Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Adopting New NYSE MKT Rules 2090-Equities (Know Your Customer) and 2111-Equities (Suitability) That Are Substantially Similar to FINRA Rules 2090 (Know Your Customer) and 2111 (Suitability), Deleting Current NYSE MKT Rule 405-Equities (Diligence as to Accounts), and Making Other Conforming Changes, 41364-41368 [2016-14933]

Download as PDF 41364 Federal Register / Vol. 81, No. 122 / Friday, June 24, 2016 / Notices C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act.38 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is: (i) Necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. 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: sradovich on DSK3GDR082PROD 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– NASDAQ–2016–089 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–NASDAQ–2016–089. 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 38 15 U.S.C. 78s(b)(3)(A)(ii). VerDate Sep<11>2014 17:43 Jun 23, 2016 Jkt 238001 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–2016–089 and should be submitted on or before July 15, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.39 Robert W. Errett, Deputy Secretary. [FR Doc. 2016–14929 Filed 6–23–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–78106; File No. SR– NYSEMKT–2016–59] Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Adopting New NYSE MKT Rules 2090—Equities (Know Your Customer) and 2111—Equities (Suitability) That Are Substantially Similar to FINRA Rules 2090 (Know Your Customer) and 2111 (Suitability), Deleting Current NYSE MKT Rule 405— Equities (Diligence as to Accounts), and Making Other Conforming Changes June 20, 2016. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (‘‘Act’’ or ‘‘Exchange Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that on June 9, 2016, NYSE MKT LLC (‘‘Exchange’’ or ‘‘NYSE MKT’’) 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 Commission is publishing this notice to solicit comments on the 39 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 15 U.S.C. 78a. 3 17 CFR 240.19b–4. 1 15 PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 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 adopting new rule text that is substantially similar to Rules 2090 (Know Your Customer) and 2111 (Suitability) of the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’), (2) deleting current Rule 405—Equities (Diligence as to Accounts) (‘‘Rule 405’’), and (3) making other conforming changes. 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. 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 its rules to harmonize with certain FINRA rules. Specifically, the Exchange proposes (1) adopting new rule text that is substantially similar to FINRA Rules 2090 and 2111; (2) deleting Rule 405; 4 and (3) making other conforming changes. Background In 2007, FINRA and the Exchange’s affiliate the New York Stock Exchange LLC (‘‘NYSE’’) 5 entered into an 4 References to rules are to NYSE MKT rules unless otherwise indicated. 5 NYSE Regulation, Inc., a former not-for-profit subsidiary of the NYSE, was also a party to the Agreement by virtue of the fact that it performed regulatory functions for the NYSE pursuant to a delegation agreement. See Securities Exchange Act Release No. 53382 (February 27, 2006), 71 FR 11251, 11264–65 (March 6, 2006) (SR–NYSE–2005– 77) (approving delegation agreement). NYSE Regulation also performed regulatory services for the Exchange pursuant to an intercompany Regulatory Services Agreement (‘‘RSA’’) that gave the Exchange the contractual right to review NYSE E:\FR\FM\24JNN1.SGM 24JNN1 Federal Register / Vol. 81, No. 122 / Friday, June 24, 2016 / Notices sradovich on DSK3GDR082PROD with NOTICES agreement (the ‘‘Agreement’’) pursuant to Rule 17d–2 under the Act to reduce regulatory duplication by allocating to FINRA certain regulatory responsibilities for NYSE rules and rule interpretations (‘‘FINRA Incorporated NYSE Rules’’).6 NYSE MKT became a party to the Agreement effective December 15, 2008.7 In order to reduce regulatory duplication and relieve firms that are members of the Exchange, the NYSE and FINRA of conflicting or unnecessary regulatory burdens, FINRA has been reviewing and amending the NASD and FINRA Incorporated NYSE Rules in order to create a consolidated FINRA rulebook.8 As part of the rule consolidation process, in 2010, FINRA harmonized NASD and FINRA Incorporated NYSE Rules and interpretations concerning know your customer and suitability.9 In its filing, FINRA (1) adopted FINRA Rules 2090 (Know Your Customer) and 2090 (Suitability), and (2) deleted NASD Rule 2310 (Recommendations to Customers (Suitability)) and NYSE Rule 405 (Diligence as to Accounts) as well as NYSE Rule Interpretations 405/01 through/04. The rule change was effective July 9, 2012.10 Regulation’s performance. The delegation agreement and related RSA terminated on February 16, 2016, and NYSE Regulation has ceased providing regulatory services to the Exchange, which has re-integrated its regulatory functions. 6 See Securities Exchange Act Release Nos. 56148 (July 26, 2007), 72 FR 42146 (August 1, 2007) (order approving the Agreement); 56147 (July 26, 2007), 72 FR 42166 (August 1, 2007) (SR–NASD–2007–054) (order approving the incorporation of certain NYSE Rules as ‘‘Common Rules’’). Paragraph 2(b) of the Agreement sets forth procedures regarding proposed changes by FINRA or the Exchange to the substance of any of the Common Rules. 7 See Securities Exchange Act Release Nos. 56148 (July 26, 2007), 72 FR 42146 (August 1, 2007) (order approving the Agreement); 56147 (July 26, 2007), 72 FR 42166 (August 1, 2007) (SR–NASD–2007–054) (order approving the incorporation of certain NYSE Rules as ‘‘Common Rules’’); 60409 (July 30, 2009), 74 FR 39353 (August 6, 2009) (order approving the amended and restated Agreement, adding NYSE MKT LLC as a party). Paragraph 2(b) of the Agreement sets forth procedures regarding proposed changes by FINRA, NYSE or NYSE MKT to the substance of any of the Common Rules. 8 FINRA’s rulebook currently has three sets of rules: (1) NASD Rules, (2) FINRA Incorporated NYSE Rules, and (3) consolidated FINRA Rules. The FINRA Incorporated NYSE Rules apply only to those members of FINRA that are also members of the NYSE (‘‘Dual Members’’), while the consolidated FINRA Rules apply to all FINRA members. For more information about the FINRA rulebook consolidation process, see FINRA Information Notice, March 12, 2008. 9 See Securities Exchange Act Release No. 63325 ((November 17, 2010), 75 FR 71479 (November 23, 2010) (SR–FINRA–2010–039) (‘‘FINRA Know Your Customer and Suitability Approval’’). 10 See FINRA Regulatory Notice 11–25 (May 2011). The original effective date was October 7, 2011. VerDate Sep<11>2014 17:43 Jun 23, 2016 Jkt 238001 Currently, the Exchange does not have separate rules for know your customer and suitability. Rather, Rule 405, based on NYSE Rule 405,11 requires every member organization, through a principal executive or a person or persons designated under the provisions of Rule 3110(a), to take certain actions relative to customers and customer accounts. First, Rule 405(1) requires member organizations to use ‘‘due diligence’’ to learn the ‘‘essential facts relative to every customer, every order, every cash or margin account accepted or carried by such organization and every person holding power of attorney over any account accepted or carried by such organization.’’ Second, Rule 405(2) requires member organizations to supervise diligently all accounts handled by registered representatives. Finally, Rule 405(3) requires persons designated by the member to be informed of the essential facts relative to the customer and to the nature of the proposed account prior to approving the opening of the account. Supplementary Material .10 of Rule 405 generally discusses the requirements that firms know their customers and imposes specific knowledge and due diligence requirements in connection with the authority of third parties to act on behalf of customers that are legal entities, including margin accounts carried by a member organization for a non-member corporation, cash accounts carried for a non-member corporation, and agency accounts carried by a member organization.12 Supplementary Material .20 of Rule 405 refers to the requirements of Rule 4311 concerning the permitted allocation of responsibilities between introducing and carrying organizations. Supplementary Material .30 cross references to Rule 414 (Index and Currency Warrants).13 11 The NYSE recently made a similar filing to delete Rule 405 and its related interpretations and adopt new NYSE Rules 2090 and 2111 based on FINRA Rules 2090 and 2111. See Securities Exchange Act Release No. 77838 (May 16, 2016), 81 FR 31974 (May 20, 2016) (SR–NYSE–2016–33). 12 As discussed below, the Exchange believes that Supplementary Material .10 of Rule 405—Equities is redundant of proposed Rule 2090 and proposed Supplementary Material .01 thereof that would require firms to know the essential facts concerning every customer. 13 NYSE Rule 414 provides that Rule 723 (Suitability) applies to recommendations in currency warrants, currency index warrants and stock index warrants. When the Exchange adopted the NYSE’s rules in 2008, however, NYSE Rule 414 was not adopted. See Securities Exchange Act Release No. 58265 (July 30, 2008), 73 FR 46075, 46078 (August 7, 2008) (SR–Amex–2008–63). The Exchange believes that the other cross references in Rule 405 are either no longer necessary or moot. PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 41365 Proposed Rule Change The Exchange proposes to delete current Rule 405 as either duplicative of, or not aligned with, the proposed know your customer and suitability requirements discussed below, and adopt the text of FINRA Rules 2090 and 2111.14 Proposed Rule 2090—Equities (Know Your Customer) Like FINRA Rule 2090, proposed Rule 2090—Equities (‘‘Rule 2090’’) would encompass the ‘‘main ethical standard’’ of Rule 405(1).15 The proposed rule would require every ‘‘member organization through a principal executive or a person or persons designated under the provisions of Rule 3110(a)’’ 16 to use ‘‘reasonable diligence,’’ with regard to the opening and maintenance of every account, in order to know and retain the essential facts concerning every customer. The proposed supplementary material would define ‘‘essential facts’’ as those ‘‘required to (a) effectively service the customer’s account, (b) act in accordance with any special handling instructions for the account, (c) understand the authority of each person acting on behalf of the customer, and (d) comply with applicable laws, regulations, and rules.’’ 17 The proposed rule would be identical to FINRA Rule 2090 except that the proposed rule would use the term ‘‘member organization’’ rather than ‘‘member,’’ which has different meanings under FINRA and Exchange rules.18 14 The technical and conforming changes are that the Exchange would (1) substitute the term ‘‘member organization’’ for ‘‘member’’ (see note 18, infra), (2) substitute the term ‘‘Exchange’’ for ‘‘FINRA,’’ (3) change certain cross-references to FINRA rules to cross-references to Exchange rules, and (4) add references to proposed Rules 2090— Equities and 2111—Equities in Rule 3170 (Tape Recording of Registered Persons by Certain Firms). 15 FINRA Know Your Customer and Suitability Approval, 75 FR at 71480. 16 This is the current formulation in Rule 405, which the Exchange proposes to retain. 17 See Proposed Rule 2090.01. Like FINRA, the Exchange does not propose to incorporate the requirement in NYSE Rule 405(1) to learn the essential facts relative to ‘‘every order.’’ The Exchange agrees with FINRA that the application of existing order-handling rules renders this formulation unnecessary. See FINRA Know Your Customer and Suitability Approval, 75 FR at 71480. Further, the Exchange’s proposed suitability rule would also require member organizations and persons associated with a member organization to use reasonable diligence to understand the securities and strategies they recommend, further obviating the need for this language. See id. 18 Under FINRA Rules, a ‘‘member’’ means individual, partnership, corporation or other legal entity admitted to membership in FINRA under Articles III and IV of the FINRA By-Laws. See FINRA Rule 0160(b)(10). Article III, Sec. 1(a) E:\FR\FM\24JNN1.SGM Continued 24JNN1 41366 Federal Register / Vol. 81, No. 122 / Friday, June 24, 2016 / Notices sradovich on DSK3GDR082PROD with NOTICES Proposed Rule 2111—Equities (Suitability) Proposed Rule 2111—Equities (‘‘Rule 2111’’), like its FINRA counterpart, would require a member organization or person associated with a member organization 19 to have a ‘‘reasonable basis’’ to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer. This assessment would be based on the information obtained through the reasonable diligence of the member organization or person associated with a member organization to ascertain the customer’s investment profile, which includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member organization or person associated with a member organization in connection with such recommendation.20 Like the FINRA generally limits membership to registered brokers, dealers, municipal securities brokers or dealers, or government securities brokers or dealers. NYSE MKT’s equivalent term is ‘‘member organization.’’ See Rule 2(b)(i)—Equities (defining ‘‘member organization’’ as a registered broker or dealer (unless exempt pursuant to the Act) that is a member of FINRA or another registered securities exchange). Under Rule 2(a)—Equities, the term ‘‘member’’ means a natural person associated with a member organization who has been approved by the Exchange and designated by such member organization to effect transactions on the floor of the Exchange or any facility thereof. A ‘‘member’’ is not a registered broker-dealer and does not have employees; only member organizations have employees. For purposes of the proposed amendments to its disciplinary rules, the Exchange proposes to continue using the phrase ‘‘covered person’’ to indicate employees of a member organization. As noted below, for purposes of the proposed change, the Exchange proposes to continue using the phrase ‘‘person associated with a member organization’’ to indicate employees of a member organization for purposes of proposed Rule 2111. 19 As proposed, Rule 2111 is identical to FINRA Rule 2111 except that the Exchange proposes to use the phrase ‘‘member organization or person associated with a member organization’’ rather than ‘‘member or an associated person’’ to indicate the coverage of the rule. As discussed above, ‘‘member’’ and ‘‘member organization’’ have different meanings under NYSE MKT and FINRA rules, and under the Exchange’s rules only member organizations can have employees. See note 16, supra. The Exchange thus proposes to use the phrase ‘‘person associated with a member organization’’ to indicate employees of a member organization for purposes of proposed Rule 2111. 20 See Proposed Rule 2111(a). For institutional customers, the proposed Rule would require that a member organization or person associated with a member organization have a reasonable basis to believe that the institutional customer is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies, and is exercising independent judgment in evaluating VerDate Sep<11>2014 17:43 Jun 23, 2016 Jkt 238001 rule, the proposed Rule would explicitly cover a recommended investment strategy.21 The proposed Rule would exclude the following communications from the coverage of proposed Rule 2111 as long as they do not include (standing alone or in combination with other communications) a recommendation of a particular security or securities: • General financial and investment information, including (i) basic investment concepts, such as risk and return, diversification, dollar cost averaging, compounded return, and tax deferred investment, (ii) historic differences in the return of asset classes (e.g., equities, bonds, or cash) based on standard market indices, (iii) effects of inflation, (iv) estimates of future retirement income needs, and (v) assessment of a customer’s investment profile; • Descriptive information about an employer-sponsored retirement or benefit plan, participation in the plan, the benefits of plan participation, and the investment options available under the plan; • Asset allocation models that are (i) based on generally accepted investment theory, (ii) accompanied by disclosures of all material facts and assumptions that may affect a reasonable investor’s assessment of the asset allocation model or any report generated by such model, and (iii) in compliance with FINRA Rule 2214 (Requirements for the Use of Investment Analysis Tools) if the asset allocation model is an ‘‘investment analysis tool’’ covered by FINRA Rule 2214; and • Interactive investment materials that incorporate the above.22 Again like its FINRA counterpart, the proposed Rule would be composed of three main suitability obligations, as follows: • The reasonable-basis suitability obligation, which requires a member organization or person associated with a member organization to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors; 23 recommendations. See Proposed Rule 2111(b). Institutional customers would also be required to affirmatively indicate that they are exercising independent judgment. See id. 21 FINRA Know Your Customer and Suitability Approval, 75 FR at 71481. 22 See Proposed Rule 2111.03. 23 See Proposed Rule 2111.05(a). The proposed rule would clarify that, in general, what constitutes reasonable diligence will vary depending on, among other things, the complexity of and risks associated with the security or investment strategy and the member organization’s or person associated with a member organization’s familiarity with the security PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 • The customer-specific suitability obligation, which requires that a member organization or person associated with a member organization have a reasonable basis to believe that the recommendation is suitable for a particular customer based on that customer’s investment profile, as delineated in proposed Rule 2111(a); 24 and • The quantitative suitability obligation, which requires a member organization or person associated with a member organization who has actual or de facto control over a customer account to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile, as delineated in proposed Rule 2111(a).25 Proposed Rule 2111 would also prohibit a member organization or person associated with a member organization from recommending a transaction or investment strategy involving a security or securities or the continuing purchase of a security or securities or use of an investment strategy involving a security or securities unless the member organization or person associated with a member organization has a reasonable basis to believe that the customer has the financial ability to meet such a commitment.26 Finally, like the FINRA rule, proposed Rule 2111 would provide an exemption to customer-specific suitability for institutional investors, who would be required to affirmatively indicate that they are exercising independent judgment in evaluating the recommendations of the member organization on a trade-by-trade basis, on an asset-class-by-asset-class basis, or or investment strategy. Further, a member organization’s or person associated with a member organization’s reasonable diligence must provide the member organization or person associated with a member organization with an understanding of the potential risks and rewards associated with the recommended security or strategy. Finally, the proposed rule would specify that the lack of such an understanding when recommending a security or strategy violates the suitability rule. See generally id. 24 See Proposed Rule 2111.05(b). 25 See Proposed Rule 2111.05(c). The proposed rule would provide that no single test defines excessive activity but that factors such as the turnover rate, the cost-equity ratio, and the use of in-and-out trading in a customer’s account may provide a basis for a finding that a member organization or person associated with a member organization has violated the quantitative suitability obligation. See id. 26 See Proposed Rule 2111.06. E:\FR\FM\24JNN1.SGM 24JNN1 Federal Register / Vol. 81, No. 122 / Friday, June 24, 2016 / Notices in terms of all potential transactions for its account.27 2. Statutory Basis sradovich on DSK3GDR082PROD with NOTICES The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act,28 in general, and furthers the objectives of Section 6(b)(5) of the Act,29 in particular, because the proposed rule change would be consistent with and facilitate a governance and regulatory structure that is 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. The Exchange believes the proposed rule change is consistent with the Exchange’s obligations under the Exchange Act to prevent fraudulent or manipulative acts and practices, and to promote just and equitable principles of trade, because the proposed rule would incorporate the FINRA ‘‘know your customer’’ rule and related suitability standards into the Exchange’s Rules. The ‘‘know your customer’’ and suitability obligations are critical to ensuring investor protection and fair dealing with customers. Further, the Exchange believes that the proposed rule change supports the objectives of Section 6(b)(5) of the Act by providing greater harmonization between Exchange rules and FINRA rules of similar purpose, resulting in less burdensome and more efficient regulatory compliance. In particular, Exchange member organizations that are also FINRA members are subject to NYSE MKT Rule 405 and FINRA Rules 2090 and 2111, and harmonizing these rules by adopting proposed rules identical to FINRA Rules 2090 and 2111would promote just and equitable principles of trade by providing greater harmonization between NYSE MKT 27 See Proposed Rule 2111.07. Like the FINRA rule, the institutional-customer exemption would apply only if both parts of the two-part test are met: (1) There is a reasonable basis to believe that the institutional customer is capable of evaluating investment risks independently, in general and with regard to particular transactions and investment strategies, and (2) the institutional customer affirmatively indicates that it is exercising independent judgment in evaluating recommendations. See Proposed Rule 2111(b); FINRA Know Your Customer and Suitability Approval, 75 FR at 71481, n. 25. 28 15 U.S.C. 78f(b). 29 15 U.S.C. 78f(b)(5). VerDate Sep<11>2014 17:43 Jun 23, 2016 Jkt 238001 Rules and FINRA Rules of similar purpose by requiring the same standards for ‘‘know your customer’’ and suitability, resulting in less burdensome and more efficient regulatory compliance for Dual Members. As previously noted, the proposed rule text is substantially the same as NYSE MKT’s rule text. To the extent the Exchange has proposed changes that differ from the FINRA version of the Exchange rules, such changes are generally technical in nature and do not change the substance of the proposed rules. The Exchange also believes that the proposed rule change will update and add specificity to the requirements governing ‘‘know your customer’’ and suitability requirements, which will promote just and equitable principles of trade and help to protect investors. B. Self-Regulatory Organization’s Statement on Burden on Competition In accordance with Section 6(b)(8) of the Act,30 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 Act. The proposed rule change is not intended to address competitive issues but rather to achieve greater consistency between the Exchange’s rules and FINRA’s rules concerning ‘‘know your customer’’ and suitability. 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 The Exchange has filed the proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 31 and Rule 19b–4(f)(6) thereunder.32 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 prior to 30 days from the date on which it was filed, or such shorter time as the Commission may designate, if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) U.S.C. 78f(b)(8). U.S.C. 78s(b)(3)(A)(iii). 32 17 CFR 240.19b–4(f)(6). of the Act and Rule 19b–4(f)(6)(iii) thereunder. A proposed rule change filed under Rule 19b–4(f)(6) 33 normally does not become operative prior to 30 days after the date of the filing. However, pursuant to Rule 19b–4(f)(6)(iii),34 the Commission may designate a shorter time if such action is consistent with the protection of investors and the public interest. At any time within 60 days of the filing of such 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 under Section 19(b)(2)(B) 35 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: 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– NYSEMKT–2016–59 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–NYSEMKT–2016–59. 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 30 15 33 17 31 15 34 17 PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 41367 CFR 240.19b–4(f)(6). CFR 240.19b–4(f)(6)(iii). 35 15 U.S.C. 78s(b)(2)(B). E:\FR\FM\24JNN1.SGM 24JNN1 41368 Federal Register / Vol. 81, No. 122 / Friday, June 24, 2016 / Notices 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– NYSEMKT–2016–59 and should be submitted on or before July 15, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.36 Robert W. Errett, Deputy Secretary. [FR Doc. 2016–14933 Filed 6–23–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION Dated: June 20, 2016. Robert W. Errett, Deputy Secretary. [SEC File No. 270–116, OMB Control No. 3235–0109] [FR Doc. 2016–14931 Filed 6–23–16; 8:45 am] BILLING CODE 8011–01–P Submission for OMB Review; Comment Request Upon Written Request Copies Available From: Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE., Washington, DC 20549–2736. sradovich on DSK3GDR082PROD with NOTICES Extensions: Rule 12d1–3. Notice is hereby given that, pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.), the Securities and Exchange Commission (‘‘Commission’’) has submitted to the Office of Management and Budget this request for extension of the previously approved collection of information discussed below. Exchange Act Rule 12d1–3 (17 CFR 240.12d1–3) requires a certification that a security has been approved by an exchange for listing and registration pursuant to Section 12(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(d)) to be filed with the Commission. The information required under Rule 12d1–3 must be filed with the Commission and is publicly available. We estimate that it takes 36 17 CFR 200.30–3(a)(12). VerDate Sep<11>2014 18:31 Jun 23, 2016 Jkt 238001 approximately one-half hour to provide the information required under Rule 12d1–3 and that the information is filed by approximately 688 respondents annually for a total annual reporting burden of 344 burden hours (0.5 hours per response × 688 responses). An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. The public may view the background documentation for this information collection at the following Web site, www.reginfo.gov. Comments should be directed to: (i) Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Office of Management and Budget, Room 10102, New Executive Office Building, Washington, DC 20503, or by sending an email to: Shagufta_Ahmed@omb.eop.gov; and (ii) Pamela Dyson, Director/Chief Information Officer, Securities and Exchange Commission, c/o Remi PavlikSimon, 100 F Street NE., Washington, DC 20549 or send an email to: PRA_Mailbox@sec.gov. Comments must be submitted to OMB within 30 days of this notice. SMALL BUSINESS ADMINISTRATION [Disaster Declaration #14746 and #14747] Notice is hereby given that as a result of the Administrator’s disaster declaration, applications for disaster loans may be filed at the address listed above or other locally announced locations. The following areas have been determined to be adversely affected by the disaster: Primary Counties: San Patricio. Contiguous Counties: Texas: Aransas, Bee, Jim Wells, Live Oak, Nueces, Refugio. SUPPLEMENTARY INFORMATION: The Interest Rates are: Percent For Physical Damage: Homeowners With Credit Available Elsewhere ...................... Homeowners Without Credit Available Elsewhere .............. Businesses With Credit Available Elsewhere ...................... Businesses Without Credit Available Elsewhere .............. Non-Profit Organizations With Credit Available Elsewhere ... Non-Profit Organizations Without Credit Available Elsewhere ..................................... For Economic Injury: Businesses & Small Agricultural Cooperatives Without Credit Available Elsewhere .............. Non-Profit Organizations Without Credit Available Elsewhere ..................................... 3.250 1.625 6.250 4.000 2.625 2.625 4.000 2.625 The number assigned to this disaster for physical damage is 14746 6 and for economic injury is 14747 0. The State which received an EIDL Declaration # is Texas. Texas Disaster #TX–00471 (Catalog of Federal Domestic Assistance Number 59008) U.S. Small Business Administration. ACTION: Notice. Maria Contreras-Sweet, Administrator. AGENCY: [FR Doc. 2016–14990 Filed 6–23–16; 8:45 am] This is a notice of an Administrative declaration of a disaster for the State of Texas dated 06/16/2016. Incident: Severe Storms and Flooding. Incident Period: 05/16/2016. Effective Date: 06/16/2016. Physical Loan Application Deadline Date: 08/15/2016. Economic Injury (EIDL) Loan Application Deadline Date: 03/16/2017. ADDRESSES: Submit completed loan applications to: U.S. Small Business Administration, Processing and Disbursement Center, 14925 Kingsport Road, Fort Worth, TX 76155. FOR FURTHER INFORMATION CONTACT: A. Escobar, Office of Disaster Assistance, U.S. Small Business Administration, 409 3rd Street SW., Suite 6050, Washington, DC 20416. SUMMARY: PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 BILLING CODE 8025–01–P SURFACE TRANSPORTATION BOARD [Docket No. MCF 21067] Prisoner Transportation Services, LLC—Control—U.S. Corrections, LLC D/B/A U.S.C. Surface Transportation Board. Notice tentatively approving and authorizing finance transaction. AGENCY: ACTION: On May 26, 2016, Prisoner Transportation Services, LLC (Applicant) filed an application under 49 U.S.C. 14303 so that it can acquire common control of U.S. Corrections, LLC (U.S.C.). The Board is tentatively SUMMARY: E:\FR\FM\24JNN1.SGM 24JNN1

Agencies

[Federal Register Volume 81, Number 122 (Friday, June 24, 2016)]
[Notices]
[Pages 41364-41368]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-14933]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78106; File No. SR-NYSEMKT-2016-59]


Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change Adopting New NYSE MKT 
Rules 2090--Equities (Know Your Customer) and 2111--Equities 
(Suitability) That Are Substantially Similar to FINRA Rules 2090 (Know 
Your Customer) and 2111 (Suitability), Deleting Current NYSE MKT Rule 
405--Equities (Diligence as to Accounts), and Making Other Conforming 
Changes

June 20, 2016.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'' or ``Exchange Act'') \2\ and Rule 19b-4 thereunder,\3\ 
notice is hereby given that on June 9, 2016, NYSE MKT LLC (``Exchange'' 
or ``NYSE MKT'') 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 
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 Substance 
of the Proposed Rule Change

    The Exchange proposes adopting new rule text that is substantially 
similar to Rules 2090 (Know Your Customer) and 2111 (Suitability) of 
the Financial Industry Regulatory Authority, Inc. (``FINRA''), (2) 
deleting current Rule 405--Equities (Diligence as to Accounts) (``Rule 
405''), and (3) making other conforming changes. 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.

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 its rules to harmonize with certain 
FINRA rules. Specifically, the Exchange proposes (1) adopting new rule 
text that is substantially similar to FINRA Rules 2090 and 2111; (2) 
deleting Rule 405; \4\ and (3) making other conforming changes.
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    \4\ References to rules are to NYSE MKT rules unless otherwise 
indicated.
---------------------------------------------------------------------------

Background
    In 2007, FINRA and the Exchange's affiliate the New York Stock 
Exchange LLC (``NYSE'') \5\ entered into an

[[Page 41365]]

agreement (the ``Agreement'') pursuant to Rule 17d-2 under the Act to 
reduce regulatory duplication by allocating to FINRA certain regulatory 
responsibilities for NYSE rules and rule interpretations (``FINRA 
Incorporated NYSE Rules'').\6\ NYSE MKT became a party to the Agreement 
effective December 15, 2008.\7\
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    \5\ NYSE Regulation, Inc., a former not-for-profit subsidiary of 
the NYSE, was also a party to the Agreement by virtue of the fact 
that it performed regulatory functions for the NYSE pursuant to a 
delegation agreement. See Securities Exchange Act Release No. 53382 
(February 27, 2006), 71 FR 11251, 11264-65 (March 6, 2006) (SR-NYSE-
2005-77) (approving delegation agreement). NYSE Regulation also 
performed regulatory services for the Exchange pursuant to an 
intercompany Regulatory Services Agreement (``RSA'') that gave the 
Exchange the contractual right to review NYSE Regulation's 
performance. The delegation agreement and related RSA terminated on 
February 16, 2016, and NYSE Regulation has ceased providing 
regulatory services to the Exchange, which has re-integrated its 
regulatory functions.
    \6\ See Securities Exchange Act Release Nos. 56148 (July 26, 
2007), 72 FR 42146 (August 1, 2007) (order approving the Agreement); 
56147 (July 26, 2007), 72 FR 42166 (August 1, 2007) (SR-NASD-2007-
054) (order approving the incorporation of certain NYSE Rules as 
``Common Rules''). Paragraph 2(b) of the Agreement sets forth 
procedures regarding proposed changes by FINRA or the Exchange to 
the substance of any of the Common Rules.
    \7\ See Securities Exchange Act Release Nos. 56148 (July 26, 
2007), 72 FR 42146 (August 1, 2007) (order approving the Agreement); 
56147 (July 26, 2007), 72 FR 42166 (August 1, 2007) (SR-NASD-2007-
054) (order approving the incorporation of certain NYSE Rules as 
``Common Rules''); 60409 (July 30, 2009), 74 FR 39353 (August 6, 
2009) (order approving the amended and restated Agreement, adding 
NYSE MKT LLC as a party). Paragraph 2(b) of the Agreement sets forth 
procedures regarding proposed changes by FINRA, NYSE or NYSE MKT to 
the substance of any of the Common Rules.
---------------------------------------------------------------------------

    In order to reduce regulatory duplication and relieve firms that 
are members of the Exchange, the NYSE and FINRA of conflicting or 
unnecessary regulatory burdens, FINRA has been reviewing and amending 
the NASD and FINRA Incorporated NYSE Rules in order to create a 
consolidated FINRA rulebook.\8\ As part of the rule consolidation 
process, in 2010, FINRA harmonized NASD and FINRA Incorporated NYSE 
Rules and interpretations concerning know your customer and 
suitability.\9\ In its filing, FINRA (1) adopted FINRA Rules 2090 (Know 
Your Customer) and 2090 (Suitability), and (2) deleted NASD Rule 2310 
(Recommendations to Customers (Suitability)) and NYSE Rule 405 
(Diligence as to Accounts) as well as NYSE Rule Interpretations 405/01 
through/04. The rule change was effective July 9, 2012.\10\
---------------------------------------------------------------------------

    \8\ FINRA's rulebook currently has three sets of rules: (1) NASD 
Rules, (2) FINRA Incorporated NYSE Rules, and (3) consolidated FINRA 
Rules. The FINRA Incorporated NYSE Rules apply only to those members 
of FINRA that are also members of the NYSE (``Dual Members''), while 
the consolidated FINRA Rules apply to all FINRA members. For more 
information about the FINRA rulebook consolidation process, see 
FINRA Information Notice, March 12, 2008.
    \9\ See Securities Exchange Act Release No. 63325 ((November 17, 
2010), 75 FR 71479 (November 23, 2010) (SR-FINRA-2010-039) (``FINRA 
Know Your Customer and Suitability Approval'').
    \10\ See FINRA Regulatory Notice 11-25 (May 2011). The original 
effective date was October 7, 2011.
---------------------------------------------------------------------------

    Currently, the Exchange does not have separate rules for know your 
customer and suitability. Rather, Rule 405, based on NYSE Rule 405,\11\ 
requires every member organization, through a principal executive or a 
person or persons designated under the provisions of Rule 3110(a), to 
take certain actions relative to customers and customer accounts. 
First, Rule 405(1) requires member organizations to use ``due 
diligence'' to learn the ``essential facts relative to every customer, 
every order, every cash or margin account accepted or carried by such 
organization and every person holding power of attorney over any 
account accepted or carried by such organization.'' Second, Rule 405(2) 
requires member organizations to supervise diligently all accounts 
handled by registered representatives. Finally, Rule 405(3) requires 
persons designated by the member to be informed of the essential facts 
relative to the customer and to the nature of the proposed account 
prior to approving the opening of the account.
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    \11\ The NYSE recently made a similar filing to delete Rule 405 
and its related interpretations and adopt new NYSE Rules 2090 and 
2111 based on FINRA Rules 2090 and 2111. See Securities Exchange Act 
Release No. 77838 (May 16, 2016), 81 FR 31974 (May 20, 2016) (SR-
NYSE-2016-33).
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    Supplementary Material .10 of Rule 405 generally discusses the 
requirements that firms know their customers and imposes specific 
knowledge and due diligence requirements in connection with the 
authority of third parties to act on behalf of customers that are legal 
entities, including margin accounts carried by a member organization 
for a non-member corporation, cash accounts carried for a non-member 
corporation, and agency accounts carried by a member organization.\12\ 
Supplementary Material .20 of Rule 405 refers to the requirements of 
Rule 4311 concerning the permitted allocation of responsibilities 
between introducing and carrying organizations. Supplementary Material 
.30 cross references to Rule 414 (Index and Currency Warrants).\13\
---------------------------------------------------------------------------

    \12\ As discussed below, the Exchange believes that 
Supplementary Material .10 of Rule 405--Equities is redundant of 
proposed Rule 2090 and proposed Supplementary Material .01 thereof 
that would require firms to know the essential facts concerning 
every customer.
    \13\ NYSE Rule 414 provides that Rule 723 (Suitability) applies 
to recommendations in currency warrants, currency index warrants and 
stock index warrants. When the Exchange adopted the NYSE's rules in 
2008, however, NYSE Rule 414 was not adopted. See Securities 
Exchange Act Release No. 58265 (July 30, 2008), 73 FR 46075, 46078 
(August 7, 2008) (SR-Amex-2008-63). The Exchange believes that the 
other cross references in Rule 405 are either no longer necessary or 
moot.
---------------------------------------------------------------------------

Proposed Rule Change
    The Exchange proposes to delete current Rule 405 as either 
duplicative of, or not aligned with, the proposed know your customer 
and suitability requirements discussed below, and adopt the text of 
FINRA Rules 2090 and 2111.\14\
---------------------------------------------------------------------------

    \14\ The technical and conforming changes are that the Exchange 
would (1) substitute the term ``member organization'' for ``member'' 
(see note 18, infra), (2) substitute the term ``Exchange'' for 
``FINRA,'' (3) change certain cross-references to FINRA rules to 
cross-references to Exchange rules, and (4) add references to 
proposed Rules 2090--Equities and 2111--Equities in Rule 3170 (Tape 
Recording of Registered Persons by Certain Firms).
---------------------------------------------------------------------------

Proposed Rule 2090--Equities (Know Your Customer)
    Like FINRA Rule 2090, proposed Rule 2090--Equities (``Rule 2090'') 
would encompass the ``main ethical standard'' of Rule 405(1).\15\ The 
proposed rule would require every ``member organization through a 
principal executive or a person or persons designated under the 
provisions of Rule 3110(a)'' \16\ to use ``reasonable diligence,'' with 
regard to the opening and maintenance of every account, in order to 
know and retain the essential facts concerning every customer. The 
proposed supplementary material would define ``essential facts'' as 
those ``required to (a) effectively service the customer's account, (b) 
act in accordance with any special handling instructions for the 
account, (c) understand the authority of each person acting on behalf 
of the customer, and (d) comply with applicable laws, regulations, and 
rules.'' \17\ The proposed rule would be identical to FINRA Rule 2090 
except that the proposed rule would use the term ``member 
organization'' rather than ``member,'' which has different meanings 
under FINRA and Exchange rules.\18\
---------------------------------------------------------------------------

    \15\ FINRA Know Your Customer and Suitability Approval, 75 FR at 
71480.
    \16\ This is the current formulation in Rule 405, which the 
Exchange proposes to retain.
    \17\ See Proposed Rule 2090.01. Like FINRA, the Exchange does 
not propose to incorporate the requirement in NYSE Rule 405(1) to 
learn the essential facts relative to ``every order.'' The Exchange 
agrees with FINRA that the application of existing order-handling 
rules renders this formulation unnecessary. See FINRA Know Your 
Customer and Suitability Approval, 75 FR at 71480. Further, the 
Exchange's proposed suitability rule would also require member 
organizations and persons associated with a member organization to 
use reasonable diligence to understand the securities and strategies 
they recommend, further obviating the need for this language. See 
id.
    \18\ Under FINRA Rules, a ``member'' means individual, 
partnership, corporation or other legal entity admitted to 
membership in FINRA under Articles III and IV of the FINRA By-Laws. 
See FINRA Rule 0160(b)(10). Article III, Sec. 1(a) generally limits 
membership to registered brokers, dealers, municipal securities 
brokers or dealers, or government securities brokers or dealers. 
NYSE MKT's equivalent term is ``member organization.'' See Rule 
2(b)(i)--Equities (defining ``member organization'' as a registered 
broker or dealer (unless exempt pursuant to the Act) that is a 
member of FINRA or another registered securities exchange). Under 
Rule 2(a)--Equities, the term ``member'' means a natural person 
associated with a member organization who has been approved by the 
Exchange and designated by such member organization to effect 
transactions on the floor of the Exchange or any facility thereof. A 
``member'' is not a registered broker-dealer and does not have 
employees; only member organizations have employees. For purposes of 
the proposed amendments to its disciplinary rules, the Exchange 
proposes to continue using the phrase ``covered person'' to indicate 
employees of a member organization. As noted below, for purposes of 
the proposed change, the Exchange proposes to continue using the 
phrase ``person associated with a member organization'' to indicate 
employees of a member organization for purposes of proposed Rule 
2111.

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[[Page 41366]]

Proposed Rule 2111--Equities (Suitability)
    Proposed Rule 2111--Equities (``Rule 2111''), like its FINRA 
counterpart, would require a member organization or person associated 
with a member organization \19\ to have a ``reasonable basis'' to 
believe that a recommended transaction or investment strategy involving 
a security or securities is suitable for the customer. This assessment 
would be based on the information obtained through the reasonable 
diligence of the member organization or person associated with a member 
organization to ascertain the customer's investment profile, which 
includes, but is not limited to, the customer's age, other investments, 
financial situation and needs, tax status, investment objectives, 
investment experience, investment time horizon, liquidity needs, risk 
tolerance, and any other information the customer may disclose to the 
member organization or person associated with a member organization in 
connection with such recommendation.\20\ Like the FINRA rule, the 
proposed Rule would explicitly cover a recommended investment 
strategy.\21\ The proposed Rule would exclude the following 
communications from the coverage of proposed Rule 2111 as long as they 
do not include (standing alone or in combination with other 
communications) a recommendation of a particular security or 
securities:
---------------------------------------------------------------------------

    \19\ As proposed, Rule 2111 is identical to FINRA Rule 2111 
except that the Exchange proposes to use the phrase ``member 
organization or person associated with a member organization'' 
rather than ``member or an associated person'' to indicate the 
coverage of the rule. As discussed above, ``member'' and ``member 
organization'' have different meanings under NYSE MKT and FINRA 
rules, and under the Exchange's rules only member organizations can 
have employees. See note 16, supra. The Exchange thus proposes to 
use the phrase ``person associated with a member organization'' to 
indicate employees of a member organization for purposes of proposed 
Rule 2111.
    \20\ See Proposed Rule 2111(a). For institutional customers, the 
proposed Rule would require that a member organization or person 
associated with a member organization have a reasonable basis to 
believe that the institutional customer is capable of evaluating 
investment risks independently, both in general and with regard to 
particular transactions and investment strategies, and is exercising 
independent judgment in evaluating recommendations. See Proposed 
Rule 2111(b). Institutional customers would also be required to 
affirmatively indicate that they are exercising independent 
judgment. See id.
    \21\ FINRA Know Your Customer and Suitability Approval, 75 FR at 
71481.
---------------------------------------------------------------------------

     General financial and investment information, including 
(i) basic investment concepts, such as risk and return, 
diversification, dollar cost averaging, compounded return, and tax 
deferred investment, (ii) historic differences in the return of asset 
classes (e.g., equities, bonds, or cash) based on standard market 
indices, (iii) effects of inflation, (iv) estimates of future 
retirement income needs, and (v) assessment of a customer's investment 
profile;
     Descriptive information about an employer-sponsored 
retirement or benefit plan, participation in the plan, the benefits of 
plan participation, and the investment options available under the 
plan;
     Asset allocation models that are (i) based on generally 
accepted investment theory, (ii) accompanied by disclosures of all 
material facts and assumptions that may affect a reasonable investor's 
assessment of the asset allocation model or any report generated by 
such model, and (iii) in compliance with FINRA Rule 2214 (Requirements 
for the Use of Investment Analysis Tools) if the asset allocation model 
is an ``investment analysis tool'' covered by FINRA Rule 2214; and
     Interactive investment materials that incorporate the 
above.\22\
---------------------------------------------------------------------------

    \22\ See Proposed Rule 2111.03.
---------------------------------------------------------------------------

    Again like its FINRA counterpart, the proposed Rule would be 
composed of three main suitability obligations, as follows:
     The reasonable-basis suitability obligation, which 
requires a member organization or person associated with a member 
organization to have a reasonable basis to believe, based on reasonable 
diligence, that the recommendation is suitable for at least some 
investors; \23\
---------------------------------------------------------------------------

    \23\ See Proposed Rule 2111.05(a). The proposed rule would 
clarify that, in general, what constitutes reasonable diligence will 
vary depending on, among other things, the complexity of and risks 
associated with the security or investment strategy and the member 
organization's or person associated with a member organization's 
familiarity with the security or investment strategy. Further, a 
member organization's or person associated with a member 
organization's reasonable diligence must provide the member 
organization or person associated with a member organization with an 
understanding of the potential risks and rewards associated with the 
recommended security or strategy. Finally, the proposed rule would 
specify that the lack of such an understanding when recommending a 
security or strategy violates the suitability rule. See generally 
id.
---------------------------------------------------------------------------

     The customer-specific suitability obligation, which 
requires that a member organization or person associated with a member 
organization have a reasonable basis to believe that the recommendation 
is suitable for a particular customer based on that customer's 
investment profile, as delineated in proposed Rule 2111(a); \24\ and
---------------------------------------------------------------------------

    \24\ See Proposed Rule 2111.05(b).
---------------------------------------------------------------------------

     The quantitative suitability obligation, which requires a 
member organization or person associated with a member organization who 
has actual or de facto control over a customer account to have a 
reasonable basis for believing that a series of recommended 
transactions, even if suitable when viewed in isolation, are not 
excessive and unsuitable for the customer when taken together in light 
of the customer's investment profile, as delineated in proposed Rule 
2111(a).\25\
---------------------------------------------------------------------------

    \25\ See Proposed Rule 2111.05(c). The proposed rule would 
provide that no single test defines excessive activity but that 
factors such as the turnover rate, the cost-equity ratio, and the 
use of in-and-out trading in a customer's account may provide a 
basis for a finding that a member organization or person associated 
with a member organization has violated the quantitative suitability 
obligation. See id.
---------------------------------------------------------------------------

    Proposed Rule 2111 would also prohibit a member organization or 
person associated with a member organization from recommending a 
transaction or investment strategy involving a security or securities 
or the continuing purchase of a security or securities or use of an 
investment strategy involving a security or securities unless the 
member organization or person associated with a member organization has 
a reasonable basis to believe that the customer has the financial 
ability to meet such a commitment.\26\
---------------------------------------------------------------------------

    \26\ See Proposed Rule 2111.06.
---------------------------------------------------------------------------

    Finally, like the FINRA rule, proposed Rule 2111 would provide an 
exemption to customer-specific suitability for institutional investors, 
who would be required to affirmatively indicate that they are 
exercising independent judgment in evaluating the recommendations of 
the member organization on a trade-by-trade basis, on an asset-class-
by-asset-class basis, or

[[Page 41367]]

in terms of all potential transactions for its account.\27\
---------------------------------------------------------------------------

    \27\ See Proposed Rule 2111.07. Like the FINRA rule, the 
institutional-customer exemption would apply only if both parts of 
the two-part test are met: (1) There is a reasonable basis to 
believe that the institutional customer is capable of evaluating 
investment risks independently, in general and with regard to 
particular transactions and investment strategies, and (2) the 
institutional customer affirmatively indicates that it is exercising 
independent judgment in evaluating recommendations. See Proposed 
Rule 2111(b); FINRA Know Your Customer and Suitability Approval, 75 
FR at 71481, n. 25.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\28\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\29\ in particular, because 
the proposed rule change would be consistent with and facilitate a 
governance and regulatory structure that is 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. The Exchange believes the 
proposed rule change is consistent with the Exchange's obligations 
under the Exchange Act to prevent fraudulent or manipulative acts and 
practices, and to promote just and equitable principles of trade, 
because the proposed rule would incorporate the FINRA ``know your 
customer'' rule and related suitability standards into the Exchange's 
Rules. The ``know your customer'' and suitability obligations are 
critical to ensuring investor protection and fair dealing with 
customers.
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78f(b).
    \29\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Further, the Exchange believes that the proposed rule change 
supports the objectives of Section 6(b)(5) of the Act by providing 
greater harmonization between Exchange rules and FINRA rules of similar 
purpose, resulting in less burdensome and more efficient regulatory 
compliance. In particular, Exchange member organizations that are also 
FINRA members are subject to NYSE MKT Rule 405 and FINRA Rules 2090 and 
2111, and harmonizing these rules by adopting proposed rules identical 
to FINRA Rules 2090 and 2111would promote just and equitable principles 
of trade by providing greater harmonization between NYSE MKT Rules and 
FINRA Rules of similar purpose by requiring the same standards for 
``know your customer'' and suitability, resulting in less burdensome 
and more efficient regulatory compliance for Dual Members. As 
previously noted, the proposed rule text is substantially the same as 
NYSE MKT's rule text. To the extent the Exchange has proposed changes 
that differ from the FINRA version of the Exchange rules, such changes 
are generally technical in nature and do not change the substance of 
the proposed rules. The Exchange also believes that the proposed rule 
change will update and add specificity to the requirements governing 
``know your customer'' and suitability requirements, which will promote 
just and equitable principles of trade and help to protect investors.

B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\30\ 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 Act. The proposed rule change is not intended to 
address competitive issues but rather to achieve greater consistency 
between the Exchange's rules and FINRA's rules concerning ``know your 
customer'' and suitability.
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \31\ and Rule 19b-4(f)(6) thereunder.\32\ 
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 prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \32\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) \33\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\34\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest.
---------------------------------------------------------------------------

    \33\ 17 CFR 240.19b-4(f)(6).
    \34\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such 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 under 
Section 19(b)(2)(B) \35\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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-NYSEMKT-2016-59 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-NYSEMKT-2016-59. 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

[[Page 41368]]

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-NYSEMKT-2016-59 and should 
be submitted on or before July 15, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-14933 Filed 6-23-16; 8:45 am]
BILLING CODE 8011-01-P
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