange stated that it 
believes that the scienter requirement in Exchange Rule 6140--Equities, 
NYSE Rule 6140 and FINRA Rule 6140 recognizes that in today's markets, 
there can be certain instances of trading activity that may 
inadvertently and unknowingly result in executions with no change in 
beneficial ownership, and that such conduct should not always be 
treated as a wash sale violation if the market participant did not act 
with purpose--for example, the Exchange noted that activity involving 
an off-floor market participant's algorithmic orders that inadvertently 
execute against themselves due to latency issues could be deemed a 
violation of the second prong of Rule 476(a)(8).
    Second, so that there is no change in the scope of equity market 
participants subject to disciplinary action for wash sales, the 
Exchange proposed a conforming amendment to Rule 6140(a) and (b)--
Equities to provide that the rule applies not only to members and 
member organizations, but also to principal executives, approved 
persons, registered or non-registered employees of a member or member 
organization or persons otherwise subject to the jurisdiction of the 
Exchange.\4\
---------------------------------------------------------------------------

    \4\ These persons were subject to Rule 476(a)(8).
---------------------------------------------------------------------------

    The Exchange also proposed to delete Rule 4,\5\ marking it 
``Reserved.'' Finally, the Exchange proposed to add substantially the 
same text of Rule 6140(a) and (b)--Equities to (options) Rule 995NY, in 
new subparagraphs (e) and (f). As such, the Exchange is extending the 
substance of the specific wash sale prohibitions in Rule 6140(a) and 
(b)--Equities to trading on the Exchange's options market.\6\ The 
Exchange stated that locating these provisions in the options rules 
will give options market participants better notice of this prohibited 
conduct.\7\
---------------------------------------------------------------------------

    \5\ Rule 4 in Part 1 of the General Rules provides that ``[n]o 
member or member organization shall execute or cause to be executed, 
or participate in an account for which there is executed on the 
Exchange, the purchase of any security at successively higher prices 
or the sale of any security at successively lower prices for the 
purpose of creating or inducing a false, misleading or artificial 
appearance of activity in such security or for the purpose of unduly 
or improperly influencing the market price of such security or for 
the purpose of making a price which does not reflect the true state 
of the market in such security.'' Rule 4 applies to both the 
Exchange's equities and options markets.
    \6\ The references to a ``designated security'' in the text of 
Rule 6140(a) and (b)--Equities would be replaced with ``listed 
option'' in proposed Rule 995NY and similarly references to a 
``member'' or ``member organization'' would be replaced with ``ATP 
Holder.''
    \7\ The Exchange also proposed a technical amendment to move a 
definition of a term that is used in Rule 995NY(c) to that 
subparagraph of the rule. Specifically, the definition of the term 
``related instrument'' currently appears at the end of the rule 
following the designation of subparagraph (d) and the text thereof, 
although that term is used in subparagraph (c). As such, the 
Exchange proposed to move the text of the definition of ``related 
instrument'' to Rule 995NY(c).
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of Section 6 of the 
Act \8\ and the rules and regulations thereunder applicable to a 
national securities exchange.\9\ In particular, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\10\ 
which requires, among other things, that the Exchange's rules be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f.
    \9\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange is deleting Rule 476(a)(8), a rule which the Exchange 
explained was originally adopted by the NYSE (and subsequently adopted 
by the Exchange) to address manual, floor-based trading activity. In 
its place, the Exchange proposes to use Rule 6140--Equities for wash 
sale disciplinary actions in its equities market. The Exchange stated 
that Rule 6140--Equities, which has a scienter standard that the second 
prong of Rule 476(a)(8) lacks, recognizes that certain inadvertent 
trading activity, such as algorithmic trading, that results unintended 
executions with no change in beneficial ownership should not always be 
treated as a wash sale violation. In addition, the Exchange is amending 
Exchange Rule 6140(a) and (b)--Equities to cover the same persons that 
Exchange Rule 476(a)(8) covered. Finally, the Exchange is proposing to 
delete Rule 4, and to add substantially the same text as Rule 6140(a) 
and (b)--Equities to Exchange Rule 995NY so that the substance of the 
wash sale prohibitions in Rule 6140(a) and (b)--Equities also applies 
to trading on the Exchange's options market.
    The Commission understands that algorithmic trading can result in 
inadvertent executions with no change in beneficial ownership.\11\ The 
Exchange has represented that the proposed rule change would not result 
in any material change in the surveillance of potentially violative 
activity nor any material diminution of the Exchange's enforcement 
authority as it may still bring a disciplinary action in cases where a 
market participant engages in a significant number of trades without a 
change of beneficial ownership, even if such activity does not per se 
violate Rule 6140(b)--Equities or proposed Rule 995NY(f)

[[Page 79049]]

because the participant did not act with ``purpose.'' The Exchange 
further represented that such unintended activity could also give rise 
to other violations, such as a failure to supervise under Rule 342--
Equities or Rule 922, or a violation of just and equitable principles 
of trade or could otherwise constitute unethical activity under Rule 
476(a)(6) or Rule 2010--Equities. Accordingly, the Commission expects 
the Exchange to continue to surveil for potential wash sale activity 
and to take necessary action as appropriate.
---------------------------------------------------------------------------

    \11\ The Commission notes that algorithmic trading resulting in 
executions with no change in beneficial ownership, even if 
unintended, raises concerns.
---------------------------------------------------------------------------

    The Commission believes that the proposed deletion of Rule 
476(a)(8) and Rule 4 promotes harmonization, consistency and clarity 
with respect to the Exchange's rules \12\ by resolving the current 
inconsistent scienter standards of Exchange Rule 476(a)(8) and Exchange 
Rule 4,\13\ Exchange Rule 6140--Equities, NYSE Rule 6140 and FINRA Rule 
6140, as well as extending the breadth of persons covered by Rule 
6140--Equities to those persons covered by Rule 476(a)(8). The 
Commission also believes that the additions to Exchange Rule 995NY to 
apply the specific provisions of Rule 6140(a) and (b)--Equities to the 
Exchange's options market are appropriate because the Exchange's ATP 
Holders will be subject to a rule that prohibits wash sales that were 
designed to create or induce a false or misleading appearance of 
activity in a designated security. The change will provide clear notice 
to the ATP Holders of such prohibited activity, as well as make the 
prohibited activity consistent across both the Exchange's equities and 
options markets, as well as across NYSE and FINRA. The Commission 
believes that the proposed rule change should result in less burdensome 
and more efficient regulatory compliance for firms that are members of 
the Exchange, NYSE and FINRA. As such, the Exchange's rules would 
continue to protect investors and the public interest.
---------------------------------------------------------------------------

    \12\ The Exchange stated that it can bring disciplinary actions 
under Rule 476(a)(8) for conduct that occurred prior to the time the 
rule is deleted. Thus, the proposed rule change would have no impact 
on ongoing disciplinary actions involving violations of Rule 
476(a)(8).
    \13\ The Exchange noted that Rule 4 is substantially the same as 
Rule 6140(a)--Equities.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \14\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78f(b)(5).

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\15\ that the proposed rule change (SR-NYSEMKT-2013-88) 
be, and it hereby is, approved.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-30938 Filed 12-26-13; 8:45 am]
BILLING CODE 8011-01-P
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