Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of Filing of a Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Adopt New Rule 8.17 To Provide a Process for an Expedited Suspension Proceeding and Rule 12.15 To Prohibit Layering and Spoofing on BATS Exchange, Inc., 50370-50375 [2015-20421]

Download as PDF 50370 Federal Register / Vol. 80, No. 160 / Wednesday, August 19, 2015 / Notices tkelley on DSK3SPTVN1PROD with NOTICES be, registered as an investment adviser under the Investment Advisers Act of 1940 (‘‘Advisers Act’’). The Adviser and the Trust may retain one or more subadvisers (each a ‘‘Subadviser’’) to manage the portfolios of the Funds. Any Subadviser will be registered, or not subject to registration, under the Advisers Act. 3. The Distributor is a Nebraska limited liability company and a brokerdealer registered under the Securities Exchange Act of 1934 and will act as the principal underwriter of Shares of the Funds. Applicants request that the requested relief apply to any distributor of Shares, whether affiliated or unaffiliated with the Adviser (included in the term ‘‘Distributor’’). Any Distributor will comply with the terms and conditions of the Order. Applicants’ Requested Exemptive Relief 4. Applicants seek the requested Order under section 6(c) of the Act for an exemption from sections 2(a)(32), 5(a)(1), 22(d) and 22(e) of the Act and rule 22c–1 under the Act, under sections 6(c) and 17(b) of the Act for an exemption from sections 17(a)(1) and 17(a)(2) of the Act, and under section 12(d)(1)(J) of the Act for an exemption from sections 12(d)(1)(A) and (B) of the Act. The requested Order would permit applicants to offer exchange-traded managed funds. Because the relief requested is the same as the relief granted by the Commission under the Reference Order and because the Adviser has entered into, or anticipates entering into, a licensing agreement with Eaton Vance Management, or an affiliate thereof in order to offer exchange-traded managed funds,2 the Order would incorporate by reference the terms and conditions of the Reference Order. 5. Applicants request that the Order apply to the Initial Funds and to any other existing or future open-end management investment company or series thereof that: (a) Is advised by the Adviser or any entity controlling, controlled by, or under common control with the Adviser (any such entity included in the term ‘‘Adviser’’); and (b) operates as an exchange-traded managed fund as described in the Reference Order; and (c) complies with the terms and conditions of the Order and of the Reference Order, which is incorporated by reference herein (each such company or series and Initial Fund, a ‘‘Fund’’).3 6. Section 6(c) of the Act provides that the Commission may exempt any person, security or transaction, or any class of persons, securities or transactions, from any provisions of the Act, if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act. Section 17(b) of the Act authorizes the Commission to exempt a proposed transaction from section 17(a) of the Act if evidence establishes that the terms of the transaction, including the consideration to be paid or received, are reasonable and fair and do not involve overreaching on the part of any person concerned, and the proposed transaction is consistent with the policies of the registered investment company and the general purposes of the Act. Section 12(d)(1)(J) of the Act provides that the Commission may exempt any person, security, or transaction, or any class or classes of persons, securities or transactions, from any provision of section 12(d)(1) if the exemption is consistent with the public interest and the protection of investors. 7. Applicants submit that for the reasons stated in the Reference Order: (1) With respect to the relief requested pursuant to section 6(c) of the Act, the relief is appropriate, in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act; (2) with respect to the relief request pursuant to section 17(b) of the Act, the proposed transactions are reasonable and fair and do not involve overreaching on the part of any person concerned, are consistent with the policies of each registered investment company concerned and consistent with the general purposes of the Act; and (3) with respect to the relief requested pursuant to section 12(d)(1)(J) of the Act, the relief is consistent with the public interest and the protection of investors. By the Division of Investment Management, pursuant to delegated authority. Brent J. Fields, Secretary. [FR Doc. 2015–20419 Filed 8–18–15; 8:45 am] BILLING CODE 8011–01–P 2 Eaton Vance Management has obtained patents with respect to certain aspects of the Funds’ method of operation as exchange-traded managed funds. 3 All entities that currently intend to rely on the Order are named as applicants. Any other entity that relies on the Order in the future will comply VerDate Sep<11>2014 19:14 Aug 18, 2015 Jkt 235001 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–75693; File No. SR–BATS– 2015–57] Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of Filing of a Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Adopt New Rule 8.17 To Provide a Process for an Expedited Suspension Proceeding and Rule 12.15 To Prohibit Layering and Spoofing on BATS Exchange, Inc. August 13, 2015. 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 July 30, 2015, BATS Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BATS’’) 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. On August 11, 2015, the Exchange filed Amendment No. 1 to the proposal.3 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 is proposing to adopt a new rule to clearly prohibit layering and spoofing activity on the Exchange, as further described below. Further, the Exchange proposes to amend Exchange Rules to permit the Exchange to take prompt action to suspend Members or their clients that violate such rule. The text of the proposed rule change is available at the Exchange’s Web site at 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 1 15 with the terms and conditions of the Order and of the Reference Order, which is incorporated by reference herein. PO 00000 Frm 00109 Fmt 4703 Sfmt 4703 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Amendment No. 1 amended and replaced the original proposal in its entirety. 2 17 E:\FR\FM\19AUN1.SGM 19AUN1 Federal Register / Vol. 80, No. 160 / Wednesday, August 19, 2015 / Notices 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 tkelley on DSK3SPTVN1PROD with NOTICES 1. Purpose Background As a national securities exchange registered pursuant to section 6 of the Act, the Exchange is required to be organized and to have the capacity to enforce compliance by its members and persons associated with its members, with the Act, the rules and regulations thereunder, and the Exchange’s Rules.4 Further, the Exchange’s Rules are required to be ‘‘designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade . . . and, in general, to protect investors and the public interest.’’ 5 In fulfilling these requirements, the Exchange has developed a comprehensive regulatory program that includes automated surveillance of trading activity that is both operated directly by Exchange staff and by staff of the Financial Industry Regulatory Authority (‘‘FINRA’’) pursuant to a Regulatory Services Agreement (‘‘RSA’’). When disruptive and potentially manipulative or improper quoting and trading activity is identified, the Exchange or FINRA (acting as an agent of the Exchange) conducts an investigation into the activity, requesting additional information from the Member or Members involved. To the extent violations of the Act, the rules and regulations thereunder, or Exchange Rules have been identified and confirmed, the Exchange or FINRA as its agent will commence the enforcement process, which might result in, among other things, a censure, a requirement to take certain remedial actions, one or more restrictions on future business activities, a monetary fine, or even a temporary or permanent ban from the securities industry. The process described above, from the identification of disruptive and potentially manipulative or improper quoting and trading activity to a final resolution of the matter, can often take several years. The Exchange believes that this time period is generally necessary and appropriate to afford the subject Member adequate due process, particularly in complex cases. However, as described below, the Exchange 4 15 5 15 U.S.C. 78f(b)(1). U.S.C. 78f(b)(5). VerDate Sep<11>2014 19:14 Aug 18, 2015 Jkt 235001 believes that there are certain obvious and uncomplicated cases of disruptive and manipulative behavior or cases where the potential harm to investors is so large that the Exchange should have the authority to initiate an expedited suspension proceeding in order to stop the behavior from continuing on the Exchange. In recent years, several cases have been brought and resolved by the Exchange and other SROs that involved allegations of wide-spread market manipulation, much of which was ultimately being conducted by foreign persons and entities using relatively rudimentary technology to access the markets and over which the Exchange and other SROs had no direct jurisdiction. In each case, the conduct involved a pattern of disruptive quoting and trading activity indicative of manipulative layering 6 or spoofing.7 The Exchange and other SROs were able to identify the disruptive quoting and trading activity in real-time or near realtime; nonetheless, in accordance with Exchange Rules and the Act, the Members responsible for such conduct or responsible for their customers’ conduct were allowed to continue the disruptive quoting and trading activity on the Exchange and other exchanges during the entirety of the subsequent lengthy investigation and enforcement process. The Exchange believes that it should have the authority to initiate an expedited suspension proceeding in order to stop the behavior from continuing on the Exchange if a Member is engaging in or facilitating layering or spoofing activity and the Member has received sufficient notice with an opportunity to respond, but such activity has not ceased. The following two examples are instructive on the Exchange’s rationale for the proposed rule change. In July 2012, Biremis Corp. (formerly Swift Trade Securities USA, Inc.) (the ‘‘Firm’’) and its CEO were barred from the industry for, among other things, supervisory violations related to a failure by the Firm to detect and prevent disruptive and allegedly manipulative 6 ‘‘Layering’’ is a form of market manipulation in which multiple, non-bona fide limit orders are entered on one side of the market at various price levels in order to create the appearance of a change in the levels of supply and demand, thereby artificially moving the price of the security. An order is then executed on the opposite side of the market at the artificially created price, and the nonbona fide orders are cancelled. 7 ‘‘Spoofing’’ is a form of market manipulation that involves the market manipulator placing nonbona fide orders that are intended to trigger some type of market movement and/or response from other market participants, from which the market manipulator might benefit by trading bona fide orders. PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 50371 trading activities, including layering, short sale violations, and anti-money laundering violations.8 The Firm’s sole business was to provide trade execution services via a proprietary day trading platform and order management system to day traders located in foreign jurisdictions. Thus, the disruptive and allegedly manipulative trading activity introduced by the Firm to U.S. markets originated directly or indirectly from foreign clients of the Firm. The pattern of disruptive and allegedly manipulative quoting and trading activity was widespread across multiple exchanges, and the Exchange, FINRA, and other SROs identified clear patterns of the behavior in 2007 and 2008. Although the Firm and its principals were on notice of the disruptive and allegedly manipulative quoting and trading activity that was occurring, the Firm took little to no action to attempt to supervise or prevent such quoting and trading activity until at least 2009. Even when it put some controls in place, they were deficient and the pattern of disruptive and allegedly manipulative trading activity continued to occur. As noted above, the final resolution of the enforcement action to bar the Firm and its CEO from the industry was not concluded until 2012, four years after the disruptive and allegedly manipulative trading activity was first identified. In September of 2012, Hold Brothers On-Line Investment Services, Inc. (the ‘‘Firm’’) settled a regulatory action in connection with the Firm’s provision of a trading platform, trade software and trade execution, support and clearing services for day traders.9 Many traders using the Firm’s services were located in foreign jurisdictions. The Firm ultimately settled the action with FINRA and several exchanges, including the Exchange, for a total monetary fine of $3.4 million. In a separate action, the Firm settled with the Commission for a monetary fine of $2.5 million.10 Among the alleged violations in the case were disruptive and allegedly manipulative quoting and trading activity, including spoofing, layering, wash trading, and pre-arranged trading. Through its conduct and insufficient procedures and controls, the Firm also allegedly committed anti-money laundering violations by failing to detect and report 8 See Biremis Corp. and Peter Beck, FINRA Letter of Acceptance, Waiver and Consent No. 2010021162202, July 30, 2012. 9 See Hold Brothers On-Line Investment Services, LLC, FINRA Letter of Acceptance, Waiver and Consent No. 20100237710001, September 25, 2012. 10 In the Matter of Hold Brothers On-Line Investment Services, LLC, Exchange Act Release No. 67924, September 25, 2012. E:\FR\FM\19AUN1.SGM 19AUN1 50372 Federal Register / Vol. 80, No. 160 / Wednesday, August 19, 2015 / Notices tkelley on DSK3SPTVN1PROD with NOTICES manipulative and suspicious trading activity. The Firm was alleged to have not only provided foreign traders with access to the U.S. markets to engage in such activities, but that its principals also owned and funded foreign subsidiaries that engaged in the disruptive and allegedly manipulative quoting and trading activity. Although the pattern of disruptive and allegedly manipulative quoting and trading activity was identified in 2009, as noted above, the enforcement action was not concluded until 2012. Thus, although disruptive and allegedly manipulative quoting and trading was promptly detected, it continued for several years. The Exchange also notes the current criminal proceedings that have commenced against Navinder Singh Sarao. Mr. Sarao’s allegedly manipulative trading activity, which included forms of layering and spoofing in the futures markets, has been linked as a contributing factor to the ‘‘Flash Crash’’ of 2010, and yet continued through 2015. The Exchange believes that the activities described in the cases above provide justification for the proposed rule change, which is described below. Rule 8.17—Expedited Client Suspension Proceeding The Exchange proposes to adopt new Rule 8.17 to set forth procedures for issuing suspension orders, immediately prohibiting a Member from conducting continued layering or spoofing activity on the Exchange. Importantly, these procedures would also provide the Exchange the authority to order a Member to cease and desist from providing access to the Exchange to a client of the Member that is conducting layering or spoofing activity in violation of proposed Rule 12.15. Under proposed paragraph (a) of Rule 8.17, with the prior written authorization of the Chief Regulatory Officer (‘‘CRO’’) or such other senior officers as the CRO may designate, the Office of General Counsel or Regulatory Department of the Exchange (such departments generally referred to as the ‘‘Exchange’’ for purposes of proposed Rule 8.17) may initiate an expedited suspension proceeding with respect to alleged violations of Rule 12.15, which is proposed as part of this filing and described in detail below. Proposed paragraph (a) would also set forth the requirements for notice and service of such notice pursuant to the Rule, including the required method of service and the content of notice. Proposed paragraph (b) of Rule 8.17 would govern the appointment of a Hearing Panel as well as potential VerDate Sep<11>2014 19:14 Aug 18, 2015 Jkt 235001 disqualification or recusal of Hearing Officers. The proposed provision is consistent with existing Exchange Rule 8.6 and includes the requirement for a Hearing Officer to be recused in the event he or she has a conflict of interest or bias or other circumstances exist where his or her fairness might reasonably be questioned. In addition to recusal initiated by such a Hearing Officer, a party to the proceeding will be permitted to file a motion to disqualify a Hearing Officer. However, due to the compressed schedule pursuant to which the process would operate under Rule 8.17, the proposed rule would require such motion to be filed no later than 5 days after the announcement of the Hearing Panel and the Exchange’s brief in opposition to such motion would be required to be filed no later than 5 days after service thereof. Pursuant to existing Rule 8.6(b), if the Hearing Panel believes the Respondent has provided satisfactory evidence in support of the motion to disqualify, the applicable Hearing Officer shall remove himself or herself and request the Chief Executive Officer to reassign the hearing to another Hearing Officer such that the Hearing Panel still meets the compositional requirements described in Rule 8.6(a). If the Hearing Panel determines that the Respondent’s grounds for disqualification are insufficient, it shall deny the Respondent’s motion for disqualification by setting forth the reasons for the denial in writing and the Hearing Panel will proceed with the hearing. Under paragraph (c) of the proposed Rule, the hearing would be held not later than 15 days after service of the notice initiating the suspension proceeding, unless otherwise extended by the Chairman of the Hearing Panel with the consent of the Parties for good cause shown. In the event of a recusal or disqualification of a Hearing Officer, the hearing shall be held not later than five days after a replacement Hearing Officer is appointed. Proposed paragraph (c) would also govern how the hearing is conducted, including the authority of Hearing Officers, witnesses, additional information that may be required by the Hearing Panel, the requirement that a transcript of the proceeding be created and details related to such transcript, and details regarding the creation and maintenance of the record of the proceeding. Proposed paragraph (c) would also state that if a Respondent fails to appear at a hearing for which it has notice, the allegations in the notice and accompanying declaration may be PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 deemed admitted, and the Hearing Panel may issue a suspension order without further proceedings. Finally, as proposed, if the Exchange fails to appear at a hearing for which it has notice, the Hearing Panel may order that the suspension proceeding be dismissed. Under paragraph (d) of the proposed Rule, the Hearing Panel would be authorized to issue a written decision stating whether a suspension order would be imposed. The Hearing Panel would be required to issue the decision not later than 10 days after receipt of the hearing transcript, unless otherwise extended by the Chairman of the Hearing Panel with the consent of the Parties for good cause shown. The Rule would state that a suspension order shall be imposed if the Hearing Panel finds by a preponderance of the evidence that the alleged violation specified in the notice has occurred and that the violative conduct or continuation thereof is likely to result in significant market disruption or other significant harm to investors. Proposed paragraph (d) would also describe the content, scope and form of a suspension order. As proposed, a suspension order shall be limited to ordering a Respondent to cease and desist from violating proposed Rule 12.15, and, where applicable, to ordering a Respondent to cease and desist from providing access to the Exchange to a client of Respondent that is causing violations of Rule 12.15. Under the proposed rule, a suspension order shall also set forth the alleged violation and the significant market disruption or other significant harm to investors that is likely to result without the issuance of an order, describe in reasonable detail the act or acts the Respondent is to take or refrain from taking, and include the date and hour of its issuance. As proposed, a suspension order would remain effective and enforceable unless modified, set aside, limited, or revoked pursuant to proposed paragraph (e), as described below. Finally, paragraph (d) would require service of the Hearing Panel’s decision and any suspension order consistent with other portions of the proposed rule related to service. Proposed paragraph (e) of Rule 8.17 would state that at any time after the Office of Hearing Officers served the Respondent with a suspension order, a Party could apply to the Hearing Panel to have the order modified, set aside, limited, or revoked. The Hearing Panel generally would be required to respond to the request in writing within 10 days after receipt of the request. An application to modify, set aside, limit or revoke a suspension order would not E:\FR\FM\19AUN1.SGM 19AUN1 Federal Register / Vol. 80, No. 160 / Wednesday, August 19, 2015 / Notices stay the effectiveness of the suspension order. Paragraph (f) of the proposed Rule would authorize the cancellation of a Respondent’s membership with the Exchange or bar from associating with any member of the Exchange if the Respondent violated a suspension order. The Exchange believes that this authority is necessary in particular in the event a Member is ordered to but fails to prevent access to the Exchange by a client that is engaging in activity prohibited by Rule 12.15. Paragraph (f) would require notice of such action, served in accordance with the proposed Rule. The notice would be required to explicitly identify the provision of the suspension order that is alleged to have been violated and contain a statement of facts specifying the alleged violation. The notice would also state when the Exchange’s action will take effect and explain what the respondent must do to avoid such action. Finally, proposed paragraph (g) would provide that sanctions issued under the proposed Rule 8.17 would constitute final and immediately effective disciplinary sanctions imposed by the Exchange, and that the right to have any action under the Rule reviewed by the Commission would be governed by section 19 of the Act. The filing of an application for review would not stay the effectiveness of a suspension order, cancellation of membership or a bar from associating with any member, unless the Commission otherwise ordered. tkelley on DSK3SPTVN1PROD with NOTICES Rule 12.15—Layering and Spoofing Prohibited The Exchange currently has authority to prohibit and take action against manipulative trading activity, including layering and spoofing, pursuant to its general market manipulation rules, including Rule 3.1. The Exchange proposes to adopt new Rule 12.15, which would more specifically define and prohibit layering and spoofing activity on the Exchange. As noted above, the Exchange also proposes to apply the proposed suspension rules to proposed Rule 12.15. Proposed Rule 12.15 would prohibit Members from engaging in or facilitating layering or spoofing activity on the Exchange, as described in proposed Interpretation and Policy .01 of the Rule, including acting in concert with other persons to effect such activity. The Exchange believes that it is necessary to extend the prohibition to situations when persons are acting in concert to avoid a potential loophole where layering and spoofing activity is simply VerDate Sep<11>2014 19:14 Aug 18, 2015 Jkt 235001 split between several brokers or customers. To provide proper context for the situations in which the Exchange proposes to utilize its proposed authority, the Exchange believes it is necessary to describe the types of disruptive and manipulative layering and spoofing activity that would cause the Exchange to use its authority. Accordingly, the Exchange proposes to adopt Interpretation and Policy .01 and .02, providing additional details regarding layering and spoofing activity. Proposed Interpretation and Policy .01, related to layering, would describe a layering activity as a frequent pattern in which the following facts are present: (a) A party enters multiple limit orders on one side of the market at various price levels (the ‘‘Layering Orders’’); and (b) following the entry of the Layering Orders, the level of supply and demand for the security changes; and (c) the party enters one or more orders on the opposite side of the market of the Layering Orders (the ‘‘Contra-Side Orders’’) that are subsequently executed; and (d) following the execution of the Contra-Side Orders, the party cancels the Layering Orders. Proposed Interpretation and Policy .02, related to spoofing, would describe spoofing activity as a frequent pattern in which the following facts are present: (a) A party narrows the spread for a security by placing an order inside the national best bid or offer (the ‘‘Spoofing Order’’); and (b) the party then submits an order on the opposite side of the market (‘‘Contra-Side Order’’) that executes against another market participant that joined the new inside market established by the Spoofing Order. The Exchange believes that the proposed descriptions of layering and spoofing activity articulated in the rule are consistent with the activities that have been identified and described in the client access cases described above. The Exchange further believes that the proposed descriptions will provide Members with clear descriptions of layering and spoofing activity that will help them to avoid engaging in such activities or allowing their clients to engage in such activities. The Exchange proposes to make clear in Interpretation and Policy .03 that, unless otherwise indicated, the descriptions of layering activity and spoofing activity do not require the facts to occur in a specific order in order for the rule to apply. For instance, it is of no consequence whether a party first enters Layering Orders and then Contraside Orders or vice-versa. However, as proposed, it is required for supply and demand to change following the entry of PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 50373 Layering Orders. The Exchange also proposes to make clear that layering activity and spoofing activity includes a pattern or practice in which some portion of the layering or spoofing activity is conducted on the Exchange and the other portions of the layering or spoofing activity are conducted on one or more other exchanges. The Exchange believes that this authority is necessary to address market participants who would otherwise seek to avoid the prohibitions of the proposed Rule by spreading their activity amongst various execution venues. In sum, proposed Rule 12.15 coupled with proposed Rule 8.17 would provide the Exchange with authority to promptly act to prevent layering activity and spoofing activity from continuing on the Exchange. Below is an example of how the proposed rule would operate. Assume that through its surveillance program, Exchange staff identifies a pattern of potential layering activity. After an initial investigation the Exchange would then contact the Member responsible for the orders that caused the activity to request an explanation of the activity as well as any additional relevant information, including the source of the activity. If the Exchange were to continue to see the same pattern from the same Member and the source of the activity is the same or has been previously identified as a frequent source of layering activity then the Exchange could initiate an expedited suspension proceeding by serving notice on the Member that would include details regarding the alleged violations as well as the proposed sanction. In such a case the proposed sanction would likely be to order the Member to cease and desist providing access to the Exchange to the client that is responsible for the layering activity. The Member would have the opportunity to be heard in front of a Hearing Panel at a hearing to be conducted within 15 days of the notice. If the Hearing Panel determined that the violation alleged in the notice did not occur or that the conduct or its continuation would not have the potential to result in significant market disruption or other significant harm to investors, then the Hearing Panel would dismiss the suspension order proceeding. If the Hearing Panel determined that the violation alleged in the notice did occur and that the conduct or its continuation is likely to result in significant market disruption or other significant harm to investors, then the Hearing Panel would issue the order including the proposed sanction, ordering the Member to cease providing E:\FR\FM\19AUN1.SGM 19AUN1 tkelley on DSK3SPTVN1PROD with NOTICES 50374 Federal Register / Vol. 80, No. 160 / Wednesday, August 19, 2015 / Notices access to the client at issue. If the Member obeyed the order and ceased providing such access, then the Member would be permitted to do business on the Exchange without any limit to access for such Member or its other clients. The Exchange notes, however, that abiding by a suspension order and continuing to be permitted to access the Exchange would not alter the Exchange’s ability to further investigate the matter and/or later sanction the Member pursuant to the Exchange’s standard disciplinary process for supervisory violations or other violations of Exchange rules or the Act. If the Exchange instead learned that the Member failed to abide by the order and continued to provide access to the client at issue in the suspension order, the Exchange would have the authority to cancel the Member’s membership with the Exchange or to bar an individual from associating with any Member of the Exchange. The Exchange reiterates that it already has broad authority to take action against a Member in the event that such Member is engaging in or facilitating disruptive or manipulative trading activity on the Exchange. For the reasons described above, and in light of recent cases like the client access cases described above, as well as other cases currently under investigation, the Exchange believes that it is equally important for the Exchange to have the authority to promptly initiate expedited suspension proceedings against any Member who has demonstrated a clear pattern or practice of layering or spoofing activity, as described above and to take action including ordering such Member to terminate access to the Exchange to one or more of such Member’s clients if such clients are responsible for the activity. The Exchange recognizes that its proposed authority to issue a suspension order is a powerful measure that should be used very cautiously. Consequently, the proposed rules have been designed to ensure that the proceedings are used to address only the most clear and serious types of layering and spoofing activity and that the interests of Respondents are protected. For example, to ensure that proceedings are used appropriately and that the decision to initiate a proceeding is made only at the highest staff levels, the proposed rules require the CRO or another senior officer of the Exchange to issue written authorization before the Exchange can institute an expedited suspension proceeding. In addition, the Exchange believes that it would use this authority in limited circumstances, when necessary to protect investors, VerDate Sep<11>2014 19:14 Aug 18, 2015 Jkt 235001 other Members and the Exchange. Further, the Exchange believes that the proposed expedited suspension provisions described above that provide the opportunity to respond as well as a Hearing Panel determination prior to taking action will ensure that the Exchange would not utilize its authority in the absence of a clear pattern or practice of layering or spoofing activity. 2. Statutory Basis The Exchange believes that the proposed rule changes are consistent with section 6(b) of the Act 11 and further the objectives of section 6(b)(5) of the Act 12 because they are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. Pursuant to the proposal, the Exchange will have a mechanism to promptly initiate expedited suspension proceedings in the event the Exchange believes that it has sufficient proof that a violation of Rule 12.15 has occurred and is ongoing. Further, the Exchange believes that the proposal is consistent with sections 6(b)(1) and 6(b)(6) of the Act,13 which require that the rules of an exchange enforce compliance with, and provide appropriate discipline for, violations of the Commission and Exchange rules. The Exchange also believes that the proposal is consistent with the public interest, the protection of investors, or otherwise in furtherance of the purposes of the Act because the proposal helps to strengthen the Exchange’s ability to carry out its oversight and enforcement responsibilities as a self-regulatory organization in cases where awaiting the conclusion of a full disciplinary proceeding is unsuitable in view of the potential harm to other Members and their customers as well as the Exchange if conduct is allowed to continue on the Exchange. The Exchange further believes that the proposal is consistent with section 6(b)(7) of the Act,14 which requires that the rules of an exchange ‘‘provide a fair procedure for the disciplining of members and persons associated with persons . . . and the prohibition or limitation by the exchange of any 11 15 U.S.C. 78f(b). U.S.C. 78f(b)(5). 13 15 U.S.C. 78f(b)(1) and 78f(b)(6). 14 15 U.S.C. 78f(b)(7). 12 15 PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 person with respect to access to services offered by the exchange or a member thereof.’’ Finally, the Exchange also believes the proposal is consistent with sections 6(d)(1) and 6(d)(2) of the Act,15 which require that the rules of an exchange with respect to a disciplinary proceeding or proceeding that would limit or prohibit access to or membership in the exchange require the exchange to: provide adequate and specific notice of the charges brought against a member or person associated with a member, provide an opportunity to defend against such charges, keep a record, and provide details regarding the findings and applicable sanctions in the event a determination to impose a disciplinary sanction is made. The Exchange believes that each of these requirements is addressed by the notice and due process provisions included within proposed Rule 8.17. Importantly, as noted above, the Exchange anticipates using the authority proposed in this filing only in clear and egregious cases when necessary to protect investors, other Members and the Exchange, and even in such cases, the Respondent will be afforded due process in connection with the suspension proceedings. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule changes will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. To the contrary, the Exchange believes that each self-regulatory organization should be empowered to regulate trading occurring on their market consistent with the Act and without regard to competitive issues. The Exchange is requesting authority to take appropriate action if necessary for the protection of investors, other Members and the Exchange. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange has neither solicited nor received written comments on the proposed rule changes. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period 15 15 E:\FR\FM\19AUN1.SGM U.S.C. 78f(d)(1). 19AUN1 Federal Register / Vol. 80, No. 160 / Wednesday, August 19, 2015 / Notices to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (b) Institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, as modified by Amendment No. 1, is consistent with the Act. Comments may be submitted by any of the following methods: tkelley on DSK3SPTVN1PROD with NOTICES Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– BATS–2015–57 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–BATS–2015–57. 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 (http://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 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal offices 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 VerDate Sep<11>2014 19:14 Aug 18, 2015 Jkt 235001 should refer to File Number SR–BATS– 2015–57, and should be submitted on or before September 9, 2015. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.16 Brent J. Fields, Secretary. [FR Doc. 2015–20421 Filed 8–18–15; 8:45 am] BILLING CODE 8011–01–P DEPARTMENT OF STATE [Public Notice 9226] Notice of Public Meeting The Department of State will conduct an open meeting at 9 a.m. on Wednesday, September 2, 2015, in Conference Room 8–9–10 of the Department of Transportation (DOT) Headquarters Conference Center, West Building, 1200 New Jersey Avenue SE., Washington, DC 20590. The primary purpose of the meeting is to prepare for the second Session of the International Maritime Organization’s (IMO) SubCommittee on Carriage of Cargoes and Containers to be held at the IMO Headquarters, United Kingdom, September 14–18, 2015. The agenda items to be considered include: —Adoption of the agenda —Decisions of other IMO bodies —Amendments to the IGF Code and development of guidelines for lowflashpoint fuels —Safety requirements for carriage of liquefied hydrogen in bulk —Amendments to the IMSBC Code and supplements —Amendments to the IMDG Code and supplements —Amendments to CSC 1972 and associated circulars —Revised Guidelines for packing of cargo transport units —Unified interpretation to provisions of IMO safety, security and environment related Conventions —Consideration of reports of incidents involving dangerous goods or marine pollutants in packaged form on board ships or in port areas —Mandatory requirements for classification and declaration of solid bulk cargoes as harmful to the marine environment —Biennial agenda and provisional agenda for CCC 3 —Election of Chairman and Vice-Chairman for 2016 —Any other business —Report to the Committees Members of the public may attend this meeting up to the seating capacity of the room. Upon request, members of 16 17 PO 00000 CFR 200.30–3(a)(12). Frm 00114 Fmt 4703 Sfmt 4703 50375 the public may also participate via teleconference, up to the capacity of the teleconference phone line. To facilitate the building security process, and to request reasonable accommodation, those who plan to attend, or participate via the teleconference line, should contact the meeting coordinator, Ms. Amy Parker, by email at Amy.M.Parker@ uscg.mil, by phone at (202) 372–1423, or in writing at 2703 Martin Luther King Jr. Ave. SE., Stop 7509, Washington, DC 20593–7509, not later than August 24, 2015, or 7 business days prior to the meeting. Requests made after August 24, 2015 might not be able to be accommodated. Please note that due to security considerations, a valid, government issued photo identification must be presented to gain entrance to the DOT Headquarters building. DOT Headquarters is accessible by metro via the Navy Yard Metrorail Station, taxi, and privately owned conveyance. However, parking in the vicinity of the building is extremely limited. Additional information regarding this and other IMO-related public meetings may be found at: www.uscg.mil/imo. Dated: August 10, 2015. Jonathan W. Burby, Coast Guard Liaison Officer, Office of Ocean and Polar Affairs Department of State. [FR Doc. 2015–20490 Filed 8–18–15; 8:45 am] BILLING CODE 4710–09–P DEPARTMENT OF STATE [Public Notice 9229] Advisory Committee on International Postal and Delivery Services September 2015 Meeting As required by the Federal Advisory Committee Act, Public Law 92–463, the Department of State gives notice of a meeting of the Advisory Committee on International Postal and Delivery Services. This Committee will meet on Wednesday, September 9, 2015, from 1:00 p.m. to 5:00 p.m. Eastern Time at the American Institute of Architects, Board Room, 1735 New York Avenue NW., Washington, DC 20006. Any member of the public interested in providing input to the meeting should contact Ms. Shereece Robinson, whose contact information is listed below (see the FOR FURTHER INFORMATION section of this notice). Each individual providing oral input is requested to limit his or her comments to five minutes. Requests to be added to the speakers list must be received in writing (letter or email) prior to the close of business on Wednesday, September 2, 2015; written comments from members SUMMARY: E:\FR\FM\19AUN1.SGM 19AUN1

Agencies

[Federal Register Volume 80, Number 160 (Wednesday, August 19, 2015)]
[Notices]
[Pages 50370-50375]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-20421]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75693; File No. SR-BATS-2015-57]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change, as Modified by Amendment No. 1 
Thereto, To Adopt New Rule 8.17 To Provide a Process for an Expedited 
Suspension Proceeding and Rule 12.15 To Prohibit Layering and Spoofing 
on BATS Exchange, Inc.

August 13, 2015.
    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 July 30, 2015, BATS Exchange, Inc. (the ``Exchange'' or ``BATS'') 
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. On August 11, 
2015, the Exchange filed Amendment No. 1 to the proposal.\3\ 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.
    \3\ Amendment No. 1 amended and replaced the original proposal 
in its entirety.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to adopt a new rule to clearly prohibit 
layering and spoofing activity on the Exchange, as further described 
below. Further, the Exchange proposes to amend Exchange Rules to permit 
the Exchange to take prompt action to suspend Members or their clients 
that violate such rule.
    The text of the proposed rule change is available at the Exchange's 
Web site at 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

[[Page 50371]]

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
Background
    As a national securities exchange registered pursuant to section 6 
of the Act, the Exchange is required to be organized and to have the 
capacity to enforce compliance by its members and persons associated 
with its members, with the Act, the rules and regulations thereunder, 
and the Exchange's Rules.\4\ Further, the Exchange's Rules are required 
to be ``designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade . . . and, 
in general, to protect investors and the public interest.'' \5\ In 
fulfilling these requirements, the Exchange has developed a 
comprehensive regulatory program that includes automated surveillance 
of trading activity that is both operated directly by Exchange staff 
and by staff of the Financial Industry Regulatory Authority (``FINRA'') 
pursuant to a Regulatory Services Agreement (``RSA''). When disruptive 
and potentially manipulative or improper quoting and trading activity 
is identified, the Exchange or FINRA (acting as an agent of the 
Exchange) conducts an investigation into the activity, requesting 
additional information from the Member or Members involved. To the 
extent violations of the Act, the rules and regulations thereunder, or 
Exchange Rules have been identified and confirmed, the Exchange or 
FINRA as its agent will commence the enforcement process, which might 
result in, among other things, a censure, a requirement to take certain 
remedial actions, one or more restrictions on future business 
activities, a monetary fine, or even a temporary or permanent ban from 
the securities industry.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78f(b)(1).
    \5\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The process described above, from the identification of disruptive 
and potentially manipulative or improper quoting and trading activity 
to a final resolution of the matter, can often take several years. The 
Exchange believes that this time period is generally necessary and 
appropriate to afford the subject Member adequate due process, 
particularly in complex cases. However, as described below, the 
Exchange believes that there are certain obvious and uncomplicated 
cases of disruptive and manipulative behavior or cases where the 
potential harm to investors is so large that the Exchange should have 
the authority to initiate an expedited suspension proceeding in order 
to stop the behavior from continuing on the Exchange.
    In recent years, several cases have been brought and resolved by 
the Exchange and other SROs that involved allegations of wide-spread 
market manipulation, much of which was ultimately being conducted by 
foreign persons and entities using relatively rudimentary technology to 
access the markets and over which the Exchange and other SROs had no 
direct jurisdiction. In each case, the conduct involved a pattern of 
disruptive quoting and trading activity indicative of manipulative 
layering \6\ or spoofing.\7\ The Exchange and other SROs were able to 
identify the disruptive quoting and trading activity in real-time or 
near real-time; nonetheless, in accordance with Exchange Rules and the 
Act, the Members responsible for such conduct or responsible for their 
customers' conduct were allowed to continue the disruptive quoting and 
trading activity on the Exchange and other exchanges during the 
entirety of the subsequent lengthy investigation and enforcement 
process. The Exchange believes that it should have the authority to 
initiate an expedited suspension proceeding in order to stop the 
behavior from continuing on the Exchange if a Member is engaging in or 
facilitating layering or spoofing activity and the Member has received 
sufficient notice with an opportunity to respond, but such activity has 
not ceased.
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    \6\ ``Layering'' is a form of market manipulation in which 
multiple, non-bona fide limit orders are entered on one side of the 
market at various price levels in order to create the appearance of 
a change in the levels of supply and demand, thereby artificially 
moving the price of the security. An order is then executed on the 
opposite side of the market at the artificially created price, and 
the non-bona fide orders are cancelled.
    \7\ ``Spoofing'' is a form of market manipulation that involves 
the market manipulator placing non-bona fide orders that are 
intended to trigger some type of market movement and/or response 
from other market participants, from which the market manipulator 
might benefit by trading bona fide orders.
---------------------------------------------------------------------------

    The following two examples are instructive on the Exchange's 
rationale for the proposed rule change.
    In July 2012, Biremis Corp. (formerly Swift Trade Securities USA, 
Inc.) (the ``Firm'') and its CEO were barred from the industry for, 
among other things, supervisory violations related to a failure by the 
Firm to detect and prevent disruptive and allegedly manipulative 
trading activities, including layering, short sale violations, and 
anti-money laundering violations.\8\ The Firm's sole business was to 
provide trade execution services via a proprietary day trading platform 
and order management system to day traders located in foreign 
jurisdictions. Thus, the disruptive and allegedly manipulative trading 
activity introduced by the Firm to U.S. markets originated directly or 
indirectly from foreign clients of the Firm. The pattern of disruptive 
and allegedly manipulative quoting and trading activity was widespread 
across multiple exchanges, and the Exchange, FINRA, and other SROs 
identified clear patterns of the behavior in 2007 and 2008. Although 
the Firm and its principals were on notice of the disruptive and 
allegedly manipulative quoting and trading activity that was occurring, 
the Firm took little to no action to attempt to supervise or prevent 
such quoting and trading activity until at least 2009. Even when it put 
some controls in place, they were deficient and the pattern of 
disruptive and allegedly manipulative trading activity continued to 
occur. As noted above, the final resolution of the enforcement action 
to bar the Firm and its CEO from the industry was not concluded until 
2012, four years after the disruptive and allegedly manipulative 
trading activity was first identified.
---------------------------------------------------------------------------

    \8\ See Biremis Corp. and Peter Beck, FINRA Letter of 
Acceptance, Waiver and Consent No. 2010021162202, July 30, 2012.
---------------------------------------------------------------------------

    In September of 2012, Hold Brothers On-Line Investment Services, 
Inc. (the ``Firm'') settled a regulatory action in connection with the 
Firm's provision of a trading platform, trade software and trade 
execution, support and clearing services for day traders.\9\ Many 
traders using the Firm's services were located in foreign 
jurisdictions. The Firm ultimately settled the action with FINRA and 
several exchanges, including the Exchange, for a total monetary fine of 
$3.4 million. In a separate action, the Firm settled with the 
Commission for a monetary fine of $2.5 million.\10\ Among the alleged 
violations in the case were disruptive and allegedly manipulative 
quoting and trading activity, including spoofing, layering, wash 
trading, and pre-arranged trading. Through its conduct and insufficient 
procedures and controls, the Firm also allegedly committed anti-money 
laundering violations by failing to detect and report

[[Page 50372]]

manipulative and suspicious trading activity. The Firm was alleged to 
have not only provided foreign traders with access to the U.S. markets 
to engage in such activities, but that its principals also owned and 
funded foreign subsidiaries that engaged in the disruptive and 
allegedly manipulative quoting and trading activity. Although the 
pattern of disruptive and allegedly manipulative quoting and trading 
activity was identified in 2009, as noted above, the enforcement action 
was not concluded until 2012. Thus, although disruptive and allegedly 
manipulative quoting and trading was promptly detected, it continued 
for several years.
---------------------------------------------------------------------------

    \9\ See Hold Brothers On-Line Investment Services, LLC, FINRA 
Letter of Acceptance, Waiver and Consent No. 20100237710001, 
September 25, 2012.
    \10\ In the Matter of Hold Brothers On-Line Investment Services, 
LLC, Exchange Act Release No. 67924, September 25, 2012.
---------------------------------------------------------------------------

    The Exchange also notes the current criminal proceedings that have 
commenced against Navinder Singh Sarao. Mr. Sarao's allegedly 
manipulative trading activity, which included forms of layering and 
spoofing in the futures markets, has been linked as a contributing 
factor to the ``Flash Crash'' of 2010, and yet continued through 2015.
    The Exchange believes that the activities described in the cases 
above provide justification for the proposed rule change, which is 
described below.
Rule 8.17--Expedited Client Suspension Proceeding
    The Exchange proposes to adopt new Rule 8.17 to set forth 
procedures for issuing suspension orders, immediately prohibiting a 
Member from conducting continued layering or spoofing activity on the 
Exchange. Importantly, these procedures would also provide the Exchange 
the authority to order a Member to cease and desist from providing 
access to the Exchange to a client of the Member that is conducting 
layering or spoofing activity in violation of proposed Rule 12.15.
    Under proposed paragraph (a) of Rule 8.17, with the prior written 
authorization of the Chief Regulatory Officer (``CRO'') or such other 
senior officers as the CRO may designate, the Office of General Counsel 
or Regulatory Department of the Exchange (such departments generally 
referred to as the ``Exchange'' for purposes of proposed Rule 8.17) may 
initiate an expedited suspension proceeding with respect to alleged 
violations of Rule 12.15, which is proposed as part of this filing and 
described in detail below. Proposed paragraph (a) would also set forth 
the requirements for notice and service of such notice pursuant to the 
Rule, including the required method of service and the content of 
notice.
    Proposed paragraph (b) of Rule 8.17 would govern the appointment of 
a Hearing Panel as well as potential disqualification or recusal of 
Hearing Officers. The proposed provision is consistent with existing 
Exchange Rule 8.6 and includes the requirement for a Hearing Officer to 
be recused in the event he or she has a conflict of interest or bias or 
other circumstances exist where his or her fairness might reasonably be 
questioned. In addition to recusal initiated by such a Hearing Officer, 
a party to the proceeding will be permitted to file a motion to 
disqualify a Hearing Officer. However, due to the compressed schedule 
pursuant to which the process would operate under Rule 8.17, the 
proposed rule would require such motion to be filed no later than 5 
days after the announcement of the Hearing Panel and the Exchange's 
brief in opposition to such motion would be required to be filed no 
later than 5 days after service thereof. Pursuant to existing Rule 
8.6(b), if the Hearing Panel believes the Respondent has provided 
satisfactory evidence in support of the motion to disqualify, the 
applicable Hearing Officer shall remove himself or herself and request 
the Chief Executive Officer to reassign the hearing to another Hearing 
Officer such that the Hearing Panel still meets the compositional 
requirements described in Rule 8.6(a). If the Hearing Panel determines 
that the Respondent's grounds for disqualification are insufficient, it 
shall deny the Respondent's motion for disqualification by setting 
forth the reasons for the denial in writing and the Hearing Panel will 
proceed with the hearing.
    Under paragraph (c) of the proposed Rule, the hearing would be held 
not later than 15 days after service of the notice initiating the 
suspension proceeding, unless otherwise extended by the Chairman of the 
Hearing Panel with the consent of the Parties for good cause shown. In 
the event of a recusal or disqualification of a Hearing Officer, the 
hearing shall be held not later than five days after a replacement 
Hearing Officer is appointed. Proposed paragraph (c) would also govern 
how the hearing is conducted, including the authority of Hearing 
Officers, witnesses, additional information that may be required by the 
Hearing Panel, the requirement that a transcript of the proceeding be 
created and details related to such transcript, and details regarding 
the creation and maintenance of the record of the proceeding. Proposed 
paragraph (c) would also state that if a Respondent fails to appear at 
a hearing for which it has notice, the allegations in the notice and 
accompanying declaration may be deemed admitted, and the Hearing Panel 
may issue a suspension order without further proceedings. Finally, as 
proposed, if the Exchange fails to appear at a hearing for which it has 
notice, the Hearing Panel may order that the suspension proceeding be 
dismissed.
    Under paragraph (d) of the proposed Rule, the Hearing Panel would 
be authorized to issue a written decision stating whether a suspension 
order would be imposed. The Hearing Panel would be required to issue 
the decision not later than 10 days after receipt of the hearing 
transcript, unless otherwise extended by the Chairman of the Hearing 
Panel with the consent of the Parties for good cause shown. The Rule 
would state that a suspension order shall be imposed if the Hearing 
Panel finds by a preponderance of the evidence that the alleged 
violation specified in the notice has occurred and that the violative 
conduct or continuation thereof is likely to result in significant 
market disruption or other significant harm to investors.
    Proposed paragraph (d) would also describe the content, scope and 
form of a suspension order. As proposed, a suspension order shall be 
limited to ordering a Respondent to cease and desist from violating 
proposed Rule 12.15, and, where applicable, to ordering a Respondent to 
cease and desist from providing access to the Exchange to a client of 
Respondent that is causing violations of Rule 12.15. Under the proposed 
rule, a suspension order shall also set forth the alleged violation and 
the significant market disruption or other significant harm to 
investors that is likely to result without the issuance of an order, 
describe in reasonable detail the act or acts the Respondent is to take 
or refrain from taking, and include the date and hour of its issuance. 
As proposed, a suspension order would remain effective and enforceable 
unless modified, set aside, limited, or revoked pursuant to proposed 
paragraph (e), as described below. Finally, paragraph (d) would require 
service of the Hearing Panel's decision and any suspension order 
consistent with other portions of the proposed rule related to service.
    Proposed paragraph (e) of Rule 8.17 would state that at any time 
after the Office of Hearing Officers served the Respondent with a 
suspension order, a Party could apply to the Hearing Panel to have the 
order modified, set aside, limited, or revoked. The Hearing Panel 
generally would be required to respond to the request in writing within 
10 days after receipt of the request. An application to modify, set 
aside, limit or revoke a suspension order would not

[[Page 50373]]

stay the effectiveness of the suspension order.
    Paragraph (f) of the proposed Rule would authorize the cancellation 
of a Respondent's membership with the Exchange or bar from associating 
with any member of the Exchange if the Respondent violated a suspension 
order. The Exchange believes that this authority is necessary in 
particular in the event a Member is ordered to but fails to prevent 
access to the Exchange by a client that is engaging in activity 
prohibited by Rule 12.15. Paragraph (f) would require notice of such 
action, served in accordance with the proposed Rule. The notice would 
be required to explicitly identify the provision of the suspension 
order that is alleged to have been violated and contain a statement of 
facts specifying the alleged violation. The notice would also state 
when the Exchange's action will take effect and explain what the 
respondent must do to avoid such action.
    Finally, proposed paragraph (g) would provide that sanctions issued 
under the proposed Rule 8.17 would constitute final and immediately 
effective disciplinary sanctions imposed by the Exchange, and that the 
right to have any action under the Rule reviewed by the Commission 
would be governed by section 19 of the Act. The filing of an 
application for review would not stay the effectiveness of a suspension 
order, cancellation of membership or a bar from associating with any 
member, unless the Commission otherwise ordered.
Rule 12.15--Layering and Spoofing Prohibited
    The Exchange currently has authority to prohibit and take action 
against manipulative trading activity, including layering and spoofing, 
pursuant to its general market manipulation rules, including Rule 3.1. 
The Exchange proposes to adopt new Rule 12.15, which would more 
specifically define and prohibit layering and spoofing activity on the 
Exchange. As noted above, the Exchange also proposes to apply the 
proposed suspension rules to proposed Rule 12.15.
    Proposed Rule 12.15 would prohibit Members from engaging in or 
facilitating layering or spoofing activity on the Exchange, as 
described in proposed Interpretation and Policy .01 of the Rule, 
including acting in concert with other persons to effect such activity. 
The Exchange believes that it is necessary to extend the prohibition to 
situations when persons are acting in concert to avoid a potential 
loophole where layering and spoofing activity is simply split between 
several brokers or customers.
    To provide proper context for the situations in which the Exchange 
proposes to utilize its proposed authority, the Exchange believes it is 
necessary to describe the types of disruptive and manipulative layering 
and spoofing activity that would cause the Exchange to use its 
authority. Accordingly, the Exchange proposes to adopt Interpretation 
and Policy .01 and .02, providing additional details regarding layering 
and spoofing activity. Proposed Interpretation and Policy .01, related 
to layering, would describe a layering activity as a frequent pattern 
in which the following facts are present: (a) A party enters multiple 
limit orders on one side of the market at various price levels (the 
``Layering Orders''); and (b) following the entry of the Layering 
Orders, the level of supply and demand for the security changes; and 
(c) the party enters one or more orders on the opposite side of the 
market of the Layering Orders (the ``Contra-Side Orders'') that are 
subsequently executed; and (d) following the execution of the Contra-
Side Orders, the party cancels the Layering Orders. Proposed 
Interpretation and Policy .02, related to spoofing, would describe 
spoofing activity as a frequent pattern in which the following facts 
are present: (a) A party narrows the spread for a security by placing 
an order inside the national best bid or offer (the ``Spoofing 
Order''); and (b) the party then submits an order on the opposite side 
of the market (``Contra-Side Order'') that executes against another 
market participant that joined the new inside market established by the 
Spoofing Order. The Exchange believes that the proposed descriptions of 
layering and spoofing activity articulated in the rule are consistent 
with the activities that have been identified and described in the 
client access cases described above. The Exchange further believes that 
the proposed descriptions will provide Members with clear descriptions 
of layering and spoofing activity that will help them to avoid engaging 
in such activities or allowing their clients to engage in such 
activities.
    The Exchange proposes to make clear in Interpretation and Policy 
.03 that, unless otherwise indicated, the descriptions of layering 
activity and spoofing activity do not require the facts to occur in a 
specific order in order for the rule to apply. For instance, it is of 
no consequence whether a party first enters Layering Orders and then 
Contra-side Orders or vice-versa. However, as proposed, it is required 
for supply and demand to change following the entry of Layering Orders. 
The Exchange also proposes to make clear that layering activity and 
spoofing activity includes a pattern or practice in which some portion 
of the layering or spoofing activity is conducted on the Exchange and 
the other portions of the layering or spoofing activity are conducted 
on one or more other exchanges. The Exchange believes that this 
authority is necessary to address market participants who would 
otherwise seek to avoid the prohibitions of the proposed Rule by 
spreading their activity amongst various execution venues.
    In sum, proposed Rule 12.15 coupled with proposed Rule 8.17 would 
provide the Exchange with authority to promptly act to prevent layering 
activity and spoofing activity from continuing on the Exchange. Below 
is an example of how the proposed rule would operate.
    Assume that through its surveillance program, Exchange staff 
identifies a pattern of potential layering activity. After an initial 
investigation the Exchange would then contact the Member responsible 
for the orders that caused the activity to request an explanation of 
the activity as well as any additional relevant information, including 
the source of the activity. If the Exchange were to continue to see the 
same pattern from the same Member and the source of the activity is the 
same or has been previously identified as a frequent source of layering 
activity then the Exchange could initiate an expedited suspension 
proceeding by serving notice on the Member that would include details 
regarding the alleged violations as well as the proposed sanction. In 
such a case the proposed sanction would likely be to order the Member 
to cease and desist providing access to the Exchange to the client that 
is responsible for the layering activity. The Member would have the 
opportunity to be heard in front of a Hearing Panel at a hearing to be 
conducted within 15 days of the notice. If the Hearing Panel determined 
that the violation alleged in the notice did not occur or that the 
conduct or its continuation would not have the potential to result in 
significant market disruption or other significant harm to investors, 
then the Hearing Panel would dismiss the suspension order proceeding. 
If the Hearing Panel determined that the violation alleged in the 
notice did occur and that the conduct or its continuation is likely to 
result in significant market disruption or other significant harm to 
investors, then the Hearing Panel would issue the order including the 
proposed sanction, ordering the Member to cease providing

[[Page 50374]]

access to the client at issue. If the Member obeyed the order and 
ceased providing such access, then the Member would be permitted to do 
business on the Exchange without any limit to access for such Member or 
its other clients. The Exchange notes, however, that abiding by a 
suspension order and continuing to be permitted to access the Exchange 
would not alter the Exchange's ability to further investigate the 
matter and/or later sanction the Member pursuant to the Exchange's 
standard disciplinary process for supervisory violations or other 
violations of Exchange rules or the Act. If the Exchange instead 
learned that the Member failed to abide by the order and continued to 
provide access to the client at issue in the suspension order, the 
Exchange would have the authority to cancel the Member's membership 
with the Exchange or to bar an individual from associating with any 
Member of the Exchange.
    The Exchange reiterates that it already has broad authority to take 
action against a Member in the event that such Member is engaging in or 
facilitating disruptive or manipulative trading activity on the 
Exchange. For the reasons described above, and in light of recent cases 
like the client access cases described above, as well as other cases 
currently under investigation, the Exchange believes that it is equally 
important for the Exchange to have the authority to promptly initiate 
expedited suspension proceedings against any Member who has 
demonstrated a clear pattern or practice of layering or spoofing 
activity, as described above and to take action including ordering such 
Member to terminate access to the Exchange to one or more of such 
Member's clients if such clients are responsible for the activity. The 
Exchange recognizes that its proposed authority to issue a suspension 
order is a powerful measure that should be used very cautiously. 
Consequently, the proposed rules have been designed to ensure that the 
proceedings are used to address only the most clear and serious types 
of layering and spoofing activity and that the interests of Respondents 
are protected. For example, to ensure that proceedings are used 
appropriately and that the decision to initiate a proceeding is made 
only at the highest staff levels, the proposed rules require the CRO or 
another senior officer of the Exchange to issue written authorization 
before the Exchange can institute an expedited suspension proceeding. 
In addition, the Exchange believes that it would use this authority in 
limited circumstances, when necessary to protect investors, other 
Members and the Exchange. Further, the Exchange believes that the 
proposed expedited suspension provisions described above that provide 
the opportunity to respond as well as a Hearing Panel determination 
prior to taking action will ensure that the Exchange would not utilize 
its authority in the absence of a clear pattern or practice of layering 
or spoofing activity.
2. Statutory Basis
    The Exchange believes that the proposed rule changes are consistent 
with section 6(b) of the Act \11\ and further the objectives of section 
6(b)(5) of the Act \12\ because they are designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest. Pursuant to the proposal, the Exchange will have a 
mechanism to promptly initiate expedited suspension proceedings in the 
event the Exchange believes that it has sufficient proof that a 
violation of Rule 12.15 has occurred and is ongoing.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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    Further, the Exchange believes that the proposal is consistent with 
sections 6(b)(1) and 6(b)(6) of the Act,\13\ which require that the 
rules of an exchange enforce compliance with, and provide appropriate 
discipline for, violations of the Commission and Exchange rules. The 
Exchange also believes that the proposal is consistent with the public 
interest, the protection of investors, or otherwise in furtherance of 
the purposes of the Act because the proposal helps to strengthen the 
Exchange's ability to carry out its oversight and enforcement 
responsibilities as a self-regulatory organization in cases where 
awaiting the conclusion of a full disciplinary proceeding is unsuitable 
in view of the potential harm to other Members and their customers as 
well as the Exchange if conduct is allowed to continue on the Exchange.
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    \13\ 15 U.S.C. 78f(b)(1) and 78f(b)(6).
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    The Exchange further believes that the proposal is consistent with 
section 6(b)(7) of the Act,\14\ which requires that the rules of an 
exchange ``provide a fair procedure for the disciplining of members and 
persons associated with persons . . . and the prohibition or limitation 
by the exchange of any person with respect to access to services 
offered by the exchange or a member thereof.'' Finally, the Exchange 
also believes the proposal is consistent with sections 6(d)(1) and 
6(d)(2) of the Act,\15\ which require that the rules of an exchange 
with respect to a disciplinary proceeding or proceeding that would 
limit or prohibit access to or membership in the exchange require the 
exchange to: provide adequate and specific notice of the charges 
brought against a member or person associated with a member, provide an 
opportunity to defend against such charges, keep a record, and provide 
details regarding the findings and applicable sanctions in the event a 
determination to impose a disciplinary sanction is made. The Exchange 
believes that each of these requirements is addressed by the notice and 
due process provisions included within proposed Rule 8.17. Importantly, 
as noted above, the Exchange anticipates using the authority proposed 
in this filing only in clear and egregious cases when necessary to 
protect investors, other Members and the Exchange, and even in such 
cases, the Respondent will be afforded due process in connection with 
the suspension proceedings.
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    \14\ 15 U.S.C. 78f(b)(7).
    \15\ 15 U.S.C. 78f(d)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule changes will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. To the contrary, 
the Exchange believes that each self-regulatory organization should be 
empowered to regulate trading occurring on their market consistent with 
the Act and without regard to competitive issues. The Exchange is 
requesting authority to take appropriate action if necessary for the 
protection of investors, other Members and the Exchange.

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

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

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period

[[Page 50375]]

to be appropriate and publishes its reasons for so finding or (ii) as 
to which the Exchange consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (b) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment No. 1, is consistent with the Act. 
Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-BATS-2015-57 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-BATS-2015-57. 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 (http://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 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal offices 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-BATS-2015-57, 
and should be submitted on or before September 9, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-20421 Filed 8-18-15; 8:45 am]
 BILLING CODE 8011-01-P