Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Rule 705 (Fidelity Bonds), 61674-61677 [2014-24301]

Download as PDF 61674 Federal Register / Vol. 79, No. 198 / Tuesday, October 14, 2014 / Notices to utilize the Algo Test Facility at no cost in addition to the current NTF Subscription fees set forth in Rule 7030(d)(1)(C). Moreover, the Exchange’s fees for this service are equitably allocated and non-discriminatory in that all NTF Subscribers will receive the service free of cost. Non-NTF Subscribers would be required to become NTF Subscribers and incur the fees borne by these customers today in order to receive the Algo Test Facility services at no additional cost. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act, as amended.11 The Exchange does not intend to assess fees to NTF Subscribers at this time to utilize the Algo Test Facility. While non-NTF Subscribers would be required to become NTF Subscribers in order to receive this service, the Exchange does not believe this requirement imposes an undue burden on competition because NTF Subscribers today pay costs for the service they receive and the hand-offs are necessary for use of the Algo Test Facility. All customers are being treated in the same manner and the Exchange is offering the Algo Test Facility for free to those NTF Subscribers incurring costs today. Also, while there is a limit on the number simulations per day for this product, this limitation on the number of simulations applies equally to all users per day. Therefore, the Exchange believes that the proposed rule change enhances, rather than burdens, competition by providing customers an opportunity to utilize the product for free. mstockstill on DSK4VPTVN1PROD with NOTICES 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 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 from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act 12 and subparagraph (f)(6) of Rule 19b–4 thereunder.13 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: (i) Necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. The Exchange has provided the Commission written notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change. 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: VerDate Sep<11>2014 16:59 Oct 10, 2014 Jkt 235001 [FR Doc. 2014–24304 Filed 10–10–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–73311; File No. SR–Phlx– 2014–65] Paper Comments • Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NASDAQ–2014–097. 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 October 7, 2014. Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Rule 705 (Fidelity Bonds) Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on September 25, 2014, NASDAQ OMX PHLX LLC (‘‘Phlx’’ or ‘‘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. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to delete certain extraneous language from Exchange Rule 705 to amend an inadvertent error in the rule text. 14 17 U.S.C. 78s(b)(3)(a)(ii). 13 17 CFR 240.19b–4(f)(6). U.S.C. 78f(b)(8). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.14 Kevin M. O’Neill, Deputy Secretary. 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– NASDAQ–2014–097 on the subject line. 12 15 11 15 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 10:00 a.m. and 3:00 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– NASDAQ–2014–097 and should be submitted on or before November 4, 2014. PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\14OCN1.SGM 14OCN1 Federal Register / Vol. 79, No. 198 / Tuesday, October 14, 2014 / Notices The text of the proposed rule change is available on the Exchange’s Web site at https://nasdaqomxphlx. cchwallstreet.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 aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change mstockstill on DSK4VPTVN1PROD with NOTICES 1. Purpose The purpose of the proposed rule change is to correct the text of Exchange Rule 705, entitled ‘‘Fidelity Bonds,’’ by deleting certain text which was not deleted when the Exchange filed to replace Rule 705 3 with a rule in substantially the same form as that of the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’).4 Exchange Rule 705 was replaced by a new Rule 705 as of April 2, 2012, in order to harmonize the Phlx Rules with FINRA rules. The title of Exchange Rule 705 was changed from ‘‘Members Must Carry’’ to ‘‘Fidelity Bonds.’’ The Exchange intended to delete Rule 705 in its entirety and rename the rule and replace the text with new text similar to that in FINRA Rule 4360. The Exchange inadvertently did not include all of the Supplementary Material section of the Rule in the original filing so that it could be deleted. The Exchange proposes to delete the current Supplementary Material .03 to Exchange 3 See Securities Exchange Act Release No. 66362 (February 9, 2012), 77 FR 8931 (February 15, 2012) (SR–Phlx–2012–13). See also Securities Exchange Act Release No. 66407 (February 16, 2012), 77 FR 10787 (February 23, 2012) (SR–Phlx–2012–21). See also Securities Exchange Act Release No. 66411 (February 16, 2012), 77 FR 10788 (February 23, 2012) (SR–NYSE–2012–04) (an immediately effective filing which incorporated the FINRA rule by merely noting the text would be the same as the FINRA rule). See also Securities Exchange Act Release No. 66412 (February 16, 2012), 77 FR 10791 (February 23, 2012) (SR–NYSEAmex–2012–08) (an immediately effective filing which incorporated the FINRA rule by merely noting the text would be the same as the FINRA rule). 4 See FINRA Rule 4360 ‘‘Fidelity Bonds.’’ VerDate Sep<11>2014 16:59 Oct 10, 2014 Jkt 235001 Rule 705 in accordance with the intent of the original rule proposal. The purpose of a fidelity bond is to protect a member organization 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 organization’s capital. At this time the Exchange is seeking to delete rule text which covers Employee Blanket Bond Coverage in Supplementary Material .03. The rule text that the Exchange proposes to delete states that member organizations subject to minimum net capital under Rule 15c3–1 are required to have Brokers Blanket Bond Coverage with respect to employees (including officers, regardless of their duties) in amounts not less than the minimums prescribed above which apply both to partner coverage and employee blanket bond coverage. In addition to this basic Brokers Blanket Bond Coverage, ‘‘member organizations are required to include the following minimum specific coverages with respect to: MISPLACEMENT, FRAUDULENT TRADING, CHECK FORGERY and SECURITIES FORGERY, ON PREMISES AND IN TRANSIT.’’ Further, all employee Fidelity coverage shall be on the Standard Form 14 Stock Brokers’ Bond, Federal Insurance Company’s Form B Bond or Lloyd’s form if it is the full equivalent. With respect to Misplacement, Check Forgery, On Premises and In Transit, at least the amount of the basic bond minimum requirement shall be carried. With respect to Fraudulent Trading, at least $50,000 or 50% of the basic bond minimum requirement, whichever is greater, with a top minimum of $500,000 shall be carried. With respect to Securities Forgery, at least $50,000 or 25% of the basic bond minimum requirement, whichever is greater, with a top minimum of $250,000 shall be carried. The rule text the Exchange is proposing to delete further goes on to note that a ‘‘review for adequacy of coverage shall be made at least annually as of the anniversary date of the issuance of the bond and minimum requirements for the next twelve months shall be established by reference to the highest net capital requirement in the preceding twelve months. Each member organization will be expected to review carefully any need for coverage greater than that provided by the required minimums. Where experience or the nature of the business warrants additional coverage the Exchange expects the member organization to acquire it.’’ PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 61675 Each member and member organization, according to the rule text the Exchange is proposing to delete, is required to carry certain forms of insurance and advise the Exchange if such insurance is entirely or partially cancelled. Members and member organizations are required to provide details in writing within 10 days of cancellation. ‘‘A member organization which becomes eligible to elect and does elect to compute its minimum required net capital under the alternative net capital requirement set forth in paragraph (f) of Rule 15c3–1, instead of under the requirements set forth in paragraph (a) in the deleted rule text, shall determine its minimum required coverage in the same manner as specified in sections .02(b) and .03 hereof.’’ Finally, the rule states that each member organization ‘‘may self-insure to the extent of $5,000 or 10% of its minimum insurance requirement as fixed by the Exchange, whichever is greater, for each type of coverage required by the rule. The excess of any such amount self-insured over the maximum permissible self-insurance must be deducted from the member organization’s net worth in the calculation of net capital for purposes of Rule 15c3–1.’’ The Exchange notes that at the time of the filing it sought to replace the current rule in its entirety and adopt the FINRA rule as noted in the original filing.5 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. 5 See Securities Exchange Act Release No. 66362 (February 9, 2012), 77 FR 8931 (February 15, 2012) (SR–Phlx–2012–13). E:\FR\FM\14OCN1.SGM 14OCN1 61676 Federal Register / Vol. 79, No. 198 / Tuesday, October 14, 2014 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES 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. 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, FINRA Rule 4360 continues to exempt from the fidelity bond requirements any firm that acts solely as a Designated Market Maker, floor broker or registered floor trader and does not conduct business with the public. The Exchange intended to adopt the FINRA rule instead. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act 6 in general, and furthers the objectives of Section 6(b)(5) of the Act 7 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 correcting an error in the Exchange’s rules in order that the Rule properly reflect the correct text. An accurate and up-to-date Rulebook will avoid confusion for market participants. This proposal is not substantive, rather, the proposal seeks to update the rules to reflect the current operation of the Exchange. The Exchange believes that the requirements of FINRA Rule 4360, including, but not limited to, requiring each member that is required to join the Securities Investor Protection Corporation 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 6 15 7 15 U.S.C. 78f(b). U.S.C. 78f(b)(5). VerDate Sep<11>2014 16:59 Oct 10, 2014 Jkt 235001 from unforeseen losses. The proposed amendments will conform Phlx’s rule 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. The Exchange is merely seeking to correct an inadvertent error in the rule text. The Exchange’s original intent was to adopt the FINRA rule and the changes proposed herein further that intent and conform the Phlx rule to the FINRA rule to promote application of consistent regulatory standards. 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 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 from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the Act 8 and subparagraph (f)(6) of Rule 19b–4 thereunder.9 A proposed rule change filed under Rule 19b–4(f)(6) normally does not become operative prior to 30 days after the date of filing.10 Rule 19b–4(f)(6)(iii), however, permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest.11 The Exchange has requested that the Commission waive the 30-day operative delay so that the Exchange can quickly correct the inadvertent error and avoid inconsistency in its rules. The Commission believes that the waiver of the 30-day operative delay is 8 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. 10 17 CFR 240.19b–4(f)(6)(iii). 11 Id. 9 17 PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 consistent with the protection of investors and the public interest because accurate rules are important to the function of the Exchange. The proposed amendments reflect the Exchange’s intent in a prior filing. Furthermore, the proposed rule change is not substantive but merely seeks to properly amend rules to reflect the current operation of the Exchange. Therefore, the Commission designates the proposal operative upon filing.12 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: (i) Necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) otherwise in furtherance of the purposes of the Act.13 If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved.14 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– Phlx–2014–65 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–Phlx–2014–65. 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 12 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). 13 15 U.S.C. 78s(b)(3)(C). 14 Id. E:\FR\FM\14OCN1.SGM 14OCN1 Federal Register / Vol. 79, No. 198 / Tuesday, October 14, 2014 / Notices 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 10:00 a.m. and 3:00 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–Phlx–2014–65 and should be submitted on or before November 4, 2014. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.15 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–24301 Filed 10–10–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–73313; File No. SR–FINRA– 2014–030) Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change Relating to Quotation Requirements for Unlisted Equity Securities and Deletion of the Rules Related to the OTC Bulletin Board Service mstockstill on DSK4VPTVN1PROD with NOTICES October 7, 2014. I. Introduction On June 27, 2014, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act ’’ or ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to adopt rules relating to quotation requirements for over-thecounter (‘‘OTC’’) equity securities and to delete the rules relating to the OTC 15 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Sep<11>2014 16:59 Oct 10, 2014 Jkt 235001 Bulletin Board Service (‘‘OTCBB’’ or ‘‘Service’’) and thus cease its operation. The proposed rule change was published for comment in the Federal Register on July 15, 2014.3 The Commission received one comment letter on the proposed rule change.4 This order institutes proceedings under Section 19(b)(2)(B) of the Act 5 to determine whether to approve or disapprove the proposed rule change. Institution of proceedings does not indicate that the Commission has reached any conclusions with respect to the proposed rule change, nor does it mean that the Commission will ultimately disapprove the proposed rule change. Rather, as discussed below, the Commission seeks additional input from interested parties on the proposed rule change. II. Description of the Proposed Rule Change As described more fully in the Notice, FINRA proposed to adopt rules: (1) Governing the treatment of quotations in OTC equity securities 6 by member inter-dealer quotation systems,7 and addressing fair and non-discriminatory access to such systems; (2) requiring member inter-dealer quotation systems to provide FINRA with a written description of quotation-related data products offered and related pricing information, including fees, rebates, discounts and cross-product pricing incentives; (3) expanding the reporting requirements related to quotation information in OTC equity securities; and (4) deleting the Rule 6500 Series and related rules and thereby ceasing operation of the OTCBB. A. Current Regulatory Framework for Governing Quotations FINRA, under the statutory mandate of Section 15A of the Act,8 has 3 See Securities Exchange Act Release No. 72575 (July 9, 2014), 79 FR 41339 (‘‘Notice’’). On August 8, 2014, FINRA consented to extending the time period for the Commission to either approve or disapprove the proposed rule change, or to institute proceedings to determine whether to approve or disapprove the proposed rule change, to October 10, 2014. 4 See Letter from Daniel Zinn, General Counsel, OTC Markets Group Inc., dated August 5, 2014 (‘‘OTC Markets Letter’’). 5 15 U.S.C. 78s(b)(2)(B). 6 FINRA Rule 6420(f) defines ‘‘OTC equity security’’ as any equity security that is not an ‘‘NMS stock’’ as that term is defined in Rule 600(b)(47) of SEC Regulation NMS; provided, however, that the term ‘‘OTC equity security’’ shall not include any Restricted Equity Security. 7 FINRA Rule 6420(c) defines ‘‘inter-dealer quotation system’’ as any system of general circulation to brokers or dealers which regularly disseminates quotations of identified brokers or dealers. 8 See 15 U.S.C. 78o–3. PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 61677 previously adopted rules governing the form and content of quotations relating to securities sold OTC, including rules designed to: (1) Produce fair and informative quotations; (2) prevent fictitious or misleading quotations; and (3) promote orderly procedures for collecting, distributing, and publishing quotations.9 FINRA’s Rule 6400 Series (Quoting and Trading in OTC Equity Securities), among other things, provides a regulatory framework governing the form and content of quotations in OTC equity securities and, together with other FINRA rules, including rules in the Rule 5200 Series (Quotation and Trading Obligations and Practices), specifies provisions directed toward the mandate set forth in Section 15A(b)(11) of the Act (collectively referred to as the ‘‘Quotation Governance Rules’’). FINRA also operates the OTCBB and has established the Rule 6500 Series, which governs the operation and use of the OTCBB. FINRA’s Quotation Governance Rules generally prescribe limitations around the conduct of members that publish quotations in OTC equity securities, including quotations displayed on interdealer quotation systems. While these rules apply to member quotation activities, they generally do not include rules specifically directed to the member inter-dealer quotation systems on or through which such quotation activity may take place. For example, FINRA Rule 6432 (Compliance with the Information Requirements of Exchange Act Rule 15c2–11) generally provides that members may not initiate or resume quotations in any quotation medium unless the member files Form 211 with FINRA and complies with Exchange Act Rule 15c2–11 (Initiation or resumption of quotations without specific information).10 In 2010, the Commission approved four FINRA rules governing quotation activity generally by prescribing additional requirements for members entering quotations on inter-dealer quotation systems in OTC equity securities: (1) Rule 6434 (Minimum Pricing Increment for OTC Equity Securities); (2) Rule 6437 (Prohibition 9 Section 15A(b)(11) of the Act provides: ‘‘The rules of the association include provisions governing the form and content of quotations relating to securities sold otherwise than on a national securities exchange which may be distributed or published by any member or person associated with a member, and the persons to whom such quotations may be supplied. Such rules relating to quotations shall be designed to produce fair and informative quotations, to prevent fictitious or misleading quotations, and to promote orderly procedures for collecting, distributing, and publishing quotations.’’ See 15 U.S.C. 78o–3(b)(11). 10 See 17 CFR 240.15c2–11. E:\FR\FM\14OCN1.SGM 14OCN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 79, Number 198 (Tuesday, October 14, 2014)]
[Notices]
[Pages 61674-61677]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-24301]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73311; File No. SR-Phlx-2014-65]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change Relating to
Rule 705 (Fidelity Bonds)

October 7, 2014.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 25, 2014, NASDAQ OMX PHLX LLC (``Phlx'' or ``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 delete certain extraneous language from
Exchange Rule 705 to amend an inadvertent error in the rule text.

[[Page 61675]]

The text of the proposed rule change is available on the Exchange's
Web site at https://nasdaqomxphlx.cchwallstreet.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 aspects of such
statements.

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

1. Purpose
The purpose of the proposed rule change is to correct the text of
Exchange Rule 705, entitled ``Fidelity Bonds,'' by deleting certain
text which was not deleted when the Exchange filed to replace Rule 705
\3\ with a rule in substantially the same form as that of the Financial
Industry Regulatory Authority, Inc. (``FINRA'').\4\ Exchange Rule 705
was replaced by a new Rule 705 as of April 2, 2012, in order to
harmonize the Phlx Rules with FINRA rules. The title of Exchange Rule
705 was changed from ``Members Must Carry'' to ``Fidelity Bonds.'' The
Exchange intended to delete Rule 705 in its entirety and rename the
rule and replace the text with new text similar to that in FINRA Rule
4360. The Exchange inadvertently did not include all of the
Supplementary Material section of the Rule in the original filing so
that it could be deleted. The Exchange proposes to delete the current
Supplementary Material .03 to Exchange Rule 705 in accordance with the
intent of the original rule proposal.
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\3\ See Securities Exchange Act Release No. 66362 (February 9,
2012), 77 FR 8931 (February 15, 2012) (SR-Phlx-2012-13). See also
Securities Exchange Act Release No. 66407 (February 16, 2012), 77 FR
10787 (February 23, 2012) (SR-Phlx-2012-21). See also Securities
Exchange Act Release No. 66411 (February 16, 2012), 77 FR 10788
(February 23, 2012) (SR-NYSE-2012-04) (an immediately effective
filing which incorporated the FINRA rule by merely noting the text
would be the same as the FINRA rule). See also Securities Exchange
Act Release No. 66412 (February 16, 2012), 77 FR 10791 (February 23,
2012) (SR-NYSEAmex-2012-08) (an immediately effective filing which
incorporated the FINRA rule by merely noting the text would be the
same as the FINRA rule).
\4\ See FINRA Rule 4360 ``Fidelity Bonds.''
---------------------------------------------------------------------------

The purpose of a fidelity bond is to protect a member organization
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 organization's capital. At this time the
Exchange is seeking to delete rule text which covers Employee Blanket
Bond Coverage in Supplementary Material .03. The rule text that the
Exchange proposes to delete states that member organizations subject to
minimum net capital under Rule 15c3-1 are required to have Brokers
Blanket Bond Coverage with respect to employees (including officers,
regardless of their duties) in amounts not less than the minimums
prescribed above which apply both to partner coverage and employee
blanket bond coverage. In addition to this basic Brokers Blanket Bond
Coverage, ``member organizations are required to include the following
minimum specific coverages with respect to: MISPLACEMENT, FRAUDULENT
TRADING, CHECK FORGERY and SECURITIES FORGERY, ON PREMISES AND IN
TRANSIT.'' Further, all employee Fidelity coverage shall be on the
Standard Form 14 Stock Brokers' Bond, Federal Insurance Company's Form
B Bond or Lloyd's form if it is the full equivalent. With respect to
Misplacement, Check Forgery, On Premises and In Transit, at least the
amount of the basic bond minimum requirement shall be carried. With
respect to Fraudulent Trading, at least $50,000 or 50% of the basic
bond minimum requirement, whichever is greater, with a top minimum of
$500,000 shall be carried. With respect to Securities Forgery, at least
$50,000 or 25% of the basic bond minimum requirement, whichever is
greater, with a top minimum of $250,000 shall be carried.
The rule text the Exchange is proposing to delete further goes on
to note that a ``review for adequacy of coverage shall be made at least
annually as of the anniversary date of the issuance of the bond and
minimum requirements for the next twelve months shall be established by
reference to the highest net capital requirement in the preceding
twelve months. Each member organization will be expected to review
carefully any need for coverage greater than that provided by the
required minimums. Where experience or the nature of the business
warrants additional coverage the Exchange expects the member
organization to acquire it.''
Each member and member organization, according to the rule text the
Exchange is proposing to delete, is required to carry certain forms of
insurance and advise the Exchange if such insurance is entirely or
partially cancelled. Members and member organizations are required to
provide details in writing within 10 days of cancellation. ``A member
organization which becomes eligible to elect and does elect to compute
its minimum required net capital under the alternative net capital
requirement set forth in paragraph (f) of Rule 15c3-1, instead of under
the requirements set forth in paragraph (a) in the deleted rule text,
shall determine its minimum required coverage in the same manner as
specified in sections .02(b) and .03 hereof.''
Finally, the rule states that each member organization ``may self-
insure to the extent of $5,000 or 10% of its minimum insurance
requirement as fixed by the Exchange, whichever is greater, for each
type of coverage required by the rule. The excess of any such amount
self-insured over the maximum permissible self-insurance must be
deducted from the member organization's net worth in the calculation of
net capital for purposes of Rule 15c3-1.''
The Exchange notes that at the time of the filing it sought to
replace the current rule in its entirety and adopt the FINRA rule as
noted in the original filing.\5\ 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.
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\5\ See Securities Exchange Act Release No. 66362 (February 9,
2012), 77 FR 8931 (February 15, 2012) (SR-Phlx-2012-13).

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[[Page 61676]]

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.
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, FINRA Rule 4360 continues to exempt from the fidelity
bond requirements any firm that acts solely as a Designated Market
Maker, floor broker or registered floor trader and does not conduct
business with the public.
The Exchange intended to adopt the FINRA rule instead.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \6\ in general, and furthers the objectives of Section
6(b)(5) of the Act \7\ 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 correcting an error in the Exchange's rules in order that the Rule
properly reflect the correct text. An accurate and up-to-date Rulebook
will avoid confusion for market participants. This proposal is not
substantive, rather, the proposal seeks to update the rules to reflect
the current operation of the Exchange. The Exchange believes that the
requirements of FINRA Rule 4360, including, but not limited to,
requiring each member that is required to join the Securities Investor
Protection Corporation 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 Phlx's rule to a corresponding FINRA rule, to promote
application of consistent regulatory standards.
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\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(5).
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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. The Exchange is merely seeking
to correct an inadvertent error in the rule text. The Exchange's
original intent was to adopt the FINRA rule and the changes proposed
herein further that intent and conform the Phlx rule to the FINRA rule
to promote application of consistent regulatory standards.

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

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 from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \8\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\9\
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\8\ 15 U.S.C. 78s(b)(3)(A).
\9\ 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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A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative prior to 30 days after the date of filing.\10\
Rule 19b-4(f)(6)(iii), however, permits the Commission to designate a
shorter time if such action is consistent with the protection of
investors and the public interest.\11\ The Exchange has requested that
the Commission waive the 30-day operative delay so that the Exchange
can quickly correct the inadvertent error and avoid inconsistency in
its rules.
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\10\ 17 CFR 240.19b-4(f)(6)(iii).
\11\ Id.
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The Commission believes that the waiver of the 30-day operative
delay is consistent with the protection of investors and the public
interest because accurate rules are important to the function of the
Exchange. The proposed amendments reflect the Exchange's intent in a
prior filing. Furthermore, the proposed rule change is not substantive
but merely seeks to properly amend rules to reflect the current
operation of the Exchange. Therefore, the Commission designates the
proposal operative upon filing.\12\
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\12\ 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: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) otherwise in furtherance of the
purposes of the Act.\13\ If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or disapproved.\14\
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\13\ 15 U.S.C. 78s(b)(3)(C).
\14\ Id.
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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-Phlx-2014-65 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2014-65. 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

[[Page 61677]]

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 10:00 a.m. and 3:00 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-Phlx-2014-65 and
should be submitted on or before November 4, 2014.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-24301 Filed 10-10-14; 8:45 am]
BILLING CODE 8011-01-P

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