Self-Regulatory Organizations; NASDAQ BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Delete From the Exchange's Rulebook Section 10, Limitations on Dealings, of Chapter VII, Market Participants, 18907-18911 [2016-07336]

Download as PDF Federal Register / Vol. 81, No. 63 / Friday, April 1, 2016 / Notices For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.22 Robert W. Errett, Deputy Secretary. [FR Doc. 2016–07337 Filed 3–31–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–77461; File No. SR–BX– 2016–018) Self-Regulatory Organizations; NASDAQ BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Delete From the Exchange’s Rulebook Section 10, Limitations on Dealings, of Chapter VII, Market Participants March 28, 2016. 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 March 18, 2016, NASDAQ BX, Inc. (‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Exchange has designated this proposal as a ‘‘non-controversial’’ proposed rule change pursuant to Section 19(b)(3)(A) of the Act 3 and Rule 19b–4(f)(6)(iii) thereunder,4 which renders it effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. asabaliauskas on DSK3SPTVN1PROD with NOTICES I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to delete from the Exchange’s rulebook Section 10, Limitations on Dealings, of Chapter VII, Market Participants. The text of the proposed rule change is available on the Exchange’s Web site at https://nasdaqomxbx. 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 22 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A). 4 17 CFR 240.19b–4(f)(6)(iii). 1 15 VerDate Sep<11>2014 17:25 Mar 31, 2016 Jkt 238001 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 Exchange is proposing to adopt a principles-based approach to prohibit the misuse of material nonpublic information by BX Options Market Makers (‘‘Market Makers’’) by deleting from the Exchange’s rulebook Section 10, Limitations on Dealings, of Chapter VII, Market Participants (the ‘‘Market Maker Restrictions’’). In doing so, the Exchange would harmonize its rules governing Exchange Options Participants 5 generally and Exchange Market Makers in particular relating to protecting against the misuse of material, non-public information. The Exchange believes that the Market Maker Restrictions are no longer necessary because all Market Makers are subject to the Exchange’s general principles-based requirements governing the protection against the misuse of material, non-public information, pursuant to Chapter III, Business Conduct, Section 4, Prevention of the Misuse of Material Nonpublic Information, discussed below, which obviates the need for separatelyprescribed requirements for a subset of market participants on the Exchange. Additionally, there is no separate regulatory purpose served by having separate rules for Market Makers. The Exchange notes that this proposed rule change will not decrease the protections against the misuse of material, nonpublic information; instead, it is designed to provide more flexibility to market participants. This is a competitive filing that is based on a proposal recently submitted by NYSE MKT LLC (‘‘NYSE MKT’’) and approved by the Commission.6 5 The term ‘‘Options Participant’’ or ‘‘Participant’’ means a firm, or organization that is registered with the Exchange pursuant to Chapter II of the BX rules for purposes of participating in options trading on BX Options as a ‘‘BX Options Order Entry Firm’’ or ‘‘BX Options Market Maker.’’ 6 See Securities Exchange Act Release No. 75432 (July 13, 2015), 80 FR 42597 (July 17, 2015) (Order Approving SR–NYSEMKT–2015–23). See also Securities Exchange Act Release Nos. 75792 (August 31, 2015), 80 FR 53606 (September 4, 2015) PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 18907 A Market Maker is an Options Participant registered with the Exchange for the purpose of making markets in options contracts traded on the Exchange and that is vested with the rights and responsibilities specified in Chapter VII of the BX rules.7 Importantly, all Market Makers have access to the same information in the Exchange’s order book. Moreover, Market Makers have no agency obligations on the Exchange’s order book. Notwithstanding that Market Makers have access to the same Exchange trading information as all other market participants on the Exchange, the Exchange has specific rules governing how Market Makers may operate. Proposed Rule Change The Exchange believes that the Market Maker Restrictions are no longer necessary and proposes to delete them. The Exchange believes that Chapter III, Section 4 governing the misuse of material, non-public information, provides for an appropriate, principlesbased approach to prevent the market abuses the Market Maker Restrictions are designed to address. Specifically, Chapter III, Section 4 provides that every Options Participant shall establish, maintain and enforce written policies and procedures reasonably designed, taking into consideration the nature of the Participant’s business, to prevent the misuse of material nonpublic information by such Participant or persons associated with such Participant in violation of the federal securities laws or the Rules thereunder, and the Rules of the Exchange. Chapter III, Section 4 provides that misuse of material nonpublic information includes, but is not limited to: (i) Trading in any securities issued by a corporation, or in any related securities or related options or other derivative securities, while in possession of material nonpublic information concerning that corporation; (ii) trading in an underlying security or related options or other derivative securities, while in possession of material nonpublic information concerning imminent transactions in the underlying security or related securities; and (iii) disclosing to another person any material nonpublic information involving a corporation whose shares are publicly traded or disclosing an imminent (SR–ISE–2015–26) and 76687 (December 18, 2015), 80 FR 80403 (December 24, 2015) (SR–PHLX–2015– 85). 7 See Chapter I, General Provisions, Section 1, Definitions, subsection (a)(9). E:\FR\FM\01APN1.SGM 01APN1 18908 Federal Register / Vol. 81, No. 63 / Friday, April 1, 2016 / Notices asabaliauskas on DSK3SPTVN1PROD with NOTICES transaction in an underlying security or related securities for the purpose of facilitating the possible misuse of such material nonpublic information. Subsection (c) of Chapter III, Section 4, requires each Options Participant to establish, maintain and enforce certain policies and procedures as appropriate for the nature of each Participant’s business.8 Under the rule, Participants that are required to file Form X–17A–5 under the Exchange Act or Rules thereunder, with the Exchange on an annual basis only, shall, contemporaneously with those submissions, file attestations signed by such Participants stating that the procedures mandated by this Section have been established, enforced and maintained. The rule requires any Options Participant or associated person who becomes aware of any possible misuse of material nonpublic information to promptly notify BX Regulation. Finally, subsection (f) of Chapter III, Section 4 specifies that it may be considered conduct inconsistent with just and equitable principles of trade for any Participant or person associated with a Participant who has knowledge of all material terms and conditions of (i) an order and a solicited order, (ii) an order being facilitated or submitted to BX Options for price improvement, or (iii) orders being crossed; the execution of which are imminent, to enter, based on such knowledge, an order to buy or sell an option for the same underlying security as any option that is the subject of the order, or an order to buy or sell the security underlying such class, or an order to buy or sell any related instrument until (a) the terms and conditions of the order and any changes in the terms and conditions of the order of which the Participant or person associated with the Participant has knowledge are disclosed, or (b) the trade 8 In particular, the rule requires that (i) all associated persons must be advised in writing of the prohibition against the misuse of material nonpublic information; (ii) signed attestations from the Participant and all associated persons affirming their awareness of, and agreement to abide by, the aforementioned prohibitions must be maintained for at least three (3) years, the first two (2) years in an easily accessible place; (iii) records of all brokerage accounts maintained by the Participant and all associated persons must be acquired and maintained for at least three (3) years, the first two (2) years in an easily accessible place, and such brokerage accounts must be reviewed periodically by the Participant for the purpose of detecting the possible misuse of material nonpublic information; and (iv) any business dealings the Participant may have with any corporation whose securities are publicly traded, or any other circumstances that may result in the Participant receiving, in the ordinary course of business, material nonpublic information concerning any such corporation, must be identified and documented. VerDate Sep<11>2014 17:25 Mar 31, 2016 Jkt 238001 can no longer reasonably be considered imminent in view of the passage of time since the order was received. It states that the terms of an order are ‘‘disclosed’’ to BX Options Participants when the order is entered into the BX Options Book. For purposes of subsection (f), an order to buy or sell a ‘‘related instrument’’ means, in reference to an index option, an order to buy or sell securities comprising 10% or more of the component securities in the index or an order to buy or sell a futures contract on an economically equivalent index. Because Options Participants are already subject to the requirements of Chapter III, Section 4 as described above, the Exchange does not believe it necessary to separately require specific limitations on Market Makers. Deleting the Market Maker Restrictions including its requirements for specific procedures would provide Market Makers flexibility to adapt their policies and procedures as appropriate to reflect changes to their business model, business activities, or the securities market in a manner similar to how Options Participants on the Exchange currently operate and consistent with Chapter III, Section 4. Options Participants registered as Market Makers have certain rights and bear certain responsibilities beyond those of other Options Participants.9 9 Chapter VII, Section 5, Obligations of Market Makers, of the BX provides that in registering as a Market Maker, an Options Participant commits himself to various obligations and that transactions of a Market Maker in its market making capacity must constitute a course of dealings reasonably calculated to contribute to the maintenance of a fair and orderly market. The rule states that Market Makers should not make bids or offers or enter into transactions that are inconsistent with such course of dealings and that ordinarily, Market Makers are expected to (i) during trading hours, maintain a two-sided market, pursuant to Section 6(d)(i) of Chapter VII, in those options in which the Market Maker is registered to trade, in a manner that enhances the depth, liquidity and competitiveness of the market, (ii) [Reserved], (iii) engage, to a reasonable degree under the existing circumstances, in dealings for their own accounts when there exists, or it is reasonably anticipated that there will exist, a lack of price continuity, a temporary disparity between the supply of (or demand for) a particular option contract, or a temporary distortion of the price relationships between option contracts of the same class, (iv) compete with other Market Makers in all options in which the Market Maker is registered to trade, (v) make markets that will be honored for the number of contracts entered into BX Options’ System in all options in which the Market Maker is registered to trade (vi) update quotations in response to changed market conditions in all options in which the Market Maker is registered to trade (vii) maintain active markets in all options in which the Market Maker is registered (viii) honor all orders that the Trading System routes to away markets pursuant to Chapter XII of the BX rules. Section 5 further provides that Market Makers should not effect purchases or sales on BX Options except in a reasonable and orderly manner. If BX Regulation finds any substantial or continued failure by a Market Maker to engage in PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 Market Makers are distinguished under Exchange rules from other Options Participants in that Market Makers have quoting obligations.10 However, none of these heightened obligations or different entitlements provides different or greater access to nonpublic information than any other Options Participant on the Exchange. Accordingly, because Market Makers do not have any trading advantages at the Exchange due to their market role, the Exchange believes they should be subject to the same rules as other Options Participants regarding the protection against the misuse of material non-public information, which in this case is existing Chapter III, Section 4.11 The Exchange is not proposing to change what is considered to be material, nonpublic information that an affiliated brokerage business of a Market Maker could share with such Market Maker. In that regard, the proposed rule change will not permit affiliates of a Market Maker to have access to any nonpublic order or quote information of the Market Maker, including hidden or undisplayed size or price information of such orders or quotes. Affiliates of Market Makers would only have access to orders and quotes that are publicly available to all market participants. Members do not expect to receive any additional order or quote information as a result of this proposed rule change. The Exchange does not believe that there will be any material change to member information barriers as a result of the removal of the Exchange preapproval requirement. The Exchange has rules prohibiting Options Participants from disadvantaging their customers or other market participants by improperly capitalizing on the Options Participant’s access to or receipt of material, non-public information.12 a course of dealings as specified in paragraph (a) of Section 5, such Market Maker will be subject to disciplinary action or suspension or revocation of registration in one or more of the securities in which the Market Maker is registered. 10 Section 6, Market Maker Quotations, of Chapter VII, Market Participants, details specific Market Maker quoting obligations. 11 The Exchange notes that by deleting the Market Maker Restrictions, the Exchange would no longer require specific information barriers for Market Makers or require pre-approval of any information barriers that a Market Maker would erect for purposes of protecting against the misuse of material non-public information. However, the policies and procedures of Market Makers, including those relating to information barriers, would be subject to review by FINRA, on behalf of the Exchange, pursuant to a Regulatory Services Agreement. 12 For example, Chapter XI, Doing Business with the Public, Section 8, Supervision of Accounts, provides in part that each member that conducts a public customer options business shall ensure that its written supervisory system policies and E:\FR\FM\01APN1.SGM 01APN1 Federal Register / Vol. 81, No. 63 / Friday, April 1, 2016 / Notices asabaliauskas on DSK3SPTVN1PROD with NOTICES Further, the Exchange does not believe there will be any material change to Market Maker information barriers as a result of removal of the Exchange’s pre-approval requirements. In fact, the Exchange anticipates that eliminating the pre-approval requirement should facilitate implementation of changes to Market Maker information barriers as necessary to protect against the misuse of material, non-public information. The Exchange also suggests that the pre-approval requirement is unnecessary because Market Makers do not have agency responsibilities to orders in the book, or time and place information advantages because of their market role. The Exchange notes that its proposed principles-based approach to protecting against the misuse of material nonpublic information for all its Options Participants is consistent with recently filed and approved rule changes for NYSE MKT, NYSE Arca Equities, Inc. (‘‘NYSE Arca’’), BATS Exchange, Inc. (‘‘BATS’’), and New York Stock Exchange LLC (‘‘NYSE’’) governing cash equity market makers on those respective exchanges.13 Except for prescribed rules relating to floor-based designated market makers on the NYSE, who have access to specified non-public trading information, each of these exchanges have moved to a principlesbased approach to protecting against the misuse of material non-public information. In connection with approving those rule changes, the procedures pursuant to NASD Rules 3010, 3012, and 3013 adequately address the member’s public customer options business. The Exchange has separately filed a proposed rule change to replace references to these NASD rules with FINRA rules which have replaced them. See SR–BX–2016–017 filed March 14, 2016. 13 See Securities Exchange Act Release No. 75432 (July 13, 2015), 80 FR 42597 (July 17, 2015) (Order Approving Adopting a Principles-Based Approach to Prohibit the Misuse of Material Nonpublic Information by Specialists and e-Specialists by Deleting Rule 927.3NY and Section (f) of Rule 927.5NY). See also Securities Exchange Act Release Nos. 60604 (Sept. 2, 2009), 76 FR 46272 (Sept. 8, 2009) (SR–NYSEArca–2009–78) (Order approving elimination of NYSE Arca rule that required market makers to establish and maintain specifically prescribed information barriers, including discussion of NYSE Arca and Nasdaq rules) (‘‘Arca Approval Order’’); 61574 (Feb. 23, 2010), 75 FR 9455 (Mar. 2, 2010) (SR–BATS–2010–003) (Order approving amendments to BATS Rule 5.5 to move to a principles-based approach to protecting against the misuse of material, nonpublic information, and noting that the proposed change is consistent with the approaches of NYSE Arca and Nasdaq) (‘‘BATS Approval Order’’); 72534 (July 3, 2014), 79 FR 39440 (July 10, 2014), SR–NYSE–2014–12) (Order approving amendments to NYSE Rule 98 governing designated market makers to move to a principlesbased approach to prohibit the misuse of material non-public information) (‘‘NYSE Approval Order’’); and 76687 (December 18, 2015), 80 FR 80403 (December 24, 2015) (SR–PHLX–2015–85). VerDate Sep<11>2014 17:25 Mar 31, 2016 Jkt 238001 Commission found that, with adequate oversight by the exchanges of their members, eliminating prescriptive information barrier requirements should not reduce the effectiveness of exchange rules requiring members to establish and maintain systems to supervise the activities of members, including written procedures reasonably designed to ensure compliance with applicable federal securities law and regulations, and with the rules of the applicable exchange. The Exchange believes that a principles based rule applicable to members of options markets would be equally effective in protecting against the misuse of material non-public information.14 Indeed, Chapter III, Section 4 is currently applicable to Market Makers and already requires policies and procedures reasonably designed to protect against the misuse of material nonpublic information, which is similar to the respective NYSE MKT, NYSE Arca Equities, BATS and NYSE rules governing cash equity market makers. The Exchange believes Chapter III, Section 4 provides appropriate protection against the misuse of material nonpublic information by Market Makers such that there is no further need for prescriptive information barrier requirements as set forth in the Market Maker Restrictions. The Exchange notes that even with this proposed rule change, pursuant to Chapter III, Section 4, a Market Maker would still be obligated to ensure that its policies and procedures reflect the current state of its business and continue to be reasonably designed to achieve compliance with applicable federal securities law and regulations, including without limitation, Regulation SHO 15 under the Act and Section 15(g) 14 International Securities Exchange, Inc. (‘‘ISE’’) and BOX Options Exchange LLC (‘‘BOX’’) have recently taken a similar approach. See Notice of Filing and Immediate Effectiveness of Proposed Rule Change Adopting a Principles-Based Approach to Prohibit the Misuse of Material, Non-public Information by Market Makers by Deleting Rule 810, Securities Exchange Act Release No. 75792 (August 31, 2015), 80 FR 53606 (September 4, 2015) (SR–ISE–2015–26). See also Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Adopt a Principles-based Approach to Prohibit the Misuse of Material Nonpublic Information by Market Makers, Securities Exchange Act Release No. 75916 (September 14, 2015), 80 FR 56503 (September 18, 2015) (SR–BOX–2015–31). 15 The Commission adopted a narrow exception to Regulation SHO’s ‘‘locate’’ requirement only for market makers engaged in bona fide market making in the security at the time they effect the short sale. See 17 CFR 242.203(b)(2)(iii). See also Exchange Act Release No. 50103 (July 28, 2004), 69 FR 48008, 48015 (Aug. 6, 2004); Exchange Act Release No. 58775 (Oct. 14, 2008), 73 FR 61690, 61698–9 (Oct. 17, 2008). Broker-dealers would not be able to rely on the Exchange’s or any self-regulatory organization’s designation of market marking for PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 18909 of the Act ,16 and with applicable Exchange rules, including being reasonably designed to protect against the misuse of material, non-public information. While information barriers would not specifically be required under the proposal, Chapter III, Section 4 already requires that an Options Participant consider its business model or business activities in structuring its policies and procedures, which may dictate that an information barrier or a functional separation be part of the appropriate set of policies and procedures that would be reasonably designed to achieve compliance with applicable securities law and regulations, and with applicable Exchange rules. The Exchange believes that the proposed reliance on principles-based Chapter III, Section 4 would ensure that a Market Maker would be required to protect against the misuse of any material non-public information. Chapter III, Section 4 already requires that firms refrain from trading while in possession of material non-public information concerning imminent transactions in the security or related product. The Exchange believes that moving to a principles-based approach rather than prescribing how and when to wall off a Market Maker from the rest of the firm would provide Market Makers with flexibility when managing risk across a firm, including integrating options positions with other positions of the firm or, as applicable, by the respective independent trading unit. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act 17 in general, and furthers the objectives of Section 6(b)(5) of the Act 18 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. The Exchange believes that the proposed rule change would remove impediments eligibility for the bona-fide market making exception to the ‘‘locate’’ requirement, as such designations are distinct and independent from Regulation SHO. Eligibility for the bona-fide market making exception depends on the facts and circumstances and a determination of bona-fide market making is based on the Commission’s factors outlined in the aforementioned Regulation SHO releases. It should also be noted that a determination of bona-fide market making is relevant for the purposes of close-out obligations under Rule 204 of Regulation SHO. See 17 CFR 242.204(a)(3). 16 15 U.S.C. 78o(g). 17 15 U.S.C. 78f(b). 18 15 U.S.C. 78f(b)(5). E:\FR\FM\01APN1.SGM 01APN1 asabaliauskas on DSK3SPTVN1PROD with NOTICES 18910 Federal Register / Vol. 81, No. 63 / Friday, April 1, 2016 / Notices to and perfect the mechanism of a free and open market by adopting a principles based approach to permit a member or member organization to maintain and enforce policies and procedures to, among other things, prohibit the misuse of material nonpublic information and provide flexibility on how a Market Maker structures its operations. The Exchange notes that the proposed rule change is based on an approved rule of the Exchange to which members and member organizations are subject— Section 4, Prevention of the Misuse of Material Nonpublic Information, of Chapter III, Business Conduct—and harmonizes the rules governing Options Participants. Moreover, Market Makers would continue to be subject to federal and Exchange requirements for protecting material non-public order information.19 The Exchange believes that the proposed rule change would remove impediments to and perfect the mechanism of a free and open market because it would harmonize the Exchange’s approach to protecting against the misuse of material nonpublic information and no longer subject Market Makers to prescriptive requirements. The Exchange does not believe that the existing prescriptive requirements applicable to Market Makers are narrowly tailored to their roles because Market Makers do not have access to Exchange trading information in a manner different from any other market participant on the Exchange. The Exchange further believes the proposal is designed to prevent fraudulent and manipulative acts and practices and to promote just and equitable principles of trade because existing rules make clear to members and member organizations the type of conduct that is prohibited by the Exchange. While the proposal eliminates prescriptive requirements relating to the misuse of material nonpublic information, Market Makers would remain subject to existing Exchange rules requiring them to establish and maintain systems to supervise their activities, and to create, implement, and maintain written procedures that are reasonably designed to comply with applicable securities laws and Exchange rules, including the prohibition on the misuse of material, nonpublic information. Additionally, the policies and procedures of Market Makers, including those relating to information barriers, would be subject 19 See 15 U.S.C. 78o(g) and Chapter III, Section 4 of the Exchange’s rulebook. VerDate Sep<11>2014 17:25 Mar 31, 2016 Jkt 238001 to review by FINRA, on behalf of the Exchange. The Exchange notes that the proposed rule change would still require that Market Makers maintain and enforce policies and procedures reasonably designed to ensure compliance with applicable federal securities laws and regulations and with Exchange rules. Even though there would no longer be pre-approval of Market Maker information barriers, any Market Maker written policies and procedures would continue to be subject to oversight by the Exchange and therefore the elimination of prescribed restrictions should not reduce the effectiveness of the Exchange rules to protect against the misuse of material non-public information. Rather, Options Participants will be able to utilize a flexible, principles-based approach to modify their policies and procedures as appropriate to reflect changes to their business model, business activities, or to the securities market itself. Moreover, while specified information barriers may no longer be required, an Options Participant’s business model or business activities may dictate that an information barrier or functional separation be part of the appropriate set of policies and procedures that would be reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable Exchange rules. The Exchange therefore believes that the proposed rule change will maintain the existing protection of investors and the public interest that is currently applicable to Market Makers, while at the same time removing impediments to and perfecting a free and open market by moving to a principles-based approach to protect against the misuse of material non-public information. 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. As indicated above, the rule change is being proposed as a competitive response to a filing submitted by NYSE MKT that was recently approved by the Commission. The Exchange believes that the proposal will enhance competition by allowing Market Makers to comply with applicable Exchange rules in a manner best suited to their business models, business activities, and the securities markets, thus reducing regulatory burdens while still ensuring compliance with applicable securities laws and regulations and Exchange rules. The PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 Exchange believes that the proposal will foster a fair and orderly marketplace without being overly burdensome upon Market Makers. Moreover, the Exchange believes that the proposed rule change would eliminate a burden on competition for Options Participants which currently exists as a result of disparate rule treatment between options and equities markets regarding how to protect against the misuse of material non-public information. For those members and member organizations that are also members of equity exchanges, their respective equity market maker operations are now subject to a principles-based approach to protecting against the misuse of material nonpublic information. The Exchange believes it would remove a burden on competition to enable members and member organizations to similarly apply a principles-based approach to protecting against the misuse of material nonpublic information in the options space as ISE has recently done. To this end, the Exchange notes that Chapter III, Section 4 still requires a Market Maker to evaluate its business to assure that its policies and procedures are reasonably designed to protect against the misuse of material nonpublic information. However, with this proposed rule change, an Options Participant that trades equities and options could look at its firm more holistically to structure its operations in a manner that provides it with better tools to manage its risks across multiple security classes, while at the same time protecting against the misuse of material non-public information. 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 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, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b–4(f)(6) thereunder.20 20 In addition, Rule 19b–4(f)(6)(iii) requires the Exchange to give the Commission written notice of E:\FR\FM\01APN1.SGM 01APN1 Federal Register / Vol. 81, No. 63 / Friday, April 1, 2016 / Notices A proposed rule change filed pursuant to Rule 19b–4(f)(6) under the Act normally does not become operative for 30 days after the date of its filing. However, Rule 19b–4(f)(6)(iii) permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has asked the Commission to waive the 30-day operative delay so that the proposal may become operative immediately upon filing. Waiver of the 30-day operative delay would help facilitate the harmonization of information barrier rules across options exchanges. The Exchange represents that Exchange rules still require a Market Maker to evaluate its business to assure that its policies and procedures are reasonably designed to protect against the misuse of material nonpublic information. Further, the Exchange represents that the proposed rule change will not decrease the protections against the misuse of material, non-public information; instead, it is designed to provide more flexibility to market participants. Based on the foregoing, the Commission believes the waiver of the operative delay is consistent with the protection of investors and the public interest.21 The Commission hereby grants the waiver and designates the proposal operative upon filing. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. IV. Solicitation of Comments asabaliauskas on DSK3SPTVN1PROD with NOTICES 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: the Exchange’s 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, or such shorter time as designated by the Commission. The Exchange has satisfied this requirement. 21 For purposes only of waiving the 30-day operative delay, the Commission has also considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). VerDate Sep<11>2014 17:25 Mar 31, 2016 Jkt 238001 Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– BX–2016–018 on the subject line. 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–BX–2016–018. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 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–BX–2016–018 and should be submitted on or before April 22, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.22 Robert W. Errett, Deputy Secretary. SECURITIES AND EXCHANGE COMMISSION [Release No. 34–77454; File No. SR– NASDAQ–2016–039] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Modify the Maximum Number of Times an Order on Nasdaq May Be Updated Before The System Cancels The Order March 28, 2016. 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 March 16, 2016, The NASDAQ Stock Market LLC (‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III, below, which Items have been prepared by Nasdaq. 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 Nasdaq proposes to proposal [sic] to modify the maximum number of times an Order on Nasdaq may be updated before the System cancels the Order. The text of the proposed rule change is available on Nasdaq’s Web site at https://nasdaq.cchwallstreet.com, at the principal office of Nasdaq, 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, Nasdaq 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. Nasdaq has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. [FR Doc. 2016–07336 Filed 3–31–16; 8:45 am] BILLING CODE 8011–01–P 1 15 22 17 PO 00000 CFR 200.30–3(a)(12). Frm 00089 Fmt 4703 Sfmt 4703 18911 2 17 E:\FR\FM\01APN1.SGM U.S.C. 78s(b)(1). CFR 240.19b–4. 01APN1

Agencies

[Federal Register Volume 81, Number 63 (Friday, April 1, 2016)]
[Notices]
[Pages 18907-18911]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-07336]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77461; File No. SR-BX-2016-018)


Self-Regulatory Organizations; NASDAQ BX, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Delete From the 
Exchange's Rulebook Section 10, Limitations on Dealings, of Chapter 
VII, Market Participants

March 28, 2016.
    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 March 18, 2016, NASDAQ BX, Inc. (``Exchange'') filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the Exchange. The Exchange has designated this 
proposal as a ``non-controversial'' proposed rule change pursuant to 
Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6)(iii) 
thereunder,\4\ which renders it effective upon filing with the 
Commission. 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\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------

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

    The Exchange proposes to delete from the Exchange's rulebook 
Section 10, Limitations on Dealings, of Chapter VII, Market 
Participants.
    The text of the proposed rule change is available on the Exchange's 
Web site at https://nasdaqomxbx.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 Exchange is proposing to adopt a principles-based approach to 
prohibit the misuse of material nonpublic information by BX Options 
Market Makers (``Market Makers'') by deleting from the Exchange's 
rulebook Section 10, Limitations on Dealings, of Chapter VII, Market 
Participants (the ``Market Maker Restrictions''). In doing so, the 
Exchange would harmonize its rules governing Exchange Options 
Participants \5\ generally and Exchange Market Makers in particular 
relating to protecting against the misuse of material, non-public 
information. The Exchange believes that the Market Maker Restrictions 
are no longer necessary because all Market Makers are subject to the 
Exchange's general principles-based requirements governing the 
protection against the misuse of material, non-public information, 
pursuant to Chapter III, Business Conduct, Section 4, Prevention of the 
Misuse of Material Nonpublic Information, discussed below, which 
obviates the need for separately-prescribed requirements for a subset 
of market participants on the Exchange. Additionally, there is no 
separate regulatory purpose served by having separate rules for Market 
Makers. The Exchange notes that this proposed rule change will not 
decrease the protections against the misuse of material, non-public 
information; instead, it is designed to provide more flexibility to 
market participants. This is a competitive filing that is based on a 
proposal recently submitted by NYSE MKT LLC (``NYSE MKT'') and approved 
by the Commission.\6\
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    \5\ The term ``Options Participant'' or ``Participant'' means a 
firm, or organization that is registered with the Exchange pursuant 
to Chapter II of the BX rules for purposes of participating in 
options trading on BX Options as a ``BX Options Order Entry Firm'' 
or ``BX Options Market Maker.''
    \6\ See Securities Exchange Act Release No. 75432 (July 13, 
2015), 80 FR 42597 (July 17, 2015) (Order Approving SR-NYSEMKT-2015-
23). See also Securities Exchange Act Release Nos. 75792 (August 31, 
2015), 80 FR 53606 (September 4, 2015) (SR-ISE-2015-26) and 76687 
(December 18, 2015), 80 FR 80403 (December 24, 2015) (SR-PHLX-2015-
85).
---------------------------------------------------------------------------

    A Market Maker is an Options Participant registered with the 
Exchange for the purpose of making markets in options contracts traded 
on the Exchange and that is vested with the rights and responsibilities 
specified in Chapter VII of the BX rules.\7\ Importantly, all Market 
Makers have access to the same information in the Exchange's order 
book. Moreover, Market Makers have no agency obligations on the 
Exchange's order book. Notwithstanding that Market Makers have access 
to the same Exchange trading information as all other market 
participants on the Exchange, the Exchange has specific rules governing 
how Market Makers may operate.
---------------------------------------------------------------------------

    \7\ See Chapter I, General Provisions, Section 1, Definitions, 
subsection (a)(9).
---------------------------------------------------------------------------

Proposed Rule Change
    The Exchange believes that the Market Maker Restrictions are no 
longer necessary and proposes to delete them. The Exchange believes 
that Chapter III, Section 4 governing the misuse of material, non-
public information, provides for an appropriate, principles-based 
approach to prevent the market abuses the Market Maker Restrictions are 
designed to address. Specifically, Chapter III, Section 4 provides that 
every Options Participant shall establish, maintain and enforce written 
policies and procedures reasonably designed, taking into consideration 
the nature of the Participant's business, to prevent the misuse of 
material nonpublic information by such Participant or persons 
associated with such Participant in violation of the federal securities 
laws or the Rules thereunder, and the Rules of the Exchange. Chapter 
III, Section 4 provides that misuse of material nonpublic information 
includes, but is not limited to: (i) Trading in any securities issued 
by a corporation, or in any related securities or related options or 
other derivative securities, while in possession of material nonpublic 
information concerning that corporation; (ii) trading in an underlying 
security or related options or other derivative securities, while in 
possession of material nonpublic information concerning imminent 
transactions in the underlying security or related securities; and 
(iii) disclosing to another person any material nonpublic information 
involving a corporation whose shares are publicly traded or disclosing 
an imminent

[[Page 18908]]

transaction in an underlying security or related securities for the 
purpose of facilitating the possible misuse of such material nonpublic 
information. Subsection (c) of Chapter III, Section 4, requires each 
Options Participant to establish, maintain and enforce certain policies 
and procedures as appropriate for the nature of each Participant's 
business.\8\ Under the rule, Participants that are required to file 
Form X-17A-5 under the Exchange Act or Rules thereunder, with the 
Exchange on an annual basis only, shall, contemporaneously with those 
submissions, file attestations signed by such Participants stating that 
the procedures mandated by this Section have been established, enforced 
and maintained. The rule requires any Options Participant or associated 
person who becomes aware of any possible misuse of material nonpublic 
information to promptly notify BX Regulation.
---------------------------------------------------------------------------

    \8\ In particular, the rule requires that (i) all associated 
persons must be advised in writing of the prohibition against the 
misuse of material nonpublic information; (ii) signed attestations 
from the Participant and all associated persons affirming their 
awareness of, and agreement to abide by, the aforementioned 
prohibitions must be maintained for at least three (3) years, the 
first two (2) years in an easily accessible place; (iii) records of 
all brokerage accounts maintained by the Participant and all 
associated persons must be acquired and maintained for at least 
three (3) years, the first two (2) years in an easily accessible 
place, and such brokerage accounts must be reviewed periodically by 
the Participant for the purpose of detecting the possible misuse of 
material nonpublic information; and (iv) any business dealings the 
Participant may have with any corporation whose securities are 
publicly traded, or any other circumstances that may result in the 
Participant receiving, in the ordinary course of business, material 
nonpublic information concerning any such corporation, must be 
identified and documented.
---------------------------------------------------------------------------

    Finally, subsection (f) of Chapter III, Section 4 specifies that it 
may be considered conduct inconsistent with just and equitable 
principles of trade for any Participant or person associated with a 
Participant who has knowledge of all material terms and conditions of 
(i) an order and a solicited order, (ii) an order being facilitated or 
submitted to BX Options for price improvement, or (iii) orders being 
crossed; the execution of which are imminent, to enter, based on such 
knowledge, an order to buy or sell an option for the same underlying 
security as any option that is the subject of the order, or an order to 
buy or sell the security underlying such class, or an order to buy or 
sell any related instrument until (a) the terms and conditions of the 
order and any changes in the terms and conditions of the order of which 
the Participant or person associated with the Participant has knowledge 
are disclosed, or (b) the trade can no longer reasonably be considered 
imminent in view of the passage of time since the order was received. 
It states that the terms of an order are ``disclosed'' to BX Options 
Participants when the order is entered into the BX Options Book. For 
purposes of subsection (f), an order to buy or sell a ``related 
instrument'' means, in reference to an index option, an order to buy or 
sell securities comprising 10% or more of the component securities in 
the index or an order to buy or sell a futures contract on an 
economically equivalent index.
    Because Options Participants are already subject to the 
requirements of Chapter III, Section 4 as described above, the Exchange 
does not believe it necessary to separately require specific 
limitations on Market Makers. Deleting the Market Maker Restrictions 
including its requirements for specific procedures would provide Market 
Makers flexibility to adapt their policies and procedures as 
appropriate to reflect changes to their business model, business 
activities, or the securities market in a manner similar to how Options 
Participants on the Exchange currently operate and consistent with 
Chapter III, Section 4.
    Options Participants registered as Market Makers have certain 
rights and bear certain responsibilities beyond those of other Options 
Participants.\9\ Market Makers are distinguished under Exchange rules 
from other Options Participants in that Market Makers have quoting 
obligations.\10\ However, none of these heightened obligations or 
different entitlements provides different or greater access to 
nonpublic information than any other Options Participant on the 
Exchange. Accordingly, because Market Makers do not have any trading 
advantages at the Exchange due to their market role, the Exchange 
believes they should be subject to the same rules as other Options 
Participants regarding the protection against the misuse of material 
non-public information, which in this case is existing Chapter III, 
Section 4.\11\
---------------------------------------------------------------------------

    \9\ Chapter VII, Section 5, Obligations of Market Makers, of the 
BX provides that in registering as a Market Maker, an Options 
Participant commits himself to various obligations and that 
transactions of a Market Maker in its market making capacity must 
constitute a course of dealings reasonably calculated to contribute 
to the maintenance of a fair and orderly market. The rule states 
that Market Makers should not make bids or offers or enter into 
transactions that are inconsistent with such course of dealings and 
that ordinarily, Market Makers are expected to (i) during trading 
hours, maintain a two-sided market, pursuant to Section 6(d)(i) of 
Chapter VII, in those options in which the Market Maker is 
registered to trade, in a manner that enhances the depth, liquidity 
and competitiveness of the market, (ii) [Reserved], (iii) engage, to 
a reasonable degree under the existing circumstances, in dealings 
for their own accounts when there exists, or it is reasonably 
anticipated that there will exist, a lack of price continuity, a 
temporary disparity between the supply of (or demand for) a 
particular option contract, or a temporary distortion of the price 
relationships between option contracts of the same class, (iv) 
compete with other Market Makers in all options in which the Market 
Maker is registered to trade, (v) make markets that will be honored 
for the number of contracts entered into BX Options' System in all 
options in which the Market Maker is registered to trade (vi) update 
quotations in response to changed market conditions in all options 
in which the Market Maker is registered to trade (vii) maintain 
active markets in all options in which the Market Maker is 
registered (viii) honor all orders that the Trading System routes to 
away markets pursuant to Chapter XII of the BX rules. Section 5 
further provides that Market Makers should not effect purchases or 
sales on BX Options except in a reasonable and orderly manner. If BX 
Regulation finds any substantial or continued failure by a Market 
Maker to engage in a course of dealings as specified in paragraph 
(a) of Section 5, such Market Maker will be subject to disciplinary 
action or suspension or revocation of registration in one or more of 
the securities in which the Market Maker is registered.
    \10\ Section 6, Market Maker Quotations, of Chapter VII, Market 
Participants, details specific Market Maker quoting obligations.
    \11\ The Exchange notes that by deleting the Market Maker 
Restrictions, the Exchange would no longer require specific 
information barriers for Market Makers or require pre-approval of 
any information barriers that a Market Maker would erect for 
purposes of protecting against the misuse of material non-public 
information. However, the policies and procedures of Market Makers, 
including those relating to information barriers, would be subject 
to review by FINRA, on behalf of the Exchange, pursuant to a 
Regulatory Services Agreement.
---------------------------------------------------------------------------

    The Exchange is not proposing to change what is considered to be 
material, nonpublic information that an affiliated brokerage business 
of a Market Maker could share with such Market Maker. In that regard, 
the proposed rule change will not permit affiliates of a Market Maker 
to have access to any non-public order or quote information of the 
Market Maker, including hidden or undisplayed size or price information 
of such orders or quotes. Affiliates of Market Makers would only have 
access to orders and quotes that are publicly available to all market 
participants. Members do not expect to receive any additional order or 
quote information as a result of this proposed rule change. The 
Exchange does not believe that there will be any material change to 
member information barriers as a result of the removal of the Exchange 
pre-approval requirement. The Exchange has rules prohibiting Options 
Participants from disadvantaging their customers or other market 
participants by improperly capitalizing on the Options Participant's 
access to or receipt of material, non-public information.\12\
---------------------------------------------------------------------------

    \12\ For example, Chapter XI, Doing Business with the Public, 
Section 8, Supervision of Accounts, provides in part that each 
member that conducts a public customer options business shall ensure 
that its written supervisory system policies and procedures pursuant 
to NASD Rules 3010, 3012, and 3013 adequately address the member's 
public customer options business. The Exchange has separately filed 
a proposed rule change to replace references to these NASD rules 
with FINRA rules which have replaced them. See SR-BX-2016-017 filed 
March 14, 2016.

---------------------------------------------------------------------------

[[Page 18909]]

    Further, the Exchange does not believe there will be any material 
change to Market Maker information barriers as a result of removal of 
the Exchange's pre-approval requirements. In fact, the Exchange 
anticipates that eliminating the pre-approval requirement should 
facilitate implementation of changes to Market Maker information 
barriers as necessary to protect against the misuse of material, non-
public information. The Exchange also suggests that the pre-approval 
requirement is unnecessary because Market Makers do not have agency 
responsibilities to orders in the book, or time and place information 
advantages because of their market role.
    The Exchange notes that its proposed principles-based approach to 
protecting against the misuse of material non-public information for 
all its Options Participants is consistent with recently filed and 
approved rule changes for NYSE MKT, NYSE Arca Equities, Inc. (``NYSE 
Arca''), BATS Exchange, Inc. (``BATS''), and New York Stock Exchange 
LLC (``NYSE'') governing cash equity market makers on those respective 
exchanges.\13\ Except for prescribed rules relating to floor-based 
designated market makers on the NYSE, who have access to specified non-
public trading information, each of these exchanges have moved to a 
principles-based approach to protecting against the misuse of material 
non-public information. In connection with approving those rule 
changes, the Commission found that, with adequate oversight by the 
exchanges of their members, eliminating prescriptive information 
barrier requirements should not reduce the effectiveness of exchange 
rules requiring members to establish and maintain systems to supervise 
the activities of members, including written procedures reasonably 
designed to ensure compliance with applicable federal securities law 
and regulations, and with the rules of the applicable exchange.
---------------------------------------------------------------------------

    \13\ See Securities Exchange Act Release No. 75432 (July 13, 
2015), 80 FR 42597 (July 17, 2015) (Order Approving Adopting a 
Principles-Based Approach to Prohibit the Misuse of Material 
Nonpublic Information by Specialists and e-Specialists by Deleting 
Rule 927.3NY and Section (f) of Rule 927.5NY). See also Securities 
Exchange Act Release Nos. 60604 (Sept. 2, 2009), 76 FR 46272 (Sept. 
8, 2009) (SR-NYSEArca-2009-78) (Order approving elimination of NYSE 
Arca rule that required market makers to establish and maintain 
specifically prescribed information barriers, including discussion 
of NYSE Arca and Nasdaq rules) (``Arca Approval Order''); 61574 
(Feb. 23, 2010), 75 FR 9455 (Mar. 2, 2010) (SR-BATS-2010-003) (Order 
approving amendments to BATS Rule 5.5 to move to a principles-based 
approach to protecting against the misuse of material, nonpublic 
information, and noting that the proposed change is consistent with 
the approaches of NYSE Arca and Nasdaq) (``BATS Approval Order''); 
72534 (July 3, 2014), 79 FR 39440 (July 10, 2014), SR-NYSE-2014-12) 
(Order approving amendments to NYSE Rule 98 governing designated 
market makers to move to a principles-based approach to prohibit the 
misuse of material non-public information) (``NYSE Approval 
Order''); and 76687 (December 18, 2015), 80 FR 80403 (December 24, 
2015) (SR-PHLX-2015-85).
---------------------------------------------------------------------------

    The Exchange believes that a principles based rule applicable to 
members of options markets would be equally effective in protecting 
against the misuse of material non-public information.\14\ Indeed, 
Chapter III, Section 4 is currently applicable to Market Makers and 
already requires policies and procedures reasonably designed to protect 
against the misuse of material nonpublic information, which is similar 
to the respective NYSE MKT, NYSE Arca Equities, BATS and NYSE rules 
governing cash equity market makers. The Exchange believes Chapter III, 
Section 4 provides appropriate protection against the misuse of 
material nonpublic information by Market Makers such that there is no 
further need for prescriptive information barrier requirements as set 
forth in the Market Maker Restrictions.
---------------------------------------------------------------------------

    \14\ International Securities Exchange, Inc. (``ISE'') and BOX 
Options Exchange LLC (``BOX'') have recently taken a similar 
approach. See Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change Adopting a Principles-Based Approach to 
Prohibit the Misuse of Material, Non-public Information by Market 
Makers by Deleting Rule 810, Securities Exchange Act Release No. 
75792 (August 31, 2015), 80 FR 53606 (September 4, 2015) (SR-ISE-
2015-26). See also Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change to Adopt a Principles-based Approach to 
Prohibit the Misuse of Material Nonpublic Information by Market 
Makers, Securities Exchange Act Release No. 75916 (September 14, 
2015), 80 FR 56503 (September 18, 2015) (SR-BOX-2015-31).
---------------------------------------------------------------------------

    The Exchange notes that even with this proposed rule change, 
pursuant to Chapter III, Section 4, a Market Maker would still be 
obligated to ensure that its policies and procedures reflect the 
current state of its business and continue to be reasonably designed to 
achieve compliance with applicable federal securities law and 
regulations, including without limitation, Regulation SHO \15\ under 
the Act and Section 15(g) of the Act ,\16\ and with applicable Exchange 
rules, including being reasonably designed to protect against the 
misuse of material, non-public information. While information barriers 
would not specifically be required under the proposal, Chapter III, 
Section 4 already requires that an Options Participant consider its 
business model or business activities in structuring its policies and 
procedures, which may dictate that an information barrier or a 
functional separation be part of the appropriate set of policies and 
procedures that would be reasonably designed to achieve compliance with 
applicable securities law and regulations, and with applicable Exchange 
rules.
---------------------------------------------------------------------------

    \15\ The Commission adopted a narrow exception to Regulation 
SHO's ``locate'' requirement only for market makers engaged in bona 
fide market making in the security at the time they effect the short 
sale. See 17 CFR 242.203(b)(2)(iii). See also Exchange Act Release 
No. 50103 (July 28, 2004), 69 FR 48008, 48015 (Aug. 6, 2004); 
Exchange Act Release No. 58775 (Oct. 14, 2008), 73 FR 61690, 61698-9 
(Oct. 17, 2008). Broker-dealers would not be able to rely on the 
Exchange's or any self-regulatory organization's designation of 
market marking for eligibility for the bona-fide market making 
exception to the ``locate'' requirement, as such designations are 
distinct and independent from Regulation SHO. Eligibility for the 
bona-fide market making exception depends on the facts and 
circumstances and a determination of bona-fide market making is 
based on the Commission's factors outlined in the aforementioned 
Regulation SHO releases. It should also be noted that a 
determination of bona-fide market making is relevant for the 
purposes of close-out obligations under Rule 204 of Regulation SHO. 
See 17 CFR 242.204(a)(3).
    \16\ 15 U.S.C. 78o(g).
---------------------------------------------------------------------------

    The Exchange believes that the proposed reliance on principles-
based Chapter III, Section 4 would ensure that a Market Maker would be 
required to protect against the misuse of any material non-public 
information. Chapter III, Section 4 already requires that firms refrain 
from trading while in possession of material non-public information 
concerning imminent transactions in the security or related product. 
The Exchange believes that moving to a principles-based approach rather 
than prescribing how and when to wall off a Market Maker from the rest 
of the firm would provide Market Makers with flexibility when managing 
risk across a firm, including integrating options positions with other 
positions of the firm or, as applicable, by the respective independent 
trading unit.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \17\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \18\ 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. The Exchange believes that the proposed rule change would 
remove impediments

[[Page 18910]]

to and perfect the mechanism of a free and open market by adopting a 
principles based approach to permit a member or member organization to 
maintain and enforce policies and procedures to, among other things, 
prohibit the misuse of material non-public information and provide 
flexibility on how a Market Maker structures its operations.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange notes that the proposed rule change is based on an 
approved rule of the Exchange to which members and member organizations 
are subject--Section 4, Prevention of the Misuse of Material Nonpublic 
Information, of Chapter III, Business Conduct--and harmonizes the rules 
governing Options Participants. Moreover, Market Makers would continue 
to be subject to federal and Exchange requirements for protecting 
material non-public order information.\19\ The Exchange believes that 
the proposed rule change would remove impediments to and perfect the 
mechanism of a free and open market because it would harmonize the 
Exchange's approach to protecting against the misuse of material 
nonpublic information and no longer subject Market Makers to 
prescriptive requirements. The Exchange does not believe that the 
existing prescriptive requirements applicable to Market Makers are 
narrowly tailored to their roles because Market Makers do not have 
access to Exchange trading information in a manner different from any 
other market participant on the Exchange.
---------------------------------------------------------------------------

    \19\ See 15 U.S.C. 78o(g) and Chapter III, Section 4 of the 
Exchange's rulebook.
---------------------------------------------------------------------------

    The Exchange further believes the proposal is designed to prevent 
fraudulent and manipulative acts and practices and to promote just and 
equitable principles of trade because existing rules make clear to 
members and member organizations the type of conduct that is prohibited 
by the Exchange. While the proposal eliminates prescriptive 
requirements relating to the misuse of material non-public information, 
Market Makers would remain subject to existing Exchange rules requiring 
them to establish and maintain systems to supervise their activities, 
and to create, implement, and maintain written procedures that are 
reasonably designed to comply with applicable securities laws and 
Exchange rules, including the prohibition on the misuse of material, 
nonpublic information. Additionally, the policies and procedures of 
Market Makers, including those relating to information barriers, would 
be subject to review by FINRA, on behalf of the Exchange.
    The Exchange notes that the proposed rule change would still 
require that Market Makers maintain and enforce policies and procedures 
reasonably designed to ensure compliance with applicable federal 
securities laws and regulations and with Exchange rules. Even though 
there would no longer be pre-approval of Market Maker information 
barriers, any Market Maker written policies and procedures would 
continue to be subject to oversight by the Exchange and therefore the 
elimination of prescribed restrictions should not reduce the 
effectiveness of the Exchange rules to protect against the misuse of 
material non-public information. Rather, Options Participants will be 
able to utilize a flexible, principles-based approach to modify their 
policies and procedures as appropriate to reflect changes to their 
business model, business activities, or to the securities market 
itself. Moreover, while specified information barriers may no longer be 
required, an Options Participant's business model or business 
activities may dictate that an information barrier or functional 
separation be part of the appropriate set of policies and procedures 
that would be reasonably designed to achieve compliance with applicable 
securities laws and regulations, and with applicable Exchange rules. 
The Exchange therefore believes that the proposed rule change will 
maintain the existing protection of investors and the public interest 
that is currently applicable to Market Makers, while at the same time 
removing impediments to and perfecting a free and open market by moving 
to a principles-based approach to protect against the misuse of 
material non-public information.

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. As indicated above, the rule 
change is being proposed as a competitive response to a filing 
submitted by NYSE MKT that was recently approved by the Commission. The 
Exchange believes that the proposal will enhance competition by 
allowing Market Makers to comply with applicable Exchange rules in a 
manner best suited to their business models, business activities, and 
the securities markets, thus reducing regulatory burdens while still 
ensuring compliance with applicable securities laws and regulations and 
Exchange rules. The Exchange believes that the proposal will foster a 
fair and orderly marketplace without being overly burdensome upon 
Market Makers.
    Moreover, the Exchange believes that the proposed rule change would 
eliminate a burden on competition for Options Participants which 
currently exists as a result of disparate rule treatment between 
options and equities markets regarding how to protect against the 
misuse of material non-public information. For those members and member 
organizations that are also members of equity exchanges, their 
respective equity market maker operations are now subject to a 
principles-based approach to protecting against the misuse of material 
non-public information. The Exchange believes it would remove a burden 
on competition to enable members and member organizations to similarly 
apply a principles-based approach to protecting against the misuse of 
material nonpublic information in the options space as ISE has recently 
done. To this end, the Exchange notes that Chapter III, Section 4 still 
requires a Market Maker to evaluate its business to assure that its 
policies and procedures are reasonably designed to protect against the 
misuse of material nonpublic information. However, with this proposed 
rule change, an Options Participant that trades equities and options 
could look at its firm more holistically to structure its operations in 
a manner that provides it with better tools to manage its risks across 
multiple security classes, while at the same time protecting against 
the misuse of material non-public information.

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 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, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6) 
thereunder.\20\
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    \20\ In addition, Rule 19b-4(f)(6)(iii) requires the Exchange to 
give the Commission written notice of the Exchange's 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, or such shorter time as 
designated by the Commission. The Exchange has satisfied this 
requirement.

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[[Page 18911]]

    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act normally does not become operative for 30 days after the date of 
its filing. However, Rule 19b-4(f)(6)(iii) permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing. Waiver of the 30-day 
operative delay would help facilitate the harmonization of information 
barrier rules across options exchanges. The Exchange represents that 
Exchange rules still require a Market Maker to evaluate its business to 
assure that its policies and procedures are reasonably designed to 
protect against the misuse of material nonpublic information. Further, 
the Exchange represents that the proposed rule change will not decrease 
the protections against the misuse of material, non-public information; 
instead, it is designed to provide more flexibility to market 
participants. Based on the foregoing, the Commission believes the 
waiver of the operative delay is consistent with the protection of 
investors and the public interest.\21\ The Commission hereby grants the 
waiver and designates the proposal operative upon filing.
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    \21\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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 is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-BX-2016-018 on the subject line.

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-BX-2016-018. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml).
    Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE., Washington, 
DC 20549, on official business days between the hours of 10:00 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-BX-2016-018 and 
should be submitted on or before April 22, 2016.
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    \22\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-07336 Filed 3-31-16; 8:45 am]
 BILLING CODE 8011-01-P
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