Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Delete From the Rulebook Section 10, Limitations on Dealings, of Chapter VII, Market Participants, 18902-18907 [2016-07337]
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investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
under section 19(b)(2)(B) 19 of the Act to
determine whether the proposed rule
change 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:
asabaliauskas on DSK3SPTVN1PROD with NOTICES
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–
NYSEARCA–2016–48 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–NYSEARCA–2016–48. 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
19 15
U.S.C. 78s(b)(2)(B).
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available publicly. All submissions
should refer to File Number SR–
NYSEARCA–2016–48 and should be
submitted on or before April 22, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–07332 Filed 3–31–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–77460; File No. SR–
NASDAQ–2016–040]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Delete From
the 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 22,
2016, The NASDAQ Stock Market LLC
(‘‘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 ‘‘noncontroversial’’ 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.
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://nasdaq.cchwallstreet.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
20 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
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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 NOM 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
5 The term ‘‘Options Participant’’ or ‘‘Participant’’
means a firm or organization that is registered with
the Exchange pursuant to Chapter II of the NOM
Rules for purposes of participating in options
trading on NOM as a ‘‘Nasdaq Options Order Entry
Firm’’ or ‘‘Nasdaq Options Market Maker’’.
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MKT LLC (‘‘NYSE MKT’’) and approved
by the Commission.6
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 NOM 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.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Proposed Rule Change
The Exchange believes that the
Market Maker Restrictions are no longer
necessary and proposes to delete them.
The Exchange also 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
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).
7 See Chapter I, General Provisions, Section 1,
Definitions, subsection (a)(26).
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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
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 Nasdaq
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
NOM for price improvement (e.g., price
improving orders), 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
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.
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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 NOM Option Participants
when the order is entered into the NOM
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 NOM rules 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 NOM’s System in all
options in which the Market Maker is registered to
trade (vi) update quotations in response to changed
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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
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, and (viii) honor all orders that
the Trading System routes to away markets
pursuant to Chapter XII of the NOM rules. Section
5 further provides that Market Makers should not
effect purchases or sales on NOM except in a
reasonable and orderly manner. If Nasdaq
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.
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by improperly capitalizing on the
Options Participant’s access to or
receipt of material, non-public
information.12
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
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–NASDAQ–
2016–038 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’’); and 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).
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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.
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
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).
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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.
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.
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2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 17 in general, and furthers the
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).
17 15 U.S.C. 78f(b).
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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
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
18 15
U.S.C. 78f(b)(5).
15 U.S.C. 78o(g) and Chapter III, Section 4
of the Exchange’s rulebook.
19 See
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18905
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 nonpublic 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
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Federal Register / Vol. 81, No. 63 / Friday, April 1, 2016 / Notices
asabaliauskas on DSK3SPTVN1PROD with NOTICES
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 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
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17:25 Mar 31, 2016
Jkt 238001
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
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
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.
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).
PO 00000
Frm 00084
Fmt 4703
Sfmt 4703
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–
NASDAQ–2016–040 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–NASDAQ–2016–040. 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–NASDAQ–2016–040 and
should be submitted on or before April
22, 2016.
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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
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]]>Agencies
[Federal Register Volume 81, Number 63 (Friday, April 1, 2016)]
[Notices]
[Pages 18902-18907]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-07337]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77460; File No. SR-NASDAQ-2016-040]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Delete From the 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 22, 2016, The NASDAQ Stock Market LLC (``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://nasdaq.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 NOM 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.
---------------------------------------------------------------------------
\5\ The term ``Options Participant'' or ``Participant'' means a
firm or organization that is registered with the Exchange pursuant
to Chapter II of the NOM Rules for purposes of participating in
options trading on NOM as a ``Nasdaq Options Order Entry Firm'' or
``Nasdaq Options Market Maker''.
---------------------------------------------------------------------------
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
[[Page 18903]]
MKT LLC (``NYSE MKT'') and approved by the Commission.\6\
---------------------------------------------------------------------------
\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 NOM 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)(26).
---------------------------------------------------------------------------
Proposed Rule Change
The Exchange believes that the Market Maker Restrictions are no
longer necessary and proposes to delete them. The Exchange also
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 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 Nasdaq 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 NOM for price improvement (e.g., price improving orders),
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 NOM Option Participants when the order is entered into
the NOM 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\
[[Page 18904]]
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
NOM rules 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 NOM's 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, and (viii) honor all orders that the Trading System
routes to away markets pursuant to Chapter XII of the NOM rules.
Section 5 further provides that Market Makers should not effect
purchases or sales on NOM except in a reasonable and orderly manner.
If Nasdaq 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.
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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\
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\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-NASDAQ-2016-038
filed March 14, 2016.
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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\
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\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'');
and 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).
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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.
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.
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\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).
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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
[[Page 18905]]
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.
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\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).
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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 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.
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\17\ 15 U.S.C. 78f(b).
\18\ 15 U.S.C. 78f(b)(5).
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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\
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\19\ See 15 U.S.C. 78o(g) and Chapter III, Section 4 of the
Exchange's rulebook.
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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 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
[[Page 18906]]
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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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-NASDAQ-2016-040 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-NASDAQ-2016-040. 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-NASDAQ-2016-040 and
should be submitted on or before April 22, 2016.
[[Page 18907]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-07337 Filed 3-31-16; 8:45 am]
BILLING CODE 8011-01-P
