Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change Removing From Its Rules Certain Internal Procedures Regarding the Use of Fine Income, 34393-34398 [2016-12673]

Download as PDF Federal Register / Vol. 81, No. 104 / Tuesday, May 31, 2016 / Notices surveillance procedures relating to trading in the Shares and may obtain information via ISG from other exchanges that are members of ISG or with which the Exchange has entered into a comprehensive surveillance sharing agreement. In addition, as noted above, investors have ready access to information regarding each Fund’s holdings, the Portfolio Indicative Value, the Disclosed Portfolio, and quotation and last sale information for the Shares. 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 that is not necessary or appropriate in furtherance of the purpose of the Act. The Exchange believes the proposed rule change is designed to allow the Funds to invest in a broader range of debt securities thereby helping the Funds to achieve their respective investment objective. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments sradovich on DSK3TPTVN1PROD 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: 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–2016–70. 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– NYSEArca–2016–70, and should be submitted on or before June 21, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.18 Robert W. Errett, Deputy Secretary. [FR Doc. 2016–12668 Filed 5–27–16; 8:45 am] BILLING CODE 8011–01–P 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–2016–70 on the subject line. VerDate Sep<11>2014 20:07 May 27, 2016 Jkt 238001 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–77899; File No. SR–NYSE– 2016–37] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change Removing From Its Rules Certain Internal Procedures Regarding the Use of Fine Income May 24, 2016. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Act’’ or ‘‘Exchange Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that, on May 13, 2016, New York Stock Exchange LLC (‘‘NYSE’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of the Substance of the Proposed Rule Change The Exchange proposes to remove from its rules certain internal procedures regarding the use of fine income. The proposed rule change is available on the Exchange’s Web site at www.nyse.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 self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. 1 15 U.S.C. 78s(b)(1). U.S.C. 78a. 3 17 CFR 240.19b–4. 2 15 18 17 PO 00000 CFR 200.30–3(a)(12). Frm 00085 Fmt 4703 Sfmt 4703 34393 E:\FR\FM\31MYN1.SGM 31MYN1 34394 Federal Register / Vol. 81, No. 104 / Tuesday, May 31, 2016 / Notices A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to remove from its rules certain internal procedures regarding the use of fine income, which were approved in 2007 (the ‘‘Fine Income Procedures’’) in order to align the Exchange’s use of fine income with other self-regulatory organizations (‘‘SROs’’). The Exchange believes that the Fine Income Limitations [sic] are no longer necessary and are duplicative of the limitations on the use of regulatory assets and income, including fine income, set forth in Article IV, Section 4.05 of the operating agreement of the Exchange (‘‘Section 4.05’’). Section 4.05 prohibits the Exchange from using any regulatory assets or any regulatory fees, fines or penalties collected by the Exchange’s regulatory staff for commercial purposes or distributing such assets, fees, fines or penalties to NYSE Group, Inc. (‘‘NYSE Group’’), the Exchange’s member, or any other entity.4 For the reasons discussed below, the Exchange believes that together Section 4.05 and the provisions governing the Regulatory Oversight Committee (‘‘ROC’’) of the Exchange’s Board of Directors adequately address the concerns underlying the Fine Income Procedures and provide sufficient protections to ensure the proper use of fine income by the Exchange. Background sradovich on DSK3TPTVN1PROD with NOTICES The Fine Income Procedures In 2006, New York Stock Exchange, Inc. merged with Archipelago Holdings, Inc. (the ‘‘Archipelago Merger’’).5 Prior to approval of rule changes related to the Archipelago Merger, in conversation with the staff of the Securities and Exchange Commission (‘‘Commission’’), the Exchange undertook to subsequently file a proposed rule change regarding the use of fines collected from member 4 See Ninth Amended and Restated Operating Agreement of New York Stock Exchange LLC, Art. IV, Sec. 4.05; see also Securities Exchange Act Release No. 75991 (September 28, 2015), 80 FR 59837 (October 2, 2015) (SR–NYSE–2015–27) (‘‘NYSE Approval Order’’), at 59839. 5 See id. The Archipelago Merger had the effect of ‘‘demutualizing’’ New York Stock Exchange, Inc. by separating equity ownership from trading privileges, and converting it to a for-profit entity. See Securities Exchange Act Release No. 53382, 71 FR 11251, 11254 (February 27, 2006) [sic] (SR– NYSE–2005–77) (‘‘Merger Approval Order’’). In the resulting re-organization, the Exchange became a wholly-owned subsidiary of NYSE Group, and succeeded to New York Stock Exchange, Inc.’s registration as a national securities exchange under the Exchange Act. See id. at 11255. VerDate Sep<11>2014 20:07 May 27, 2016 Jkt 238001 organizations following disciplinary action against such member organizations.6 On January 31, 2007, the Commission approved the proposed rule change establishing the Fine Income Procedures.7 The Exchange’s Fine Income Procedures referred to actions to be taken by the Exchange’s subsidiary, NYSE Regulation, Inc. (‘‘NYSE Regulation’’), and NYSE Regulation’s board of directors (the ‘‘NYSE Regulation Board’’), because at the time performance of certain of the Exchange’s regulatory functions was delegated to NYSE Regulation. Such delegation was made in 2006 pursuant to a Delegation Agreement (the ‘‘Delegation Agreement’’) between the Exchange, NYSE Regulation, and NYSE Market (DE), Inc. (‘‘NYSE Market (DE)’’).8 As approved, the Fine Income Procedures provided that: 9 • Fines would play no role in the annual NYSE Regulation budget process. Beginning with the preparation of the 2007 operating budget, fines would be budgeted at zero, that is, budgeted expenses of NYSE Regulation would be offset entirely by budgeted income that did not include any anticipated income from fines. Among other things, this meant that fines would not offset amounts budgeted for compensation of NYSE Regulation employees or directors. During the course of a year, income from fines would be considered as available to fund non-compensation expenses of NYSE Regulation, which expenses were not anticipated in the budget process or which could not be included in the budget prepared in advance of the fiscal year because NYSE Regulation was unable to budget sufficient income from sources other than fines to offset the expenses. • The use of fine income by NYSE Regulation would be subject to specific 6 See id. at 11270, note 231. Subject to the requirement to file fees with the Commission, the Exchange determines, assesses, collects and retains certain registration and regulatory fees set forth in its Price List. 7 See Securities Exchange Act Release No. 55216 (January 31, 2007), 72 FR 5779 (February 7, 2007) (NYSE–2006–109) (‘‘Order Approving the Fine Income Procedures’’). 8 See NYSE Approval Order, supra note 4, at 59839. The Exchange’s market functions were delegated to NYSE Market (DE). Although the Delegation Agreement set forth the terms under which the Exchange delegated its functions to NYSE Regulation and NYSE Market (DE), the Exchange retained ultimate responsibility for the operations, rules and regulations developed by NYSE Regulation and NYSE Market (DE) and for their enforcement. 9 See Securities Exchange Act Release No. 55003 (December 22, 2006), 71 FR 78497, 78498 (December 29, 2006) (NYSE–2006–109) (the ‘‘Proposing Release’’). PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 review and approval by the NYSE Regulation board of directors. On a quarterly basis, the staff of NYSE Regulation would provide to the NYSE Regulation Board a report on the amount of fine income received to date during the year and recommendations regarding its proposed use to fund regulatory expenses as above described. The use of the fine income would be subject to NYSE Regulation Board approval. Following each year, the staff of NYSE Regulation would provide the NYSE Regulation Board a report reprising the fines imposed and the utilization of fine income by NYSE Regulation during that year. This report would analyze fines imposed by NYSE Regulation for consistency with precedent from both other NYSE disciplinary cases as well as publicly available disciplinary cases adjudicated by the National Association of Securities Dealers, Inc. and the Commission. Each year the NYSE Regulation Board would also consider whether unused fine income had accumulated beyond a level reasonably necessary for future contingencies, and could determine to utilize any such excess to fund one or more special projects of NYSE Regulation, to reduce fees charged by NYSE Regulation to its member organizations or the markets that it serves, or for a charitable purpose. Amendment of the Fine Income Procedures Effective February 16, 2016, the Delegation Agreement terminated and NYSE Regulation ceased performing regulatory functions on behalf of the Exchange, which has re-integrated its regulatory functions. The ROC of the Exchange’s Board of Directors now provides independent oversight of the regulatory function of the Exchange.10 In its filing proposing the creation of the ROC and termination of the Delegation Agreement, the Exchange addressed the Fine Income Procedures. Specifically, it ‘‘reiterate[ed] [sic] the previous commitments that fines would play no role in the annual regulatory operating budget process and that the use of fine income by Exchange regulatory staff would be subject to review and approval by the proposed ROC.’’ 11 Accordingly, the ROC has 10 See NYSE Approval Order, supra note 4, at 59838. Similarly, following termination of the Delegation Agreement, NYSE Market (DE)’s delegated market responsibilities are performed by the Exchange. 11 See Securities Exchange Act Release No. 75288 (June 24, 2015), 80 FR 37316 (June 30, 2015) (SR– NYSE–2015–27), note 25. E:\FR\FM\31MYN1.SGM 31MYN1 Federal Register / Vol. 81, No. 104 / Tuesday, May 31, 2016 / Notices sradovich on DSK3TPTVN1PROD with NOTICES assumed the responsibilities previously held by the NYSE Regulation Board. Proposed Amendment The Exchange proposes to delete the Fine Income Procedures from the Exchange rules. The Exchange would remain subject to Section 4.05, which prohibits it from using any regulatory assets or any regulatory fees, fines or penalties collected by the Exchange’s regulatory staff for commercial purposes or distributing such assets, fees, fines or penalties to the Exchange’s member or any other entity.12 In its Order Approving the Fine Income Procedures, the Commission stated that the Fine Income Procedures were ‘‘to assure the proper exercise by NYSE Regulation of its power to fine member organizations of the Exchange and the proper use by NYSE Regulation of the funds so collected.’’ 13 The Exchange believes that Section 4.05 and the operating agreement provisions governing the ROC adequately address these concerns. First, the Exchange believes that limitations on the use of fines is not the most effective way to assure proper exercise by Exchange regulatory staff of the Exchange’s power to fine member organizations. Simply put, usage limitations on fine income do not provide oversight of regulatory performance. They just monitor how the resulting income is spent. The Exchange believes that the responsibility to assure proper exercise by Exchange regulatory staff of the Exchange’s power to fine member organizations more properly lies with the ROC, which is responsible to oversee the Exchange’s regulatory and self-regulatory organization responsibilities and assess the Company’s regulatory performance.14 In addition, the disciplinary process itself contains a powerful check on the improper exercise by Exchange regulatory staff of the power to fine members and member organizations, specifically the appellate process, whereby adverse hearing panel determinations can be appealed to the Committee for Review, a committee of the Board of Directors of the Exchange that includes independent directors and individuals associated with member organizations of the Exchange, which recommends a disposition to the Board of Directors of the Exchange. Final 12 All fine monies previously collected would remain subject to the restrictions in Section 4.05. 13 Order Approving the Fine Income Procedures, supra note 7, at 5779. 14 See Ninth Amended and Restated Operating Agreement of New York Stock Exchange LLC, Art. II, Sec. 2.03(h)(ii). The ROC is made up entirely of independent directors of the Exchange. VerDate Sep<11>2014 20:07 May 27, 2016 Jkt 238001 actions of the Exchange can be appealed to the Commission, and Commission determinations can be challenged in federal court. Second, the Exchange believes that, by setting clear limitations on its use, Section 4.05 is sufficient to ensure the proper use by the Exchange of fine income. Section 4.05 addresses this concern by prohibiting the use of fines for commercial purposes or distributions. Indeed, because Section 4.05 encompasses all regulatory assets and income, not just fines, it ensures the proper use by the Exchange of a broader range of regulatory funds, by prohibiting their use for commercial purposes or distributions. The Commission stated in its Order Approving the Fine Income Procedures that it believed the Fine Income Procedures would ‘‘guard against the possibility that fines may be assessed to respond to budgetary needs rather than to serve a disciplinary purpose.’’ 15 Section 4.05 also guards against this possibility by limiting the use of fines. However, unlike the Fine Income Procedures, Section 4.05 also guards against the possibility that other regulatory income, such as examination, access, registration, qualification, arbitration, dispute resolution and other regulatory fees, or regulatory assets, could be used or assessed to respond to budgetary needs, by making them unavailable for commercial purposes or distributions. At the same time, the ROC is specifically charged with reviewing the regulatory budget of the Exchange and inquiring into the adequacy of resources available in the budget for regulatory activities.16 Accordingly, the Exchange believes that removing the Fine Income Procedures and relying on Section 4.05 and the provisions governing the ROC would provide adequate protections against the use of regulatory assets, or assessment of regulatory income, to respond to budgetary needs. The Exchange believes that the circumstances that led to the Fine Income Procedures no longer exist. At the time the Fine Income Procedures were adopted, a predecessor to Section 4.05 was in effect (the ‘‘Predecessor Section’’). Indeed, the Commission cited that fact when approving the Archipelago Merger: The Commission further notes that the NYSE has taken steps to safeguard the use of regulatory monies. Specifically, New York Stock Exchange LLC will not be permitted to use any assets of, or any regulatory fees, 15 Order Approving the Fine Income Procedures, supra note 7, at 5780. 16 See note 14, supra. PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 34395 fines, or penalties collected by, NYSE Regulation for commercial purposes or distribute such assets, fees, fines, or penalties to NYSE Group or any entity other than NYSE Regulation.17 At the time, NYSE Regulation performed regulatory functions on behalf of the Exchange. On its face, the Predecessor Section, found in the Exchange’s 2006 operating agreement, only limited the Exchange itself. NYSE Regulation had the obligation under the Delegation Agreement to assure compliance with the rules of the Exchange, but the Fine Income Procedures provided a more direct commitment by NYSE Regulation to ensure the proper exercise of NYSE Regulation’s power to fine member organizations and the proper use by NYSE Regulation of fines collected. Today, because the Delegation Agreement is no longer in effect, the same entity that fines member organizations is directly subject to the limits of Section 4.05. Accordingly, the Exchange believes that removing the Fine Income Procedures and relying on Section 4.05 and the provisions governing the ROC would provide adequate protections against the concerns cited by the Commission in the Order Approving the Fine Income Procedures. Indeed, as pointed out above, Section 4.05 is wider in scope than the Fine Income Procedures, and so limits the Exchange’s use of all regulatory assets and income, not just fine income. The proposed change would have the benefit of bringing the Exchange’s restrictions on the use of regulatory assets and income into greater conformity with those of its affiliates NYSE MKT LLC and NYSE Arca, Inc. NYSE MKT LLC has substantially the same provision as Section 4.05 its operating agreement.18 The bylaws of NYSE Arca, Inc. also preclude the use of regulatory fees and penalties for commercial operations or dividends, limiting their use to funding legal, regulatory and surveillance operations.19 In addition, removing the Fine Income Procedures from its rules would 17 See Merger Approval Order, supra note 5, at 11263. 18 See Eighth Amended and Restated Operating Agreement of NYSE MKT LLC, Art. IV, Sec. 4.05 (‘‘The Company shall not use any regulatory assets or any regulatory fees, fines or penalties collected by Exchange regulatory staff for commercial purposes or distribute such assets, fees, fines or penalties to the Member or any other entity.’’). 19 See Bylaws of NYSE Arca, Inc., Art. II, Sec. 2.06 (‘‘Any revenues received by the Exchange from regulatory fees or regulatory penalties will be applied to fund the legal, regulatory and surveillance operations of the Exchange and will not be used to pay dividends. For purposes of this Section, regulatory penalties shall include restitution and disgorgement of funds intended for customers.’’). E:\FR\FM\31MYN1.SGM 31MYN1 34396 Federal Register / Vol. 81, No. 104 / Tuesday, May 31, 2016 / Notices sradovich on DSK3TPTVN1PROD with NOTICES make the Exchange’s rules more consistent with the limitations on the use of regulatory assets and income of other SROs. Indeed, no other SRO limits the use of fine income to extrabudgetary use or subjects the use of fine income to specific review and approval by a regulatory oversight committee or any other body. Rather, other SROs’ limitations on the use of regulatory funds are generally similar to Section 4.05, in that they provide that regulatory funds shall be used to fund the relevant SRO’s legal, regulatory and (in some cases) surveillance operations, and shall not be used to make a distribution to the SRO’s member or stockholder, as the case may be. For example, the limited liability company agreement of the BOX Options Exchange (‘‘BOX’’) provides that regulatory funds shall be used to the [sic] fund legal, regulatory and surveillance operations of BOX, and BOX shall not make any distribution to members using regulatory funds. BOX defines ‘‘regulatory funds’’ to include fees, fines or penalties derived from its regulatory operations.20 Similarly, the limited liability company agreements of International Securities Exchange, LLC, and its affiliates ISE Gemini, LLC and ISE Mercury, LLC provide that regulatory funds shall not be used for non-regulatory purposes, but rather shall be used to fund legal, regulatory and surveillance operations, and the SRO shall not make any distribution to its member using regulatory funds.21 Section 4.05 is more restrictive than the provisions of some other SROs, whose rules allow the use of regulatory funds for restitution and disgorgement of funds intended for customers. For example, the governing documents of affiliates BATS BZX Exchange, Inc., BATS BYX Exchange, Inc., BATS EDGX 20 See Box Options Exchange Limited Liability Company Agreement, Art. 1, Sec. 1.1 and Art. 8, Sec. 8.1. The definition also states that ‘‘Regulatory Funds shall not include revenues derived from listing 6 A/72816686.20 [sic] fees, market data revenues, transaction revenues or any other aspect of the commercial operations of the Exchange or a facility of the Exchange, even if a portion of such revenues are used to pay costs associated with the regulatory operations of the Exchange.’’ Id. 21 Such agreements define ‘‘Regulatory Funds’’ to mean ‘‘fees, fines or penalties derived from the regulatory operations of the Company, provided that Regulatory Funds shall not include revenues derived from listing fees, market data revenues, transaction revenues or any other aspect of the commercial operations of the Company or a facility of the Company, even if a portion of such revenues are used to pay costs associated with the regulatory operations of the Company.’’ See Third Amended and Restated Limited Liability Company Agreement of International Securities Exchange, LLC, Art. III, Sec. 3.3(ii); Second Amended and Restated Limited Liability Company Agreement of ISE Gemini, LLC, Art. III, Sec. 3.3(ii); and Limited Liability Company Agreement of ISE Mercury, LLC, Art. III, Sec. 3.3(ii). VerDate Sep<11>2014 20:07 May 27, 2016 Jkt 238001 Exchange, Inc., and EDGA Exchange, Inc. provide that revenues received from fees derived from the regulatory function or regulatory penalties may be used to pay restitution and disgorgement of funds intended for customers, as well as to fund legal and regulatory operations, including surveillance and enforcement activities. Such funds may not be used for nonregulatory purposes or distributed to the stockholder.22 The limited liability company agreement of Miami International Securities Exchange, LLC, and bylaws of National Stock Exchange, Inc., have similar provisions.23 The limitations imposed on the NASDAQ Stock Market LLC (‘‘Nasdaq’’) in its operating agreement are also less restrictive than the limitations imposed on the Exchange by Section 4.05. They simply limit Nasdaq from making a distribution to its member using regulatory funds. ‘‘Regulatory funds’’ is defined to mean fees, fines, or penalties derived from the regulatory operations of Nasdaq.24 When the NASDAQ OMX Group, Inc. acquired the Boston Stock Exchange (‘‘BSE’’), the BSE by-laws were amended to include a similar provision that dividends could not be paid to the stockholders using regulatory funds, also defined as fees, 22 See Fourth Amended and Restated Bylaws of BATS BZX Exchange, Inc., Art. X, Sec. 4; Fourth Amended and Restated Bylaws of BATS BYX Exchange, Inc., Art. X, Sec. 4; Fifth Amended and Restated Bylaws of BATS EDGX Exchange, Inc., Art. X, Sec. 4; and Fifth Amended and Restated Bylaws of BATS EDGA Exchange, Inc., Art. X, Sec. 4. 23 See Second Amended and Restated Limited Liability Company Agreement of Miami International Securities Exchange, LLC, Art. IX, Sec. 9.4 (‘‘Any Regulatory Funds will not be used for non-regulatory purposes or distributed to the LLC Member, but rather, shall be applied to fund the legal and regulatory operations of the Company (including surveillance and enforcement activities), or, as the case may be, shall be used to pay restitution and disgorgement of funds intended for customers.’’); Amended and Restated By-laws of National Stock Exchange, Inc., [sic] Art. X, Sec. 10.4 (‘‘Any revenues received by the Exchange from fees derived from its regulatory function or regulatory penalties will not be used to pay dividends and shall be applied to fund the legal and regulatory operations of the Exchange (including surveillance and enforcement activities), or, as the case may be, shall be used to pay restitution and disgorgement of funds intended for customers.’’); see also Amended and Restated By-Laws of Miami International Securities Exchange, LLC, Art. IX, Sec. 9.4. 24 See Second Amended Limited Liability Company Agreement of The NASDAQ Stock Market LLC, Sec. 15. The definition of Regulatory Funds also states that ‘‘‘Regulatory Funds’ shall not be construed to include revenues derived from listing fees, market data revenues, transaction revenues, or any other aspect of the commercial operations of the Company, even if a portion of such revenues are used to pay costs associated with the regulatory operations of the Company.’’ Id, Sch. A. See also by-laws of NASDAQ BX, Inc., Art. IX, Sec. 9.8, and Second Amended Limited Liability Company Agreement of NASDAQ PHLX LLC, Sec. 14. PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 fines, or penalties derived from regulatory operations.25 The Commission described the provision as ‘‘intended to preclude BSE from using its authority to raise regulatory funds for the purpose of benefiting its shareholders, or for other non-regulatory purposes, such as executive compensation.’’ 26 The Exchange believes that Section 4.05, which is more expansive in its scope, meets the same goal. 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Exchange Act 27 in general, and Section 6(b)(1) 28 in particular, in that it enables the Exchange to be so organized as to have the capacity to be able to carry out the purposes of the Exchange Act and to comply, and to enforce compliance by its exchange members and persons associated with its exchange members, with the provisions of the Exchange Act, the rules and regulations thereunder, and the rules of the Exchange. Deletion of the Fine Income Procedures would not diminish the Exchange’s ability to adequately ensure the proper exercise of the Exchange’s power to fine member organizations and the proper use by the Exchange of the funds collected through the disciplinary process. The Exchange believes that Section 4.05 and the operating agreement provisions governing the ROC adequately address the concerns underlying adoption of the Fine Income Procedures, rendering the Fine Income Procedures superfluous. First, the Fine Income Procedures cannot assure the proper exercise by Exchange regulatory staff of the Exchange’s power to fine member organizations of the Exchange, as usage limitations on fine income do not provide oversight of regulatory performance. The responsibility more properly lies with the ROC, which is responsible for overseeing the Exchange’s regulatory and selfregulatory organization responsibilities and assessing its regulatory performance, including reviewing the regulatory budget and inquiring into the adequacy of resources available in the budget for regulatory activities.29 In 25 See Securities Exchange Act Release No. 58324 (August 7, 2008), 73 FR 46936 (August 12, 2008) (SR–BSE– 2008–02; SR–BSE–2008–23; SR–BSE– 2008– 25; SR–BSECC–2008–01), at 46942. 26 See Securities Exchange Act Release No. 58324 (August 7, 2008), 73 FR 46936 (August 12, 2008) (SR–BSE– 2008–02; SR–BSE–2008–23; SR–BSE– 2008– 25; SR–BSECC–2008–01), at 46942. 27 15 U.S.C. 78f(b). 28 15 U.S.C. 78f(b)(1). 29 See note 14, supra. E:\FR\FM\31MYN1.SGM 31MYN1 sradovich on DSK3TPTVN1PROD with NOTICES Federal Register / Vol. 81, No. 104 / Tuesday, May 31, 2016 / Notices addition, the disciplinary process itself contains a powerful check on the improper exercise by Exchange regulatory staff of the power to fine members and member organizations, specifically, the appellate process, whereby adverse hearing panel determinations can be appealed to the Committee for Review, which recommends a disposition to the Board of Directors of the Exchange. Final actions of the Exchange can be appealed to the Commission, and Commission determinations can be challenged in federal court. Second, by setting clear imitations [sic] on its use, Section 4.05 is not only sufficient to ensure the proper use by the Exchange of fine income but also, because it encompasses all regulatory assets and income, ensures the proper use by the Exchange of a broader range of regulatory funds, by prohibiting their use for commercial purposes or distributions. Finally, the Exchange believes that Section 4.05 and the operating agreement provisions governing the ROC would provide adequate protections against the assessment of regulatory income, or the use of regulatory assets, to respond to budgetary needs. By limiting their use, Section 4.05 guards against the possibility that fines may be assessed to respond to budgetary needs rather than to serve a disciplinary purpose. However, unlike the Fine Income Procedures, Section 4.05 also guards against the possibility that other regulatory income, such as examination, access, registration, qualification, arbitration, dispute resolution and other regulatory fees, or regulatory assets, could be used or assessed to respond to budgetary needs, by making them unavailable for commercial purposes or distributions. For the same reasons, the Exchange believes that the proposed deletion of the Fine Income Procedures is consistent with Section 6(b)(4),30 which requires that the rules of the exchange provide for the equitable allocation of reasonable dues, fees, and other charges among the exchange’s members and issuers and other persons using its facilities, and Section 6(b)(5),31 which requires that the rules of the exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to 30 15 31 15 U.S.C. 78f(b)(4). U.S.C. 78f(b)(5). VerDate Sep<11>2014 20:07 May 27, 2016 Jkt 238001 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. As noted, the Exchange believes that the responsibility to assure the proper exercise by Exchange regulatory staff of the Exchange’s power to fine member organizations more properly lies with the ROC, and that, by setting clear imitations [sic] on its use, Section 4.05 is not only sufficient to ensure the proper use by the Exchange of fine income but also, because it encompasses all regulatory assets and income, ensures the proper use by the Exchange of a broader range of regulatory funds, by prohibiting their use for commercial purposes or distributions. Finally, the Exchange believes that Section 4.05 and the operating agreement provisions governing the ROC would provide adequate protections against the assessment of regulatory income, or the use of regulatory assets, to respond to budgetary needs. Section 4.05 not only guards against the possibility that fines may be assessed to respond to budgetary needs rather than to serve a disciplinary purpose, but also guards against the possibility that other regulatory income or regulatory assets could be used or assessed in that manner, by making them unavailable for commercial purposes or distributions. The Exchange believes that the proposed deletion of the Fine Income Procedures is consistent with the Exchange’s present governance structure, centered on a ROC. Today, because the Delegation Agreement is no longer in effect, the same entity that fines member organizations is directly subject to the limits of Section 4.05. Accordingly, the proposed deletion is consistent with ensuring that the Exchange is so organized as to have the capacity to be able to carry out the purposes of the Exchange Act and to comply, and to enforce compliance by its exchange members and persons associated with its exchange members, with the provisions of the Exchange Act, the rules and regulations thereunder, and the rules of the Exchange. The Exchange notes that the proposed change would have the additional benefit of making the Exchange’s rules more consistent with the limitations on the use of regulatory assets and income of other SROs and bringing the Exchange’s restrictions on the use of regulatory assets and income into greater conformity with those of its affiliates NYSE MKT LLC and NYSE Arca, Inc. Indeed, no other SRO limits the use of fine income to extrabudgetary use or subjects the use of fine PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 34397 income to specific review and approval by a regulatory oversight committee or any other body.32 Rather, other SROs’ limitations on the use of regulatory funds are generally similar to Section 4.05, in that they provide that regulatory funds shall be used to fund the relevant SRO’s legal, regulatory and (in some cases) surveillance operations, and shall not be used to make a distribution to the SRO’s member or stockholder, as the case may be. In fact, Section 4.05 is more restrictive than the provisions of some other SROs, whose rules allow the use of regulatory funds for restitution and disgorgement of funds intended for customers, or simply limit the SRO from making a distribution to its member using regulatory funds. 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 that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. The proposed rule change is not intended to address competitive issues but rather is concerned solely with the administration and functioning of the Exchange. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: 32 See E:\FR\FM\31MYN1.SGM notes 20–25 [sic] and accompanying text. 31MYN1 34398 Federal Register / Vol. 81, No. 104 / Tuesday, May 31, 2016 / 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– NYSE–2016–37 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. sradovich on DSK3TPTVN1PROD with NOTICES All submissions should refer to File Number SR–NYSE–2016–37. 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 such 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–NYSE– 2016–37, and should be submitted on or before June 21, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.33 Robert W. Errett, Deputy Secretary. [FR Doc. 2016–12673 Filed 5–27–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–77889; File No. SR– BatsEDGA–2016–09] Self-Regulatory Organizations; Bats EDGA Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Change to the Market Data Section of its Fee Schedule May 24, 2016. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on May 17, 2016, Bats EDGA Exchange, Inc. (the ‘‘Exchange’’ or ‘‘EDGA’’) 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 the Exchange. The Exchange has designated the proposed rule change as one establishing or changing a member due, fee, or other charge imposed by the Exchange under Section 19(b)(3)(A)(ii) of the Act 3 and Rule 19b–4(f)(2) thereunder,4 which renders the proposed rule change 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 filed a proposal to amend the Market Data section of its fee schedule to: (i) Decrease the User fees for the EDGA Top and EDGA Last Sale feeds; and (ii) amend the New External Distributor Credit for the Bats One Feed. The text of the proposed rule change is available at the Exchange’s Web site at www.batstrading.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A)(ii). 4 17 CFR 240.19b–4(f)(2). 2 17 33 17 CFR 200.30–3(a)(12). VerDate Sep<11>2014 20:07 May 27, 2016 Jkt 238001 PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 forth in Sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend the Market Data section of its fee schedule to: (i) Decrease the User fees for the EDGA Top and EDGA Last Sale feeds; and (ii) amend the New External Distributor Credit for the Bats One Feed. EDGA Top and Last Sale Fees EDGA Top is a market data feed that includes top of book quotations and execution information for all equity securities traded on the Exchange.5 EDGA Last Sale is a market data feed that includes last sale information for all equity securities traded on Exchange.6 The Exchange proposes to decrease the User fees for the EDGA Top and EDGA Last Sale feeds. 7 The Exchange does not currently charge an External Distributor8 of EDGA Last Sale or EDGA Top a Distributor fee. The Exchange does, however, charge those who receive either EDGA Top or EDGA Last Sale from External Distributors different fees for both their Professional9 and Non-Professional10 5 See Exchange Rule 13.8(c). Exchange Rule 13.8(d). 7 The Exchange notes that Bats BYX Exchange, Inc. (‘‘BYX’’) and Bats EDGX Exchange, Inc. (‘‘EDGX’’) also filed proposed rule changes with Commission to amend similar fees for their respective Top and Last Sale market data products. See File Nos. SR-BatsBYX–2016–08 and SRBatsEDGX–2016–18. The Exchange represents that the proposed fees will continue to not cause the combined cost of subscribing to EDGX, EDGA, BYX, and Bats BZX Exchange Inc.’s (‘‘BZX’’) individual Top and Last Sale feeds to be greater than those currently charged to subscribe to the Bats One Feed. See Securities Exchange Act Release Nos. 74285 (February 18, 2015), 80 FR 9828 (February 24, 2015) (SR–BATS–2015–11); 74283 (February 18, 2015), 80 FR 9809 (February 24, 2015) (SR–EDGA–2015–09); 74282 (February 17, 2015), 80 FR 9487 (February 23, 2015) (SR–EDGX–2015–09); and 74284 (February 18, 2015), 80 FR 9792 (February 24, 2015) (SR–BYX–2015–09) (‘‘Initial Bats One Feed Fee Filings’’). In these filings, the Exchange represented that the cost of subscribing to each of the underlying individual feeds necessary to create the Bats One Feed would not be greater than the cost of subscribing to the Bats One Feed. Id. 8 An ‘‘External Distributor’’ of an Exchange Market Data product is defined as ‘‘a Distributor that receives the Exchange Market Data product and then distributes that data to a third party or one or more Users outside the Distributor’s own entity.’’ See the Exchange Fee Schedule available at https:// batstrading.com/support/fee_schedule/edga/. 9 A ‘‘Professional User’’ is defined as ‘‘any User other than a Non-Professional User.’’ See the Exchange Fee Schedule available at https:// batstrading.com/support/fee_schedule/edga/. 10 A ‘‘Non-Professional User’’ is defined as ‘‘a natural person who is not: (i) registered or qualified in any capacity with the Commission, the 6 See E:\FR\FM\31MYN1.SGM 31MYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 81, Number 104 (Tuesday, May 31, 2016)]
[Notices]
[Pages 34393-34398]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-12673]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77899; File No. SR-NYSE-2016-37]

Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing of Proposed Rule Change Removing From Its Rules
Certain Internal Procedures Regarding the Use of Fine Income

May 24, 2016.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'' or ``Exchange Act'') \2\ and Rule 19b-4
thereunder,\3\ notice is hereby given that, on May 13, 2016, New York
Stock Exchange LLC (``NYSE'' or the ``Exchange'') filed with the
Securities and Exchange Commission (the ``Commission'') the proposed
rule change as described in Items I, II, and III below, which Items
have been prepared by the self-regulatory organization. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
---------------------------------------------------------------------------

\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

The Exchange proposes to remove from its rules certain internal
procedures regarding the use of fine income. The proposed rule change
is available on the Exchange's Web site at www.nyse.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 self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.

[[Page 34394]]

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

1. Purpose
The Exchange proposes to remove from its rules certain internal
procedures regarding the use of fine income, which were approved in
2007 (the ``Fine Income Procedures'') in order to align the Exchange's
use of fine income with other self-regulatory organizations (``SROs'').
The Exchange believes that the Fine Income Limitations [sic] are no
longer necessary and are duplicative of the limitations on the use of
regulatory assets and income, including fine income, set forth in
Article IV, Section 4.05 of the operating agreement of the Exchange
(``Section 4.05''). Section 4.05 prohibits the Exchange from using any
regulatory assets or any regulatory fees, fines or penalties collected
by the Exchange's regulatory staff for commercial purposes or
distributing such assets, fees, fines or penalties to NYSE Group, Inc.
(``NYSE Group''), the Exchange's member, or any other entity.\4\
---------------------------------------------------------------------------

\4\ See Ninth Amended and Restated Operating Agreement of New
York Stock Exchange LLC, Art. IV, Sec. 4.05; see also Securities
Exchange Act Release No. 75991 (September 28, 2015), 80 FR 59837
(October 2, 2015) (SR-NYSE-2015-27) (``NYSE Approval Order''), at
59839.
---------------------------------------------------------------------------

For the reasons discussed below, the Exchange believes that
together Section 4.05 and the provisions governing the Regulatory
Oversight Committee (``ROC'') of the Exchange's Board of Directors
adequately address the concerns underlying the Fine Income Procedures
and provide sufficient protections to ensure the proper use of fine
income by the Exchange.
Background
The Fine Income Procedures
In 2006, New York Stock Exchange, Inc. merged with Archipelago
Holdings, Inc. (the ``Archipelago Merger'').\5\ Prior to approval of
rule changes related to the Archipelago Merger, in conversation with
the staff of the Securities and Exchange Commission (``Commission''),
the Exchange undertook to subsequently file a proposed rule change
regarding the use of fines collected from member organizations
following disciplinary action against such member organizations.\6\ On
January 31, 2007, the Commission approved the proposed rule change
establishing the Fine Income Procedures.\7\
---------------------------------------------------------------------------

\5\ See id. The Archipelago Merger had the effect of
``demutualizing'' New York Stock Exchange, Inc. by separating equity
ownership from trading privileges, and converting it to a for-profit
entity. See Securities Exchange Act Release No. 53382, 71 FR 11251,
11254 (February 27, 2006) [sic] (SR-NYSE-2005-77) (``Merger Approval
Order''). In the resulting re-organization, the Exchange became a
wholly-owned subsidiary of NYSE Group, and succeeded to New York
Stock Exchange, Inc.'s registration as a national securities
exchange under the Exchange Act. See id. at 11255.
\6\ See id. at 11270, note 231. Subject to the requirement to
file fees with the Commission, the Exchange determines, assesses,
collects and retains certain registration and regulatory fees set
forth in its Price List.
\7\ See Securities Exchange Act Release No. 55216 (January 31,
2007), 72 FR 5779 (February 7, 2007) (NYSE-2006-109) (``Order
Approving the Fine Income Procedures'').
---------------------------------------------------------------------------

The Exchange's Fine Income Procedures referred to actions to be
taken by the Exchange's subsidiary, NYSE Regulation, Inc. (``NYSE
Regulation''), and NYSE Regulation's board of directors (the ``NYSE
Regulation Board''), because at the time performance of certain of the
Exchange's regulatory functions was delegated to NYSE Regulation. Such
delegation was made in 2006 pursuant to a Delegation Agreement (the
``Delegation Agreement'') between the Exchange, NYSE Regulation, and
NYSE Market (DE), Inc. (``NYSE Market (DE)'').\8\
---------------------------------------------------------------------------

\8\ See NYSE Approval Order, supra note 4, at 59839. The
Exchange's market functions were delegated to NYSE Market (DE).
Although the Delegation Agreement set forth the terms under which
the Exchange delegated its functions to NYSE Regulation and NYSE
Market (DE), the Exchange retained ultimate responsibility for the
operations, rules and regulations developed by NYSE Regulation and
NYSE Market (DE) and for their enforcement.
---------------------------------------------------------------------------

As approved, the Fine Income Procedures provided that: \9\
---------------------------------------------------------------------------

\9\ See Securities Exchange Act Release No. 55003 (December 22,
2006), 71 FR 78497, 78498 (December 29, 2006) (NYSE-2006-109) (the
``Proposing Release'').
---------------------------------------------------------------------------

Fines would play no role in the annual NYSE Regulation
budget process. Beginning with the preparation of the 2007 operating
budget, fines would be budgeted at zero, that is, budgeted expenses of
NYSE Regulation would be offset entirely by budgeted income that did
not include any anticipated income from fines. Among other things, this
meant that fines would not offset amounts budgeted for compensation of
NYSE Regulation employees or directors. During the course of a year,
income from fines would be considered as available to fund non-
compensation expenses of NYSE Regulation, which expenses were not
anticipated in the budget process or which could not be included in the
budget prepared in advance of the fiscal year because NYSE Regulation
was unable to budget sufficient income from sources other than fines to
offset the expenses.
The use of fine income by NYSE Regulation would be subject
to specific review and approval by the NYSE Regulation board of
directors. On a quarterly basis, the staff of NYSE Regulation would
provide to the NYSE Regulation Board a report on the amount of fine
income received to date during the year and recommendations regarding
its proposed use to fund regulatory expenses as above described. The
use of the fine income would be subject to NYSE Regulation Board
approval. Following each year, the staff of NYSE Regulation would
provide the NYSE Regulation Board a report reprising the fines imposed
and the utilization of fine income by NYSE Regulation during that year.
This report would analyze fines imposed by NYSE Regulation for
consistency with precedent from both other NYSE disciplinary cases as
well as publicly available disciplinary cases adjudicated by the
National Association of Securities Dealers, Inc. and the Commission.
Each year the NYSE Regulation Board would also consider whether
unused fine income had accumulated beyond a level reasonably necessary
for future contingencies, and could determine to utilize any such
excess to fund one or more special projects of NYSE Regulation, to
reduce fees charged by NYSE Regulation to its member organizations or
the markets that it serves, or for a charitable purpose.
Amendment of the Fine Income Procedures
Effective February 16, 2016, the Delegation Agreement terminated
and NYSE Regulation ceased performing regulatory functions on behalf of
the Exchange, which has re-integrated its regulatory functions. The ROC
of the Exchange's Board of Directors now provides independent oversight
of the regulatory function of the Exchange.\10\
---------------------------------------------------------------------------

\10\ See NYSE Approval Order, supra note 4, at 59838. Similarly,
following termination of the Delegation Agreement, NYSE Market
(DE)'s delegated market responsibilities are performed by the
Exchange.
---------------------------------------------------------------------------

In its filing proposing the creation of the ROC and termination of
the Delegation Agreement, the Exchange addressed the Fine Income
Procedures. Specifically, it ``reiterate[ed] [sic] the previous
commitments that fines would play no role in the annual regulatory
operating budget process and that the use of fine income by Exchange
regulatory staff would be subject to review and approval by the
proposed ROC.'' \11\ Accordingly, the ROC has

[[Page 34395]]

assumed the responsibilities previously held by the NYSE Regulation
Board.
---------------------------------------------------------------------------

\11\ See Securities Exchange Act Release No. 75288 (June 24,
2015), 80 FR 37316 (June 30, 2015) (SR-NYSE-2015-27), note 25.
---------------------------------------------------------------------------

Proposed Amendment
The Exchange proposes to delete the Fine Income Procedures from the
Exchange rules. The Exchange would remain subject to Section 4.05,
which prohibits it from using any regulatory assets or any regulatory
fees, fines or penalties collected by the Exchange's regulatory staff
for commercial purposes or distributing such assets, fees, fines or
penalties to the Exchange's member or any other entity.\12\
---------------------------------------------------------------------------

\12\ All fine monies previously collected would remain subject
to the restrictions in Section 4.05.
---------------------------------------------------------------------------

In its Order Approving the Fine Income Procedures, the Commission
stated that the Fine Income Procedures were ``to assure the proper
exercise by NYSE Regulation of its power to fine member organizations
of the Exchange and the proper use by NYSE Regulation of the funds so
collected.'' \13\ The Exchange believes that Section 4.05 and the
operating agreement provisions governing the ROC adequately address
these concerns.
---------------------------------------------------------------------------

\13\ Order Approving the Fine Income Procedures, supra note 7,
at 5779.
---------------------------------------------------------------------------

First, the Exchange believes that limitations on the use of fines
is not the most effective way to assure proper exercise by Exchange
regulatory staff of the Exchange's power to fine member organizations.
Simply put, usage limitations on fine income do not provide oversight
of regulatory performance. They just monitor how the resulting income
is spent. The Exchange believes that the responsibility to assure
proper exercise by Exchange regulatory staff of the Exchange's power to
fine member organizations more properly lies with the ROC, which is
responsible to oversee the Exchange's regulatory and self-regulatory
organization responsibilities and assess the Company's regulatory
performance.\14\
---------------------------------------------------------------------------

\14\ See Ninth Amended and Restated Operating Agreement of New
York Stock Exchange LLC, Art. II, Sec. 2.03(h)(ii). The ROC is made
up entirely of independent directors of the Exchange.
---------------------------------------------------------------------------

In addition, the disciplinary process itself contains a powerful
check on the improper exercise by Exchange regulatory staff of the
power to fine members and member organizations, specifically the
appellate process, whereby adverse hearing panel determinations can be
appealed to the Committee for Review, a committee of the Board of
Directors of the Exchange that includes independent directors and
individuals associated with member organizations of the Exchange, which
recommends a disposition to the Board of Directors of the Exchange.
Final actions of the Exchange can be appealed to the Commission, and
Commission determinations can be challenged in federal court.
Second, the Exchange believes that, by setting clear limitations on
its use, Section 4.05 is sufficient to ensure the proper use by the
Exchange of fine income. Section 4.05 addresses this concern by
prohibiting the use of fines for commercial purposes or distributions.
Indeed, because Section 4.05 encompasses all regulatory assets and
income, not just fines, it ensures the proper use by the Exchange of a
broader range of regulatory funds, by prohibiting their use for
commercial purposes or distributions.
The Commission stated in its Order Approving the Fine Income
Procedures that it believed the Fine Income Procedures would ``guard
against the possibility that fines may be assessed to respond to
budgetary needs rather than to serve a disciplinary purpose.'' \15\
Section 4.05 also guards against this possibility by limiting the use
of fines. However, unlike the Fine Income Procedures, Section 4.05 also
guards against the possibility that other regulatory income, such as
examination, access, registration, qualification, arbitration, dispute
resolution and other regulatory fees, or regulatory assets, could be
used or assessed to respond to budgetary needs, by making them
unavailable for commercial purposes or distributions. At the same time,
the ROC is specifically charged with reviewing the regulatory budget of
the Exchange and inquiring into the adequacy of resources available in
the budget for regulatory activities.\16\ Accordingly, the Exchange
believes that removing the Fine Income Procedures and relying on
Section 4.05 and the provisions governing the ROC would provide
adequate protections against the use of regulatory assets, or
assessment of regulatory income, to respond to budgetary needs.
---------------------------------------------------------------------------

\15\ Order Approving the Fine Income Procedures, supra note 7,
at 5780.
\16\ See note 14, supra.
---------------------------------------------------------------------------

The Exchange believes that the circumstances that led to the Fine
Income Procedures no longer exist. At the time the Fine Income
Procedures were adopted, a predecessor to Section 4.05 was in effect
(the ``Predecessor Section''). Indeed, the Commission cited that fact
when approving the Archipelago Merger:

The Commission further notes that the NYSE has taken steps to
safeguard the use of regulatory monies. Specifically, New York Stock
Exchange LLC will not be permitted to use any assets of, or any
regulatory fees, fines, or penalties collected by, NYSE Regulation
for commercial purposes or distribute such assets, fees, fines, or
penalties to NYSE Group or any entity other than NYSE
Regulation.\17\
---------------------------------------------------------------------------

\17\ See Merger Approval Order, supra note 5, at 11263.
---------------------------------------------------------------------------

At the time, NYSE Regulation performed regulatory functions on
behalf of the Exchange. On its face, the Predecessor Section, found
in the Exchange's 2006 operating agreement, only limited the
Exchange itself. NYSE Regulation had the obligation under the
Delegation Agreement to assure compliance with the rules of the
Exchange, but the Fine Income Procedures provided a more direct
commitment by NYSE Regulation to ensure the proper exercise of NYSE
Regulation's power to fine member organizations and the proper use
by NYSE Regulation of fines collected.

Today, because the Delegation Agreement is no longer in effect, the
same entity that fines member organizations is directly subject to the
limits of Section 4.05. Accordingly, the Exchange believes that
removing the Fine Income Procedures and relying on Section 4.05 and the
provisions governing the ROC would provide adequate protections against
the concerns cited by the Commission in the Order Approving the Fine
Income Procedures. Indeed, as pointed out above, Section 4.05 is wider
in scope than the Fine Income Procedures, and so limits the Exchange's
use of all regulatory assets and income, not just fine income.
The proposed change would have the benefit of bringing the
Exchange's restrictions on the use of regulatory assets and income into
greater conformity with those of its affiliates NYSE MKT LLC and NYSE
Arca, Inc. NYSE MKT LLC has substantially the same provision as Section
4.05 its operating agreement.\18\ The bylaws of NYSE Arca, Inc. also
preclude the use of regulatory fees and penalties for commercial
operations or dividends, limiting their use to funding legal,
regulatory and surveillance operations.\19\
---------------------------------------------------------------------------

\18\ See Eighth Amended and Restated Operating Agreement of NYSE
MKT LLC, Art. IV, Sec. 4.05 (``The Company shall not use any
regulatory assets or any regulatory fees, fines or penalties
collected by Exchange regulatory staff for commercial purposes or
distribute such assets, fees, fines or penalties to the Member or
any other entity.'').
\19\ See Bylaws of NYSE Arca, Inc., Art. II, Sec. 2.06 (``Any
revenues received by the Exchange from regulatory fees or regulatory
penalties will be applied to fund the legal, regulatory and
surveillance operations of the Exchange and will not be used to pay
dividends. For purposes of this Section, regulatory penalties shall
include restitution and disgorgement of funds intended for
customers.'').
---------------------------------------------------------------------------

In addition, removing the Fine Income Procedures from its rules
would

[[Page 34396]]

make the Exchange's rules more consistent with the limitations on the
use of regulatory assets and income of other SROs. Indeed, no other SRO
limits the use of fine income to extra-budgetary use or subjects the
use of fine income to specific review and approval by a regulatory
oversight committee or any other body. Rather, other SROs' limitations
on the use of regulatory funds are generally similar to Section 4.05,
in that they provide that regulatory funds shall be used to fund the
relevant SRO's legal, regulatory and (in some cases) surveillance
operations, and shall not be used to make a distribution to the SRO's
member or stockholder, as the case may be.
For example, the limited liability company agreement of the BOX
Options Exchange (``BOX'') provides that regulatory funds shall be used
to the [sic] fund legal, regulatory and surveillance operations of BOX,
and BOX shall not make any distribution to members using regulatory
funds. BOX defines ``regulatory funds'' to include fees, fines or
penalties derived from its regulatory operations.\20\ Similarly, the
limited liability company agreements of International Securities
Exchange, LLC, and its affiliates ISE Gemini, LLC and ISE Mercury, LLC
provide that regulatory funds shall not be used for non-regulatory
purposes, but rather shall be used to fund legal, regulatory and
surveillance operations, and the SRO shall not make any distribution to
its member using regulatory funds.\21\
---------------------------------------------------------------------------

\20\ See Box Options Exchange Limited Liability Company
Agreement, Art. 1, Sec. 1.1 and Art. 8, Sec. 8.1. The definition
also states that ``Regulatory Funds shall not include revenues
derived from listing 6 A/72816686.20 [sic] fees, market data
revenues, transaction revenues or any other aspect of the commercial
operations of the Exchange or a facility of the Exchange, even if a
portion of such revenues are used to pay costs associated with the
regulatory operations of the Exchange.'' Id.
\21\ Such agreements define ``Regulatory Funds'' to mean ``fees,
fines or penalties derived from the regulatory operations of the
Company, provided that Regulatory Funds shall not include revenues
derived from listing fees, market data revenues, transaction
revenues or any other aspect of the commercial operations of the
Company or a facility of the Company, even if a portion of such
revenues are used to pay costs associated with the regulatory
operations of the Company.'' See Third Amended and Restated Limited
Liability Company Agreement of International Securities Exchange,
LLC, Art. III, Sec. 3.3(ii); Second Amended and Restated Limited
Liability Company Agreement of ISE Gemini, LLC, Art. III, Sec.
3.3(ii); and Limited Liability Company Agreement of ISE Mercury,
LLC, Art. III, Sec. 3.3(ii).
---------------------------------------------------------------------------

Section 4.05 is more restrictive than the provisions of some other
SROs, whose rules allow the use of regulatory funds for restitution and
disgorgement of funds intended for customers. For example, the
governing documents of affiliates BATS BZX Exchange, Inc., BATS BYX
Exchange, Inc., BATS EDGX Exchange, Inc., and EDGA Exchange, Inc.
provide that revenues received from fees derived from the regulatory
function or regulatory penalties may be used to pay restitution and
disgorgement of funds intended for customers, as well as to fund legal
and regulatory operations, including surveillance and enforcement
activities. Such funds may not be used for non-regulatory purposes or
distributed to the stockholder.\22\ The limited liability company
agreement of Miami International Securities Exchange, LLC, and bylaws
of National Stock Exchange, Inc., have similar provisions.\23\
---------------------------------------------------------------------------

\22\ See Fourth Amended and Restated Bylaws of BATS BZX
Exchange, Inc., Art. X, Sec. 4; Fourth Amended and Restated Bylaws
of BATS BYX Exchange, Inc., Art. X, Sec. 4; Fifth Amended and
Restated Bylaws of BATS EDGX Exchange, Inc., Art. X, Sec. 4; and
Fifth Amended and Restated Bylaws of BATS EDGA Exchange, Inc., Art.
X, Sec. 4.
\23\ See Second Amended and Restated Limited Liability Company
Agreement of Miami International Securities Exchange, LLC, Art. IX,
Sec. 9.4 (``Any Regulatory Funds will not be used for non-regulatory
purposes or distributed to the LLC Member, but rather, shall be
applied to fund the legal and regulatory operations of the Company
(including surveillance and enforcement activities), or, as the case
may be, shall be used to pay restitution and disgorgement of funds
intended for customers.''); Amended and Restated By-laws of National
Stock Exchange, Inc., [sic] Art. X, Sec. 10.4 (``Any revenues
received by the Exchange from fees derived from its regulatory
function or regulatory penalties will not be used to pay dividends
and shall be applied to fund the legal and regulatory operations of
the Exchange (including surveillance and enforcement activities),
or, as the case may be, shall be used to pay restitution and
disgorgement of funds intended for customers.''); see also Amended
and Restated By-Laws of Miami International Securities Exchange,
LLC, Art. IX, Sec. 9.4.
---------------------------------------------------------------------------

The limitations imposed on the NASDAQ Stock Market LLC (``Nasdaq'')
in its operating agreement are also less restrictive than the
limitations imposed on the Exchange by Section 4.05. They simply limit
Nasdaq from making a distribution to its member using regulatory funds.
``Regulatory funds'' is defined to mean fees, fines, or penalties
derived from the regulatory operations of Nasdaq.\24\ When the NASDAQ
OMX Group, Inc. acquired the Boston Stock Exchange (``BSE''), the BSE
by-laws were amended to include a similar provision that dividends
could not be paid to the stockholders using regulatory funds, also
defined as fees, fines, or penalties derived from regulatory
operations.\25\ The Commission described the provision as ``intended to
preclude BSE from using its authority to raise regulatory funds for the
purpose of benefiting its shareholders, or for other non-regulatory
purposes, such as executive compensation.'' \26\ The Exchange believes
that Section 4.05, which is more expansive in its scope, meets the same
goal.
---------------------------------------------------------------------------

\24\ See Second Amended Limited Liability Company Agreement of
The NASDAQ Stock Market LLC, Sec. 15. The definition of Regulatory
Funds also states that ```Regulatory Funds' shall not be construed
to include revenues derived from listing fees, market data revenues,
transaction revenues, or any other aspect of the commercial
operations of the Company, even if a portion of such revenues are
used to pay costs associated with the regulatory operations of the
Company.'' Id, Sch. A. See also by-laws of NASDAQ BX, Inc., Art. IX,
Sec. 9.8, and Second Amended Limited Liability Company Agreement of
NASDAQ PHLX LLC, Sec. 14.
\25\ See Securities Exchange Act Release No. 58324 (August 7,
2008), 73 FR 46936 (August 12, 2008) (SR-BSE- 2008-02; SR-BSE-2008-
23; SR-BSE-2008- 25; SR-BSECC-2008-01), at 46942.
\26\ See Securities Exchange Act Release No. 58324 (August 7,
2008), 73 FR 46936 (August 12, 2008) (SR-BSE- 2008-02; SR-BSE-2008-
23; SR-BSE-2008- 25; SR-BSECC-2008-01), at 46942.
---------------------------------------------------------------------------

2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Exchange Act \27\ in general, and Section
6(b)(1) \28\ in particular, in that it enables the Exchange to be so
organized as to have the capacity to be able to carry out the purposes
of the Exchange Act and to comply, and to enforce compliance by its
exchange members and persons associated with its exchange members, with
the provisions of the Exchange Act, the rules and regulations
thereunder, and the rules of the Exchange. Deletion of the Fine Income
Procedures would not diminish the Exchange's ability to adequately
ensure the proper exercise of the Exchange's power to fine member
organizations and the proper use by the Exchange of the funds collected
through the disciplinary process.
---------------------------------------------------------------------------

\27\ 15 U.S.C. 78f(b).
\28\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

The Exchange believes that Section 4.05 and the operating agreement
provisions governing the ROC adequately address the concerns underlying
adoption of the Fine Income Procedures, rendering the Fine Income
Procedures superfluous. First, the Fine Income Procedures cannot assure
the proper exercise by Exchange regulatory staff of the Exchange's
power to fine member organizations of the Exchange, as usage
limitations on fine income do not provide oversight of regulatory
performance. The responsibility more properly lies with the ROC, which
is responsible for overseeing the Exchange's regulatory and self-
regulatory organization responsibilities and assessing its regulatory
performance, including reviewing the regulatory budget and inquiring
into the adequacy of resources available in the budget for regulatory
activities.\29\ In

[[Page 34397]]

addition, the disciplinary process itself contains a powerful check on
the improper exercise by Exchange regulatory staff of the power to fine
members and member organizations, specifically, the appellate process,
whereby adverse hearing panel determinations can be appealed to the
Committee for Review, which recommends a disposition to the Board of
Directors of the Exchange. Final actions of the Exchange can be
appealed to the Commission, and Commission determinations can be
challenged in federal court. Second, by setting clear imitations [sic]
on its use, Section 4.05 is not only sufficient to ensure the proper
use by the Exchange of fine income but also, because it encompasses all
regulatory assets and income, ensures the proper use by the Exchange of
a broader range of regulatory funds, by prohibiting their use for
commercial purposes or distributions.
---------------------------------------------------------------------------

\29\ See note 14, supra.
---------------------------------------------------------------------------

Finally, the Exchange believes that Section 4.05 and the operating
agreement provisions governing the ROC would provide adequate
protections against the assessment of regulatory income, or the use of
regulatory assets, to respond to budgetary needs. By limiting their
use, Section 4.05 guards against the possibility that fines may be
assessed to respond to budgetary needs rather than to serve a
disciplinary purpose. However, unlike the Fine Income Procedures,
Section 4.05 also guards against the possibility that other regulatory
income, such as examination, access, registration, qualification,
arbitration, dispute resolution and other regulatory fees, or
regulatory assets, could be used or assessed to respond to budgetary
needs, by making them unavailable for commercial purposes or
distributions.
For the same reasons, the Exchange believes that the proposed
deletion of the Fine Income Procedures is consistent with Section
6(b)(4),\30\ which requires that the rules of the exchange provide for
the equitable allocation of reasonable dues, fees, and other charges
among the exchange's members and issuers and other persons using its
facilities, and Section 6(b)(5),\31\ which requires that the rules of
the exchange be designed to prevent fraudulent and manipulative acts
and practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to, and
perfect the mechanism of a free and open market and a national market
system and, in general, to protect investors and the public interest.
As noted, the Exchange believes that the responsibility to assure the
proper exercise by Exchange regulatory staff of the Exchange's power to
fine member organizations more properly lies with the ROC, and that, by
setting clear imitations [sic] on its use, Section 4.05 is not only
sufficient to ensure the proper use by the Exchange of fine income but
also, because it encompasses all regulatory assets and income, ensures
the proper use by the Exchange of a broader range of regulatory funds,
by prohibiting their use for commercial purposes or distributions.
Finally, the Exchange believes that Section 4.05 and the operating
agreement provisions governing the ROC would provide adequate
protections against the assessment of regulatory income, or the use of
regulatory assets, to respond to budgetary needs. Section 4.05 not only
guards against the possibility that fines may be assessed to respond to
budgetary needs rather than to serve a disciplinary purpose, but also
guards against the possibility that other regulatory income or
regulatory assets could be used or assessed in that manner, by making
them unavailable for commercial purposes or distributions.
---------------------------------------------------------------------------

\30\ 15 U.S.C. 78f(b)(4).
\31\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

The Exchange believes that the proposed deletion of the Fine Income
Procedures is consistent with the Exchange's present governance
structure, centered on a ROC. Today, because the Delegation Agreement
is no longer in effect, the same entity that fines member organizations
is directly subject to the limits of Section 4.05. Accordingly, the
proposed deletion is consistent with ensuring that the Exchange is so
organized as to have the capacity to be able to carry out the purposes
of the Exchange Act and to comply, and to enforce compliance by its
exchange members and persons associated with its exchange members, with
the provisions of the Exchange Act, the rules and regulations
thereunder, and the rules of the Exchange.
The Exchange notes that the proposed change would have the
additional benefit of making the Exchange's rules more consistent with
the limitations on the use of regulatory assets and income of other
SROs and bringing the Exchange's restrictions on the use of regulatory
assets and income into greater conformity with those of its affiliates
NYSE MKT LLC and NYSE Arca, Inc. Indeed, no other SRO limits the use of
fine income to extra-budgetary use or subjects the use of fine income
to specific review and approval by a regulatory oversight committee or
any other body.\32\ Rather, other SROs' limitations on the use of
regulatory funds are generally similar to Section 4.05, in that they
provide that regulatory funds shall be used to fund the relevant SRO's
legal, regulatory and (in some cases) surveillance operations, and
shall not be used to make a distribution to the SRO's member or
stockholder, as the case may be. In fact, Section 4.05 is more
restrictive than the provisions of some other SROs, whose rules allow
the use of regulatory funds for restitution and disgorgement of funds
intended for customers, or simply limit the SRO from making a
distribution to its member using regulatory funds.
---------------------------------------------------------------------------

\32\ See notes 20-25 [sic] and accompanying text.
---------------------------------------------------------------------------

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 that is not necessary or appropriate
in furtherance of the purposes of the Exchange Act. The proposed rule
change is not intended to address competitive issues but rather is
concerned solely with the administration and functioning of the
Exchange.

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

No written comments were solicited or received with respect to the
proposed rule change.

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

Within 45 days of the date of publication of this notice in the
Federal Register or up to 90 days (i) as the Commission may designate
if it finds such longer period to be appropriate and publishes its
reasons for so finding or (ii) as to which the self-regulatory
organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

[[Page 34398]]

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-NYSE-2016-37 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-NYSE-2016-37. 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 such 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-NYSE-2016-37, and should be
submitted on or before June 21, 2016.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
---------------------------------------------------------------------------

\33\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-12673 Filed 5-27-16; 8:45 am]
BILLING CODE 8011-01-P

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.