Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Provide a Process for an Expedited Suspension Proceeding and Adopt a Rule To Prohibit Disruptive Quoting and Trading Activity, 44366-44372 [2016-16035]
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44366
Federal Register / Vol. 81, No. 130 / Thursday, July 7, 2016 / Notices
or principal dollar amount of debt
securities that the issuer has authorized
to be outstanding. These mandatory
requirements ensure accurate
securityholder records and assist the
Commission and other regulatory
agencies with monitoring transfer agents
and ensuring compliance with the rule.
This rule does not involve the collection
of confidential information.
There are approximately 413
registered transfer agents. We estimate
that the average number of hours
necessary for each transfer agent to
comply with Rule 17Ad–10 is
approximately 80 hours per year, which
generates an industry-wide annual
burden of 33,040 hours (413 times 80
hours). This burden is of a
recordkeeping nature but also includes
a small amount of third party disclosure
and SEC reporting burdens. At an
average staff cost of $50 per hour, the
industry-wide internal labor cost of
compliance (a monetization of the
burden hours) is approximately
$1,652,000 per year (33,040 × $50).
In addition, we estimate that each
transfer agent will incur an annual
external cost burden of $18,000
resulting from the collection of
information. Therefore, the total annual
external cost on the entire transfer agent
industry is approximately $7,434,000
($18,000 times 413). This cost primarily
reflects ongoing computer operations
and maintenance associated with
generating, maintaining, and disclosing
or providing certain information
required by the rule.
The amount of time any particular
transfer agent will devote to Rule 17Ad–
10 compliance will vary according to
the size and scope of the transfer agent’s
business activity. We note, however,
that at least some of the records,
processes, and communications
required by Rule 17Ad–10 would likely
be maintained, generated, and used for
transfer agent business purposes even
without the rule.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
under the PRA unless it displays a
currently valid OMB control number.
The public may view 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
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Officer, Securities and Exchange
Commission, c/o Remi Pavlik-Simon,
100 F Street NE., Washington, DC
20549, or by sending an email to: PRA_
Mailbox@sec.gov. Comments must be
submitted to OMB within 30 days of
this notice.
Dated: June 30, 2016.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–16037 Filed 7–6–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78208; File No. SR–
NASDAQ–2016–092]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Provide a
Process for an Expedited Suspension
Proceeding and Adopt a Rule To
Prohibit Disruptive Quoting and
Trading Activity
June 30, 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 June 22,
2016, The NASDAQ Stock Market LLC
(‘‘NASDAQ’’ or ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes a proposal to
adopt a new NASDAQ Options Market
LLC rule to clearly prohibit disruptive
quoting and trading activity on the
Exchange, as further described below.
The text of the proposed rule change
is available on the Exchange’s Web site
at https://nasdaq.cchwallstreet.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
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1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
Frm 00109
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concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange is filing this proposal to
adopt an options rule to clearly prohibit
disruptive quoting and trading activity
on the Exchange and to permit the
Exchange to take prompt action to
suspend Members or their clients that
violate such rule pursuant to Rule 9400.
Background
As a national securities exchange
registered pursuant to Section 6 of the
Act, the Exchange is required to be
organized and to have the capacity to
enforce compliance by its members and
persons associated with its members,
with the Act, the rules and regulations
thereunder, and the Exchange’s Rules.
Further, the Exchange’s Rules are
required to be ‘‘designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade . . . and, in general,
to protect investors and the public
interest.’’ 3 In fulfilling these
requirements, the Exchange has
developed a comprehensive regulatory
program that includes automated
surveillance of trading activity that is
both operated directly by Exchange staff
and by staff of the Financial Industry
Regulatory Authority (‘‘FINRA’’)
pursuant to a Regulatory Services
Agreement (‘‘RSA’’). When disruptive
and potentially manipulative or
improper quoting and trading activity is
identified, the Exchange or FINRA
(acting as an agent of the Exchange)
conducts an investigation into the
activity, requesting additional
information from the Member or
Members involved. To the extent
violations of the Act, the rules and
regulations thereunder, or Exchange
Rules have been identified and
confirmed, the Exchange or FINRA as its
agent will commence the enforcement
process, which might result in, among
other things, a censure, a requirement to
take certain remedial actions, one or
more restrictions on future business
3 15
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activities, a monetary fine, or even a
temporary or permanent ban from the
securities industry.
The process described above, from the
identification of disruptive and
potentially manipulative or improper
quoting and trading activity to a final
resolution of the matter, can often take
several years. The Exchange believes
that this time period is generally
necessary and appropriate to afford the
subject Member adequate due process,
particularly in complex cases. However,
as described below, the Exchange
believes that there are certain obvious
and uncomplicated cases of disruptive
and manipulative behavior or cases
where the potential harm to investors is
so large that the Exchange should have
the authority to initiate an expedited
suspension proceeding in order to stop
the behavior from continuing on the
Exchange.
In recent years, several cases have
been brought and resolved by the
Exchange and other SROs that involved
allegations of wide-spread market
manipulation, much of which was
ultimately being conducted by foreign
persons and entities using relatively
rudimentary technology to access the
markets and over which the Exchange
and other SROs had no direct
jurisdiction. In each case, the conduct
involved a pattern of disruptive quoting
and trading activity indicative of
manipulative layering 4 or spoofing.5
The Exchange and other SROs were able
to identify the disruptive quoting and
trading activity in real-time or near realtime; nonetheless, in accordance with
Exchange Rules and the Act, the
Members responsible for such conduct
or responsible for their customers’
conduct were allowed to continue the
disruptive quoting and trading activity
on the Exchange and other exchanges
during the entirety of the subsequent
lengthy investigation and enforcement
process. The Exchange believes that it
should have the authority to initiate an
expedited suspension proceeding in
order to stop the behavior from
continuing on the Exchange if a Member
is engaging in or facilitating disruptive
4 ‘‘Layering’’ is a form of market manipulation in
which multiple, non-bona fide limit orders are
entered on one side of the market at various price
levels in order to create the appearance of a change
in the levels of supply and demand, thereby
artificially moving the price of the security. An
order is then executed on the opposite side of the
market at the artificially created price, and the nonbona fide orders are cancelled.
5 ‘‘Spoofing’’ is a form of market manipulation
that involves the market manipulator placing nonbona fide orders that are intended to trigger some
type of market movement and/or response from
other market participants, from which the market
manipulator might benefit by trading bona fide
orders.
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quoting and trading activity and the
Member has received sufficient notice
with an opportunity to respond, but
such activity has not ceased.
The following two examples are
instructive on the Exchange’s rationale
for the proposed rule change.
In July 2012, Biremis Corp. (formerly
Swift Trade Securities USA, Inc.) (the
‘‘Firm’’) and its CEO were barred from
the industry for, among other things,
supervisory violations related to a
failure by the Firm to detect and prevent
disruptive and allegedly manipulative
trading activities, including layering,
short sale violations, and anti-money
laundering violations.6 The Firm’s sole
business was to provide trade execution
services via a proprietary day trading
platform and order management system
to day traders located in foreign
jurisdictions. Thus, the disruptive and
allegedly manipulative trading activity
introduced by the Firm to U.S. markets
originated directly or indirectly from
foreign clients of the Firm. The pattern
of disruptive and allegedly
manipulative quoting and trading
activity was widespread across multiple
exchanges, and the Exchange, FINRA,
and other SROs identified clear patterns
of the behavior in 2007 and 2008.
Although the Firm and its principals
were on notice of the disruptive and
allegedly manipulative quoting and
trading activity that was occurring, the
Firm took little to no action to attempt
to supervise or prevent such quoting
and trading activity until at least 2009.
Even when it put some controls in
place, they were deficient and the
pattern of disruptive and allegedly
manipulative trading activity continued
to occur. As noted above, the final
resolution of the enforcement action to
bar the Firm and its CEO from the
industry was not concluded until 2012,
four years after the disruptive and
allegedly manipulative trading activity
was first identified.
In September of 2012, Hold Brothers
On-Line Investment Services, Inc. (the
‘‘Firm’’) settled a regulatory action in
connection with the Firm’s provision of
a trading platform, trade software and
trade execution, support and clearing
services for day traders.7 Many traders
using the Firm’s services were located
in foreign jurisdictions. The Firm
ultimately settled the action with
FINRA and several exchanges, including
the Exchange, for a total monetary fine
of $3.4 million. In a separate action, the
6 See Biremis Corp. and Peter Beck, FINRA Letter
of Acceptance, Waiver and Consent No.
2010021162202, July 30, 2012.
7 See Hold Brothers On-Line Investment Services,
LLC, FINRA Letter of Acceptance, Waiver and
Consent No. 20100237710001, September 25, 2012.
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44367
Firm settled with the Commission for a
monetary fine of $2.5 million.8 Among
the alleged violations in the case were
disruptive and allegedly manipulative
quoting and trading activity, including
spoofing, layering, wash trading, and
pre-arranged trading. Through its
conduct and insufficient procedures and
controls, the Firm also allegedly
committed anti-money laundering
violations by failing to detect and report
manipulative and suspicious trading
activity. The Firm was alleged to have
not only provided foreign traders with
access to the U.S. markets to engage in
such activities, but that its principals
also owned and funded foreign
subsidiaries that engaged in the
disruptive and allegedly manipulative
quoting and trading activity. Although
the pattern of disruptive and allegedly
manipulative quoting and trading
activity was identified in 2009, as noted
above, the enforcement action was not
concluded until 2012. Thus, although
disruptive and allegedly manipulative
quoting and trading was promptly
detected, it continued for several years.
The Exchange also notes the current
criminal proceedings that have
commenced against Navinder Singh
Sarao. Mr. Sarao’s allegedly
manipulative trading activity, which
included forms of layering and spoofing
in the futures markets, has been linked
as a contributing factor to the ‘‘Flash
Crash’’ of 2010, and yet continued
through 2015.
The Exchange believes that the
activities described in the cases above
provide justification for the proposed
rule change, which is described below.
In addition, while the examples
provided are related to the equities
market, the Exchange believes that this
type of conduct should be prohibited for
all Exchange members, equities and
options. The Exchange believes that
these patterns of disruptive and
allegedly manipulative quoting and
trading activity need to be addressed
and the product should not limit the
action taken by the Exchange. For this
reason, the Exchange now proposes a
corresponding options rule.
Rule 9400—Expedited Client
Suspension Proceeding
The Exchange adopted Rule 9400 to
set forth procedures for issuing
suspension orders, immediately
prohibiting a Member from conducting
continued disruptive quoting and
trading activity on the Exchange.
Importantly, these procedures provide
8 In the Matter of Hold Brothers On-Line
Investment Services, LLC, Exchange Act Release No.
67924, September 25, 2012.
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the Exchange the authority to order a
Member to cease and desist from
providing access to the Exchange to a
client of the Member that is conducting
disruptive quoting and trading activity
in violation of Rule 2170. Paragraph (a)
of Rule 9400, with the prior written
authorization of the Chief Regulatory
Officer (‘‘CRO’’) or such other senior
officers as the CRO may designate, the
Office of General Counsel or Regulatory
Department of the Exchange (such
departments generally referred to as the
‘‘Exchange’’ for purposes of Rule 9400)
and may initiate an expedited
suspension proceeding with respect to
alleged violations of Rule 2170.
Paragraph (a) also sets forth the
requirements for notice and service of
such notice pursuant to the Rule,
including the required method of
service and the content of notice.
Paragraph (b) of Rule 9400 governs
the appointment of a Hearing Panel as
well as potential disqualification or
recusal of Hearing Officers. The
Exchange’s Rules provide for a Hearing
Officer to be recused in the event he or
she has a conflict of interest or bias or
other circumstances exist where his or
her fairness might reasonably be
questioned in accordance with Rules
9233(a). In addition to recusal initiated
by such a Hearing Officer, a party to the
proceeding will be permitted to file a
motion to disqualify a Hearing Officer.
However, due to the compressed
schedule pursuant to which the process
would operate under Rule 9400, the rule
requires such motion to be filed no later
than 5 days after the announcement of
the Hearing Panel and the Exchange’s
brief in opposition to such motion
would be required to be filed no later
than 5 days after service thereof.
Pursuant to existing Rule 9233(c), a
motion for disqualification of a Hearing
Officer shall be decided by the Chief
Hearing Officer based on a prompt
investigation. The applicable Hearing
Officer shall remove himself or herself
and request the Chief Executive Officer
to reassign the hearing to another
Hearing Officer such that the Hearing
Panel still meets the compositional
requirements described in Rule 9231(b).
If the Chief Hearing Officer determines
that the Respondent’s grounds for
disqualification are insufficient, it shall
deny the Respondent’s motion for
disqualification by setting forth the
reasons for the denial in writing and the
Hearing Panel will proceed with the
hearing.
Under paragraph (c) of the Rule, the
hearing would be held not later than 15
days after service of the notice initiating
the suspension proceeding, unless
otherwise extended by the Chairman of
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the Hearing Panel with the consent of
the Parties for good cause shown. In the
event of a recusal or disqualification of
a Hearing Officer, the hearing shall be
held not later than five days after a
replacement Hearing Officer is
appointed. Paragraph (c) also governs
how the hearing is conducted, including
the authority of Hearing Officers,
witnesses, additional information that
may be required by the Hearing Panel,
the requirement that a transcript of the
proceeding be created and details
related to such transcript, and details
regarding the creation and maintenance
of the record of the proceeding.
Paragraph (c) also states that if a
Respondent fails to appear at a hearing
for which it has notice, the allegations
in the notice and accompanying
declaration may be deemed admitted,
and the Hearing Panel may issue a
suspension order without further
proceedings. Finally, if the Exchange
fails to appear at a hearing for which it
has notice, the Hearing Panel may order
that the suspension proceeding be
dismissed.
Under paragraph (d) of the Rule, the
Hearing Panel would be required to
issue a written decision stating whether
a suspension order would be imposed.
The Hearing Panel would be required to
issue the decision not later than 10 days
after receipt of the hearing transcript,
unless otherwise extended by the
Chairman of the Hearing Panel with the
consent of the Parties for good cause
shown. The Rule states that a
suspension order shall be imposed if the
Hearing Panel finds by a preponderance
of the evidence that the alleged
violation specified in the notice has
occurred and that the violative conduct
or continuation thereof is likely to result
in significant market disruption or other
significant harm to investors.
Paragraph (d) also describes the
content, scope and form of a suspension
order. A suspension order shall be
limited to ordering a Respondent to
cease and desist from violating Rule
2170 and/or to ordering a Respondent to
cease and desist from providing access
to the Exchange to a client of
Respondent that is causing violations of
Rule 2170. Under the rule, a suspension
order shall also set forth the alleged
violation and the significant market
disruption or other significant harm to
investors that is likely to result without
the issuance of an order. The order shall
describe in reasonable detail the act or
acts the Respondent is to take or refrain
from taking, and suspend such
Respondent unless and until such
action is taken or refrained from.
Finally, the order shall include the date
and hour of its issuance. A suspension
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order would remain effective and
enforceable unless modified, set aside,
limited, or revoked pursuant to
paragraph (e), as described below.
Finally, paragraph (d) requires service of
the Hearing Panel’s decision and any
suspension order consistent with other
portions of the rule related to service.
Paragraph (e) of Rule 9400 states that
at any time after the Hearing Officers
served the Respondent with a
suspension order, a Party could apply to
the Hearing Panel to have the order
modified, set aside, limited, or revoked.
If any part of a suspension order is
modified, set aside, limited, or revoked,
paragraph (e) of Rule 9400 provides the
Hearing Panel discretion to leave the
cease and desist part of the order in
place. For example, if a suspension
order suspends Respondent unless and
until Respondent ceases and desists
providing access to the Exchange to a
client of Respondent, and after the order
is entered the Respondent complies, the
Hearing Panel is permitted to modify
the order to lift the suspension portion
of the order while keeping in place the
cease and desist portion of the order.
With its broad modification powers, the
Hearing Panel also maintains the
discretion to impose conditions upon
the removal of a suspension—for
example, the Hearing Panel could
modify an order to lift the suspension
portion of the order in the event a
Respondent complies with the cease
and desist portion of the order but
additionally order that the suspension
will be re-imposed if Respondent
violates the cease and desist provisions
of the modified order in the future. The
Hearing Panel generally would be
required to respond to the request in
writing within 10 days after receipt of
the request. An application to modify,
set aside, limit or revoke a suspension
order would not stay the effectiveness of
the suspension order.
Finally, paragraph (f) provides that
sanctions issued under Rule 9400 would
constitute final and immediately
effective disciplinary sanctions imposed
by the Exchange, and that the right to
have any action under the Rule
reviewed by the Commission would be
governed by Section 19 of the Act. The
filing of an application for review would
not stay the effectiveness of a
suspension order unless the
Commission otherwise ordered.
Rule 2170– Disruptive Quoting and
Trading Activity Prohibited
The Exchange currently has authority
to prohibit and take action against
manipulative trading activity, including
disruptive quoting and trading activity,
pursuant to its general market
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manipulation rules, including Rules
2110, 2111, 2120, and 2170. The
Exchange proposes to adopt a new rule
at Chapter III, Section 16, which would
more specifically define and prohibit
disruptive options quoting and trading
activity on the Exchange. As noted
above, the Exchange also proposes to
apply the proposed suspension rules to
Chapter III, Section 16.
Proposed Chapter III, Section 16
would prohibit Members from engaging
in or facilitating disruptive options
quoting and trading activity on the
Exchange, as described in proposed
Chapter III, Section 16(i) and (ii),
including acting in concert with other
persons to effect such activity. The
Exchange believes that it is necessary to
extend the prohibition to situations
when persons are acting in concert to
avoid a potential loophole where
disruptive quoting and trading activity
is simply split between several brokers
or customers. The Exchange believes,
that with respect to persons acting in
concert perpetrating an abusive scheme,
it is important that the Exchange have
authority to act against the parties
perpetrating the abusive scheme,
whether it is one person or multiple
persons.
To provide proper context for the
situations in which the Exchange
proposes to utilize its authority, the
Exchange believes it is necessary to
describe the types of disruptive options
quoting and trading activity that would
cause the Exchange to use its authority.
Accordingly, the Exchange proposes to
adopt Chapter III, Section 16(i) and (ii)
providing additional details regarding
disruptive options quoting and trading
activity. Proposed Chapter III, Section
16(i)(a) describes disruptive options
quoting and trading activity containing
many of the elements indicative of
layering. It would describe disruptive
options quoting and trading activity as
a frequent pattern in which the
following facts are present: (i) A party
enters multiple limit orders on one side
of the market at various price levels (the
‘‘Displayed Orders’’); and (ii) following
the entry of the Displayed Orders, the
level of supply and demand for the
security changes; and (iii) the party
enters one or more orders on the
opposite side of the market of the
Displayed Orders (the ‘‘Contra-Side
Orders’’) that are subsequently
executed; and (iv) following the
execution of the Contra-Side Orders, the
party cancels the Displayed Orders.
Proposed Chapter III, Section 16(i)(b)
describes disruptive options quoting
and trading activity containing many of
the elements indicative of spoofing and
would describe disruptive quoting and
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trading activity as a frequent pattern in
which the following facts are present: (i)
A party narrows the spread for a
security by placing an order inside the
national best bid or offer; and (ii) the
party then submits an order on the
opposite side of the market that
executes against another market
participant that joined the new inside
market established by the order
described in proposed (b)(i) that
narrowed the spread. The Exchange
believes that the proposed descriptions
of disruptive quoting and trading
activity articulated in the rule are
consistent with the activities that have
been identified and described in the
client access cases described above.9
The Exchange further believes that the
proposed descriptions will provide
Members with clear descriptions of
disruptive options quoting and trading
activity that will help them to avoid
engaging in such activities or allowing
their clients to engage in such activities.
The Exchange proposes to make clear
in proposed Chapter III, Section 16(ii),
unless otherwise indicated, the
descriptions of disruptive options
quoting and trading activity do not
require the facts to occur in a specific
order in order for the rule to apply. For
instance, with respect to the pattern
defined in proposed Chapter III, Section
16(i)(a) it is of no consequence whether
a party first enters Displayed Orders and
then Contra-side Orders or vice-versa.
However, as proposed, supply and
demand must change following the
entry of the Displayed Orders. The
Exchange also proposes to make clear
that disruptive options quoting and
trading activity includes a pattern or
practice in which some portion of the
disruptive options quoting and trading
activity is conducted on the Exchange
and the other portions of the disruptive
options quoting and trading activity are
conducted on one or more other
exchanges. The Exchange believes that
this authority is necessary to address
market participants who would
otherwise seek to avoid the prohibitions
of the proposed Rule by spreading their
activity amongst various execution
venues. In sum, proposed Chapter III,
Section 16 coupled with Rule 9400
would provide the Exchange with
authority to promptly act to prevent
9 As previously noted herein, while the examples
noted in the Purpose Section of this 19b4 [sic] are
related to the equities market, the Exchange
believes that this type of conduct should be
prohibited for all Exchange members, equities and
options. The Exchange believes that these patterns
of disruptive and allegedly manipulative quoting
and trading activity need to be addressed and the
product should not limit the action taken by the
Exchange. For this reason, the Exchange now
proposes a corresponding options rule.
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44369
disruptive quoting and trading activity
from continuing on the Exchange.
Below is an example of how the
proposed rule would operate.
Assume that through its surveillance
program, Exchange staff identifies a
pattern of potentially disruptive options
quoting and trading activity. After an
initial investigation the Exchange would
then contact the Member responsible for
the orders that caused the activity to
request an explanation of the activity as
well as any additional relevant
information, including the source of the
activity. If the Exchange were to
continue to see the same pattern from
the same Member and the source of the
activity is the same or has been
previously identified as a frequent
source of disruptive options quoting and
trading activity then the Exchange could
initiate an expedited suspension
proceeding by serving notice on the
Member that would include details
regarding the alleged violations as well
as the proposed sanction. In such a case
the proposed sanction would likely be
to order the Member to cease and desist
providing access to the Exchange to the
client that is responsible for the
disruptive quoting and trading activity
and to suspend such Member unless
and until such action is taken.
The Member would have the
opportunity to be heard in front of a
Hearing Panel at a hearing to be
conducted within 15 days of the notice.
If the Hearing Panel determined that the
violation alleged in the notice did not
occur or that the conduct or its
continuation would not have the
potential to result in significant market
disruption or other significant harm to
investors, then the Hearing Panel would
dismiss the suspension order
proceeding.
If the Hearing Panel determined that
the violation alleged in the notice did
occur and that the conduct or its
continuation is likely to result in
significant market disruption or other
significant harm to investors, then the
Hearing Panel would issue the order
including the proposed sanction,
ordering the Member to cease providing
access to the client at issue and
suspending such Member unless and
until such action is taken. If such
Member wished for the suspension to be
lifted because the client ultimately
responsible for the activity no longer
would be provided access to the
Exchange, then such Member could
apply to the Hearing Panel to have the
order modified, set aside, limited or
revoked. The Exchange notes that the
issuance of a suspension order would
not alter the Exchange’s ability to
further investigate the matter and/or
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later sanction the Member pursuant to
the Exchange’s standard disciplinary
process for supervisory violations or
other violations of Exchange rules or the
Act.
The Exchange reiterates that it already
has broad authority to take action
against a Member in the event that such
Member is engaging in or facilitating
disruptive or manipulative trading
activity on the Exchange. For the
reasons described above, and in light of
recent cases like the client access cases
described above, as well as other cases
currently under investigation, the
Exchange believes that it is equally
important for the Exchange to have the
authority to promptly initiate expedited
suspension proceedings against any
Member who has demonstrated a clear
pattern or practice of disruptive options
quoting and trading activity, as
described above, and to take action
including ordering such Member to
terminate access to the Exchange to one
or more of such Member’s clients if such
clients are responsible for the activity.
The Exchange recognizes that its
authority to issue a suspension order is
a powerful measure that should be used
very cautiously. Consequently, the rules
have been designed to ensure that the
proceedings are used to address only the
most clear and serious types of
disruptive quoting and trading activity
and that the interests of Respondents are
protected. For example, to ensure that
proceedings are used appropriately and
that the decision to initiate a proceeding
is made only at the highest staff levels,
the rules require the CRO or another
senior officer of the Exchange to issue
written authorization before the
Exchange can institute an expedited
suspension proceeding. In addition, the
rule by its terms is limited to violations
of Chapter III, Section 16, when
necessary to protect investors, other
Members and the Exchange. The
Exchange will initiate disciplinary
action for violations of Chapter III,
Section 16, pursuant to Rule 9400.
Further, the Exchange believes that the
expedited suspension provisions
described above that provide the
opportunity to respond as well as a
Hearing Panel determination prior to
taking action will ensure that the
Exchange would not utilize its authority
in the absence of a clear pattern or
practice of disruptive options quoting
and trading activity.
The Exchange also notes that that it
may impose temporary restrictions upon
the automated entry or updating of
orders or quotes/orders as the Exchange
may determine to be necessary to
protect the integrity of the Exchange’s
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systems pursuant to Rule 4611(c).10
Also, pursuant to Rule 9555(a)(2) 11 if a
member, associated person, or other
person cannot continue to have access
to services offered by the Exchange or a
member thereof with safety to investors,
creditors, members, or the Exchange, the
Exchange’s Regulation Department staff
may provide written notice to such
member or person limiting or
prohibiting access to services offered by
the Exchange or a member thereof. This
ability to impose a temporary restriction
upon Members assists the Exchange in
maintaining the integrity of the market
and protecting investors and the public
interest.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 12 in general, and furthers the
objectives of Section 6(b)(5) of the Act 13
in particular, in that the rules of the
Exchange are designed to prevent
fraudulent and manipulative acts and
practices, it is designed to promote just
and equitable principles of trade, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general to protect investors and the
public interest. Pursuant to the
proposal, the Exchange will have a
mechanism to promptly initiate
expedited suspension proceedings in
the event the Exchange believes that it
has sufficient proof that a violation of
Rule 2170 has occurred and is ongoing.
Further, the Exchange believes that
the proposal is consistent with Sections
6(b)(1) and 6(b)(6) of the Act,14 which
require that the rules of an exchange
enforce compliance with, and provide
appropriate discipline for, violations of
the Commission and Exchange rules.
The Exchange also believes that the
proposal is consistent with the public
interest, the protection of investors, or
otherwise in furtherance of the purposes
of the Act because the proposal helps to
strengthen the Exchange’s ability to
carry out its oversight and enforcement
responsibilities as a self-regulatory
organization in cases where awaiting the
conclusion of a full disciplinary
proceeding is unsuitable in view of the
potential harm to other Members and
10 For example, such temporary restrictions may
be necessary to address a system problem at a
particular NOM Market Maker, NOM ECN or Order
Entry Firm or at the Exchange, or an unexpected
period of extremely high message traffic.
11 See Rule 9555, entitled ‘‘Failure to Meet the
Eligibility or Qualification Standards or
Prerequisites for Access to Services.’’
12 15 U.S.C. 78f(b).
13 15 U.S.C. 78f(b)(5).
14 15 U.S.C. 78f(b)(1) and 78f(b)(6).
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their customers. Also, the Exchange
notes that if this type of conduct is
allowed to continue on the Exchange,
the Exchange’s reputation could be
harmed because it may appear to the
public that the Exchange is not acting to
address the behavior. The expedited
process would enable the Exchange to
address the behavior with greater speed.
As explained above, the Exchange
notes that it has defined the prohibited
disruptive quoting and trading activity
by modifying the traditional definitions
of layering and spoofing 15 to eliminate
an express intent element that would
not be proven on an expedited basis and
would instead require a thorough
investigation into the activity. As noted
throughout this filing, the Exchange
believes it is necessary for the
protection of investors to make such
modifications in order to adopt an
expedited process rather than allowing
disruptive quoting and trading activity
to occur for several years.
Through this proposal, the Exchange
does not intend to modify the
definitions of spoofing and layering that
have generally been used by the
Exchange and other regulators in
connection with actions like those cited
above. The Exchange believes that the
pattern of disruptive and allegedly
manipulative quoting and trading
activity was widespread across multiple
exchanges, and the Exchange, FINRA,
and other SROs identified clear patterns
of the behavior in 2007 and 2008 in the
equities markets.16 The Exchange
believes that this proposal will provide
the Exchange with the necessary means
to enforce against such behavior in an
expedited manner while providing
Members with the necessary due
process. The Exchange believes that its
proposal is consistent with the Act
because it provides the Exchange with
the ability 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 from
such ongoing behavior.
Further, the Exchange believes that
adopting a rule applicable to Options
Participants is consistent with the Act
because the Exchange believes that this
type of behavior should be prohibited
for all members, not just equities
members. The type of product should
not be the determining factor, rather the
behavior which challenges the market
structure is the primary concern for the
Exchange. While this behavior may not
be as prevalent on the options market
15 See
supra, notes 4 and 5.
Section 3 [sic] herein, the Purpose section,
for examples of conduct referred to herein.
16 See
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today, the Exchange does not believe
that the possibility of such behavior in
the future would not have the same
market impact and thereby warrant an
expedited process. The Exchange
believes that treating all members,
equities and options, in a uniform
manner with respect to the type of
disciplinary action that would be taken
for violations of manipulative quoting
and trading activity is consistent with
the Act.
The Exchange further believes that the
proposal is consistent with Section
6(b)(7) of the Act,17 which requires that
the rules of an exchange ‘‘provide a fair
procedure for the disciplining of
members and persons associated with
members . . . and the prohibition or
limitation by the exchange of any
person with respect to access to services
offered by the exchange or a member
thereof.’’ Finally, the Exchange also
believes the proposal is consistent with
Sections 6(d)(1) and 6(d)(2) of the Act,18
which require that the rules of an
exchange with respect to a disciplinary
proceeding or proceeding that would
limit or prohibit access to or
membership in the exchange require the
exchange to: Provide adequate and
specific notice of the charges brought
against a member or person associated
with a member, provide an opportunity
to defend against such charges, keep a
record, and provide details regarding
the findings and applicable sanctions in
the event a determination to impose a
disciplinary sanction is made. The
Exchange believes that each of these
requirements is addressed by the notice
and due process provisions included
within Rule 9400. Importantly, as noted
above, the Exchange will use the
authority only in clear and egregious
cases when necessary to protect
investors, other Members and the
Exchange, and in such cases, the
Respondent will be afforded due
process in connection with the
suspension proceedings.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. To the
contrary, the Exchange believes that
each self-regulatory organization should
be empowered to regulate trading
occurring on its market consistent with
the Act and without regard to
competitive issues. The Exchange is
requesting authority to take appropriate
17 15
U.S.C. 78f(b)(7).
78f(d)(1).
18 U.S.C.
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action if necessary for the protection of
investors, other Members and the
Exchange. The Exchange also believes
that it is important for all exchanges to
be able to take similar action to enforce
their rules against manipulative conduct
thereby leaving no exchange prey to
such conduct.
The Exchange does not believe that
the proposed rule change imposes an
undue burden on competition, rather
this process will provide the Exchange
with the necessary means to enforce
against violations of manipulative
quoting and trading activity in an
expedited manner, while providing
Members with the necessary due
process. The Exchange believes that
adopting a rule applicable to Options
Participants does not impose an undue
burden on competition because this
type of behavior should be prohibited
for all members, not just equities
members. The Exchange’s proposal
would treat all members, equities and
options, in a uniform manner with
respect to the type of disciplinary action
that would be taken for violations of
manipulative quoting and trading
activity.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A)(iii) of the Act 19 and
subparagraph (f)(6) of Rule 19b–4
thereunder.20
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
U.S.C. 78s(b)(3)(a)(iii).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
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19 15
20 17
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44371
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 proposal 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 No. SR–
NASDAQ–2016–092 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 No.
SR–NASDAQ–2016–092. 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 No. SR–NASDAQ–
2016–092, and should be submitted on
or before July 28, 2016.
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.21
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–16035 Filed 7–6–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78220; File No. SR–FINRA–
2015–054]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Partial Amendment No. 2 to Proposed
Rule Change To Adopt FINRA Capital
Acquisition Broker Rules
July 1, 2016.
I. Introduction
On December 4, 2015, Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (the ‘‘SEC’’ or
‘‘Commission’’) proposed rule change
SR–FINRA–2015–054, pursuant to
which FINRA proposed to adopt a rule
set that would apply exclusively to
firms that meet the definition of ‘‘capital
acquisition broker’’ (‘‘CAB’’) and that
elect to be governed under this rule set
(collectively, the ‘‘CAB Rules’’).
The Commission published the
proposed rule change for public
comment in the Federal Register on
December 23, 2015.1 The Commission
received 17 comments in response to
the proposed rule change.2 On March
21 17
CFR 200.30–3(a)(12).
Exchange Act Release No. 76675
(December 17, 2015), 80 FR 79969 (December 23,
2015) (Notice of Filing File No. SR–FINRA–2015–
054).
2 Letters from Roger W. Mehle, Chairman and
CEO, Archates Capital Advisors LLC, dated
December 29, 2015; Daniel H. Kolber, President/
CEO, Intellivest Securities, Inc., dated December 30,
2016; Arne Rovell, Coronado Investments, LLC,
dated January 6, 2016; Donna DiMaria, Chairman of
the Board of Directors, and Lisa Roth, Board of
Directors, Third Party Marketers Association, dated
January 12, 2016; Frank P. L. Minard, Managing
Partner, XT Capital Partners, LLC, dated January 12,
2016; Timothy Cahill, President, Compass
Securities Corporation, dated January 13, 2016;
Mark Fairbanks, President, Foreside Distributors,
dated January 13, 2016; Dan Glusker, Perkins Fund
Marketing, LLC, dated January 13, 2016; Steven
Jafarzadeh, CAIA, Managing Director, CCO Partner,
Stonehaven, dated January 13, 2016; Richard A.
Murphy, Manager, North Bridge Capital LLC, dated
January 13, 2016; Ron Oldenkamp, President,
Genesis Marketing Group, dated January 13, 2016;
Michael S. Quinn, Member and CCO, Q Advisors
LLC, dated January 13, 2016; Lisa Roth, President,
Monahan & Roth, LLC, dated January 13, 2016;
Howard Spindel, Senior Managing Director, and
Cassondra E. Joseph, Managing Director, Integrated
Management Solutions USA LLC, dated January 13,
2016; Sajan K. Thomas, President, and Stephen J.
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23, 2016, the Commission published in
the Federal Register an order to solicit
comments on the proposed rule change
and to institute proceedings pursuant to
Section 19(b)(2)(B) of the Securities
Exchange Act of 1934 (the ‘‘Exchange
Act’’) 3 to determine whether to approve
or disapprove the proposed rule
change.4 The Commission received one
comment in response to the Order
Instituting Proceedings.5
In response to comments on the
Notice of Filing, on March 29, 2016,
FINRA filed Partial Amendment No. 1,
which amended proposed CAB Rule
016(c)(2) to clarify that the definition of
‘‘capital acquisition broker’’ does not
include any broker or dealer that effects
securities transactions that would
require the broker or dealer to report the
transaction under the FINRA Rules 6300
Series, 6400 Series, 6500 Series, 6600
Series, 6600 Series, 6700 Series, 7300
Series or 7400 Series. The Commission
published Partial Amendment No. 1 for
comment in the Federal Register on
April 15, 2016.6 The Commission
received one comment in response to
the Partial Amendment No. 1.7
On June 28, 2016, FINRA filed Partial
Amendment No. 2 to its proposed rule
change in response to comments on the
Notice of Filing. Partial Amendment No.
2 is described in Item II below, which
has been prepared by FINRA. The
Commission is publishing this notice to
solicit comments on Partial Amendment
No. 2 from interested persons.
II. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Amendment
In response to comments on the
Notice of Filing, the Order Instituting
Proceedings, and Partial Amendment
No. 1, FINRA filed this Partial
Amendment No. 2 to amend proposed
CAB Rule 016(c)(1)(F) regarding a CAB’s
authority to engage in qualifying,
identifying, soliciting, or acting as a
placement agent or finder in connection
Myott, Chief Compliance Officer, Thomas Capital
Group, Inc., dated January 13, 2016; Judith M.
Shaw, President, North American Securities
Administrators Association, Inc., dated January 15,
2016; and Peter W. LaVigne, Esq., Chair, Securities
Regulation Committee, Business Law Section, New
York State Bar Association, dated January 22, 2016.
3 15 U.S.C. 78s(b)(2)(B).
4 Securities Exchange Act Release No. 77391
(March 17, 2016), 81 FR 15588 (March 23, 2016)
(Order Instituting Proceedings on File No. SR–
FINRA–2015–054).
5 Letter from Howard Spindel, Senior Managing
Director, and Cassondra E. Joseph, Managing
Director, Integrated Solutions, dated April 8, 2016.
6 Securities Exchange Act Release No. 77581
(April 11, 2016), 81 FR 22333 (April 15, 2016)
(Notice of Filing of Partial Amendment No. 1 to File
No. SR–FINRA–2015–054).
7 Letter from Anonymous dated May 3, 2016.
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with unregistered securities
transactions. As revised by Partial
Amendment No. 2, a CAB would be
permitted to engage in:
qualifying, identifying, soliciting, or acting as
a placement agent or finder (i) on behalf of
an issuer in connection with a sale of newlyissued, unregistered securities to institutional
investors or (ii) on behalf of an issuer or a
control person in connection with a change
of control of a privately-held company. For
purposes of this subparagraph a ‘‘control
person’’ is a person who has the power to
direct the management or policies of a
company through ownership of securities, by
contract, or otherwise. Control will be
presumed to exist if, before the transaction,
the person has the right to vote or the power
to sell or direct the sale of 25% or more of
a class of voting securities or in the case of
a partnership or limited liability company
has the right to receive upon dissolution or
has contributed 25% or more of the capital.
For purposes of this subparagraph a
‘‘privately-held company’’ is a company that
does not have any class of securities
registered, or required to be registered, with
the Securities and Exchange Commission
under Section 12 of the Exchange Act or with
respect to which the company files, or is
required to file, periodic information,
documents, or reports under Section 15(d) of
the Exchange Act.
The purpose of this proposed rule
change is to provide a rule set for
member firms that advise companies on
mergers and acquisitions, advise issuers
on raising debt and equity capital in
private placements with institutional
investors, or provide advisory services
on a consulting basis to companies that
need assistance analyzing their strategic
and financial alternatives. Consistent
with this purpose, this amendment
would narrow the range of activities that
a CAB would be permitted to engage in
with regard to securities transactions
involving institutional investors.
Previously proposed CAB Rule
016(c)(1)(F) would have permitted a
CAB to engage in qualifying,
identifying, soliciting, or acting as a
placement agent or finder with respect
to institutional investors in connection
with purchases or sales of unregistered
securities. This authority would have
been limited by proposed CAB Rule
016(c)(2), which would have prohibited
CABs from effecting securities
transactions that would require the
broker or dealer to report the transaction
under the FINRA trade reporting rules.8
As amended, a CAB would be
permitted to engage in qualifying,
identifying, soliciting, or acting as a
placement agent or finder (i) on behalf
of an issuer in connection with a sale of
8 FINRA Rules 6300 Series, 6400 Series, 6500
Series, 6600 Series, 6700 Series, 7300 Series and
7400 Series.
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]]>Agencies
[Federal Register Volume 81, Number 130 (Thursday, July 7, 2016)]
[Notices]
[Pages 44366-44372]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-16035]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78208; File No. SR-NASDAQ-2016-092]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Provide a Process for an Expedited Suspension Proceeding and Adopt a
Rule To Prohibit Disruptive Quoting and Trading Activity
June 30, 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 June 22, 2016, The NASDAQ Stock Market LLC (``NASDAQ'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II
and III below, which Items have been prepared by 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\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes a proposal to adopt a new NASDAQ Options
Market LLC rule to clearly prohibit disruptive quoting and trading
activity on the Exchange, as further described below.
The text of the proposed rule change is available on the Exchange's
Web site at https://nasdaq.cchwallstreet.com, at the principal office of
the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange is filing this proposal to adopt an options rule to
clearly prohibit disruptive quoting and trading activity on the
Exchange and to permit the Exchange to take prompt action to suspend
Members or their clients that violate such rule pursuant to Rule 9400.
Background
As a national securities exchange registered pursuant to Section 6
of the Act, the Exchange is required to be organized and to have the
capacity to enforce compliance by its members and persons associated
with its members, with the Act, the rules and regulations thereunder,
and the Exchange's Rules. Further, the Exchange's Rules are required to
be ``designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade . . . and,
in general, to protect investors and the public interest.'' \3\ In
fulfilling these requirements, the Exchange has developed a
comprehensive regulatory program that includes automated surveillance
of trading activity that is both operated directly by Exchange staff
and by staff of the Financial Industry Regulatory Authority (``FINRA'')
pursuant to a Regulatory Services Agreement (``RSA''). When disruptive
and potentially manipulative or improper quoting and trading activity
is identified, the Exchange or FINRA (acting as an agent of the
Exchange) conducts an investigation into the activity, requesting
additional information from the Member or Members involved. To the
extent violations of the Act, the rules and regulations thereunder, or
Exchange Rules have been identified and confirmed, the Exchange or
FINRA as its agent will commence the enforcement process, which might
result in, among other things, a censure, a requirement to take certain
remedial actions, one or more restrictions on future business
[[Page 44367]]
activities, a monetary fine, or even a temporary or permanent ban from
the securities industry.
---------------------------------------------------------------------------
\3\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------
The process described above, from the identification of disruptive
and potentially manipulative or improper quoting and trading activity
to a final resolution of the matter, can often take several years. The
Exchange believes that this time period is generally necessary and
appropriate to afford the subject Member adequate due process,
particularly in complex cases. However, as described below, the
Exchange believes that there are certain obvious and uncomplicated
cases of disruptive and manipulative behavior or cases where the
potential harm to investors is so large that the Exchange should have
the authority to initiate an expedited suspension proceeding in order
to stop the behavior from continuing on the Exchange.
In recent years, several cases have been brought and resolved by
the Exchange and other SROs that involved allegations of wide-spread
market manipulation, much of which was ultimately being conducted by
foreign persons and entities using relatively rudimentary technology to
access the markets and over which the Exchange and other SROs had no
direct jurisdiction. In each case, the conduct involved a pattern of
disruptive quoting and trading activity indicative of manipulative
layering \4\ or spoofing.\5\ The Exchange and other SROs were able to
identify the disruptive quoting and trading activity in real-time or
near real-time; nonetheless, in accordance with Exchange Rules and the
Act, the Members responsible for such conduct or responsible for their
customers' conduct were allowed to continue the disruptive quoting and
trading activity on the Exchange and other exchanges during the
entirety of the subsequent lengthy investigation and enforcement
process. The Exchange believes that it should have the authority to
initiate an expedited suspension proceeding in order to stop the
behavior from continuing on the Exchange if a Member is engaging in or
facilitating disruptive quoting and trading activity and the Member has
received sufficient notice with an opportunity to respond, but such
activity has not ceased.
---------------------------------------------------------------------------
\4\ ``Layering'' is a form of market manipulation in which
multiple, non-bona fide limit orders are entered on one side of the
market at various price levels in order to create the appearance of
a change in the levels of supply and demand, thereby artificially
moving the price of the security. An order is then executed on the
opposite side of the market at the artificially created price, and
the non-bona fide orders are cancelled.
\5\ ``Spoofing'' is a form of market manipulation that involves
the market manipulator placing non-bona fide orders that are
intended to trigger some type of market movement and/or response
from other market participants, from which the market manipulator
might benefit by trading bona fide orders.
---------------------------------------------------------------------------
The following two examples are instructive on the Exchange's
rationale for the proposed rule change.
In July 2012, Biremis Corp. (formerly Swift Trade Securities USA,
Inc.) (the ``Firm'') and its CEO were barred from the industry for,
among other things, supervisory violations related to a failure by the
Firm to detect and prevent disruptive and allegedly manipulative
trading activities, including layering, short sale violations, and
anti-money laundering violations.\6\ The Firm's sole business was to
provide trade execution services via a proprietary day trading platform
and order management system to day traders located in foreign
jurisdictions. Thus, the disruptive and allegedly manipulative trading
activity introduced by the Firm to U.S. markets originated directly or
indirectly from foreign clients of the Firm. The pattern of disruptive
and allegedly manipulative quoting and trading activity was widespread
across multiple exchanges, and the Exchange, FINRA, and other SROs
identified clear patterns of the behavior in 2007 and 2008. Although
the Firm and its principals were on notice of the disruptive and
allegedly manipulative quoting and trading activity that was occurring,
the Firm took little to no action to attempt to supervise or prevent
such quoting and trading activity until at least 2009. Even when it put
some controls in place, they were deficient and the pattern of
disruptive and allegedly manipulative trading activity continued to
occur. As noted above, the final resolution of the enforcement action
to bar the Firm and its CEO from the industry was not concluded until
2012, four years after the disruptive and allegedly manipulative
trading activity was first identified.
---------------------------------------------------------------------------
\6\ See Biremis Corp. and Peter Beck, FINRA Letter of
Acceptance, Waiver and Consent No. 2010021162202, July 30, 2012.
---------------------------------------------------------------------------
In September of 2012, Hold Brothers On-Line Investment Services,
Inc. (the ``Firm'') settled a regulatory action in connection with the
Firm's provision of a trading platform, trade software and trade
execution, support and clearing services for day traders.\7\ Many
traders using the Firm's services were located in foreign
jurisdictions. The Firm ultimately settled the action with FINRA and
several exchanges, including the Exchange, for a total monetary fine of
$3.4 million. In a separate action, the Firm settled with the
Commission for a monetary fine of $2.5 million.\8\ Among the alleged
violations in the case were disruptive and allegedly manipulative
quoting and trading activity, including spoofing, layering, wash
trading, and pre-arranged trading. Through its conduct and insufficient
procedures and controls, the Firm also allegedly committed anti-money
laundering violations by failing to detect and report manipulative and
suspicious trading activity. The Firm was alleged to have not only
provided foreign traders with access to the U.S. markets to engage in
such activities, but that its principals also owned and funded foreign
subsidiaries that engaged in the disruptive and allegedly manipulative
quoting and trading activity. Although the pattern of disruptive and
allegedly manipulative quoting and trading activity was identified in
2009, as noted above, the enforcement action was not concluded until
2012. Thus, although disruptive and allegedly manipulative quoting and
trading was promptly detected, it continued for several years.
---------------------------------------------------------------------------
\7\ See Hold Brothers On-Line Investment Services, LLC, FINRA
Letter of Acceptance, Waiver and Consent No. 20100237710001,
September 25, 2012.
\8\ In the Matter of Hold Brothers On-Line Investment Services,
LLC, Exchange Act Release No. 67924, September 25, 2012.
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The Exchange also notes the current criminal proceedings that have
commenced against Navinder Singh Sarao. Mr. Sarao's allegedly
manipulative trading activity, which included forms of layering and
spoofing in the futures markets, has been linked as a contributing
factor to the ``Flash Crash'' of 2010, and yet continued through 2015.
The Exchange believes that the activities described in the cases
above provide justification for the proposed rule change, which is
described below. In addition, while the examples provided are related
to the equities market, the Exchange believes that this type of conduct
should be prohibited for all Exchange members, equities and options.
The Exchange believes that these patterns of disruptive and allegedly
manipulative quoting and trading activity need to be addressed and the
product should not limit the action taken by the Exchange. For this
reason, the Exchange now proposes a corresponding options rule.
Rule 9400--Expedited Client Suspension Proceeding
The Exchange adopted Rule 9400 to set forth procedures for issuing
suspension orders, immediately prohibiting a Member from conducting
continued disruptive quoting and trading activity on the Exchange.
Importantly, these procedures provide
[[Page 44368]]
the Exchange the authority to order a Member to cease and desist from
providing access to the Exchange to a client of the Member that is
conducting disruptive quoting and trading activity in violation of Rule
2170. Paragraph (a) of Rule 9400, with the prior written authorization
of the Chief Regulatory Officer (``CRO'') or such other senior officers
as the CRO may designate, the Office of General Counsel or Regulatory
Department of the Exchange (such departments generally referred to as
the ``Exchange'' for purposes of Rule 9400) and may initiate an
expedited suspension proceeding with respect to alleged violations of
Rule 2170. Paragraph (a) also sets forth the requirements for notice
and service of such notice pursuant to the Rule, including the required
method of service and the content of notice.
Paragraph (b) of Rule 9400 governs the appointment of a Hearing
Panel as well as potential disqualification or recusal of Hearing
Officers. The Exchange's Rules provide for a Hearing Officer to be
recused in the event he or she has a conflict of interest or bias or
other circumstances exist where his or her fairness might reasonably be
questioned in accordance with Rules 9233(a). In addition to recusal
initiated by such a Hearing Officer, a party to the proceeding will be
permitted to file a motion to disqualify a Hearing Officer. However,
due to the compressed schedule pursuant to which the process would
operate under Rule 9400, the rule requires such motion to be filed no
later than 5 days after the announcement of the Hearing Panel and the
Exchange's brief in opposition to such motion would be required to be
filed no later than 5 days after service thereof. Pursuant to existing
Rule 9233(c), a motion for disqualification of a Hearing Officer shall
be decided by the Chief Hearing Officer based on a prompt
investigation. The applicable Hearing Officer shall remove himself or
herself and request the Chief Executive Officer to reassign the hearing
to another Hearing Officer such that the Hearing Panel still meets the
compositional requirements described in Rule 9231(b). If the Chief
Hearing Officer determines that the Respondent's grounds for
disqualification are insufficient, it shall deny the Respondent's
motion for disqualification by setting forth the reasons for the denial
in writing and the Hearing Panel will proceed with the hearing.
Under paragraph (c) of the Rule, the hearing would be held not
later than 15 days after service of the notice initiating the
suspension proceeding, unless otherwise extended by the Chairman of the
Hearing Panel with the consent of the Parties for good cause shown. In
the event of a recusal or disqualification of a Hearing Officer, the
hearing shall be held not later than five days after a replacement
Hearing Officer is appointed. Paragraph (c) also governs how the
hearing is conducted, including the authority of Hearing Officers,
witnesses, additional information that may be required by the Hearing
Panel, the requirement that a transcript of the proceeding be created
and details related to such transcript, and details regarding the
creation and maintenance of the record of the proceeding. Paragraph (c)
also states that if a Respondent fails to appear at a hearing for which
it has notice, the allegations in the notice and accompanying
declaration may be deemed admitted, and the Hearing Panel may issue a
suspension order without further proceedings. Finally, if the Exchange
fails to appear at a hearing for which it has notice, the Hearing Panel
may order that the suspension proceeding be dismissed.
Under paragraph (d) of the Rule, the Hearing Panel would be
required to issue a written decision stating whether a suspension order
would be imposed. The Hearing Panel would be required to issue the
decision not later than 10 days after receipt of the hearing
transcript, unless otherwise extended by the Chairman of the Hearing
Panel with the consent of the Parties for good cause shown. The Rule
states that a suspension order shall be imposed if the Hearing Panel
finds by a preponderance of the evidence that the alleged violation
specified in the notice has occurred and that the violative conduct or
continuation thereof is likely to result in significant market
disruption or other significant harm to investors.
Paragraph (d) also describes the content, scope and form of a
suspension order. A suspension order shall be limited to ordering a
Respondent to cease and desist from violating Rule 2170 and/or to
ordering a Respondent to cease and desist from providing access to the
Exchange to a client of Respondent that is causing violations of Rule
2170. Under the rule, a suspension order shall also set forth the
alleged violation and the significant market disruption or other
significant harm to investors that is likely to result without the
issuance of an order. The order shall describe in reasonable detail the
act or acts the Respondent is to take or refrain from taking, and
suspend such Respondent unless and until such action is taken or
refrained from. Finally, the order shall include the date and hour of
its issuance. A suspension order would remain effective and enforceable
unless modified, set aside, limited, or revoked pursuant to paragraph
(e), as described below. Finally, paragraph (d) requires service of the
Hearing Panel's decision and any suspension order consistent with other
portions of the rule related to service.
Paragraph (e) of Rule 9400 states that at any time after the
Hearing Officers served the Respondent with a suspension order, a Party
could apply to the Hearing Panel to have the order modified, set aside,
limited, or revoked. If any part of a suspension order is modified, set
aside, limited, or revoked, paragraph (e) of Rule 9400 provides the
Hearing Panel discretion to leave the cease and desist part of the
order in place. For example, if a suspension order suspends Respondent
unless and until Respondent ceases and desists providing access to the
Exchange to a client of Respondent, and after the order is entered the
Respondent complies, the Hearing Panel is permitted to modify the order
to lift the suspension portion of the order while keeping in place the
cease and desist portion of the order. With its broad modification
powers, the Hearing Panel also maintains the discretion to impose
conditions upon the removal of a suspension--for example, the Hearing
Panel could modify an order to lift the suspension portion of the order
in the event a Respondent complies with the cease and desist portion of
the order but additionally order that the suspension will be re-imposed
if Respondent violates the cease and desist provisions of the modified
order in the future. The Hearing Panel generally would be required to
respond to the request in writing within 10 days after receipt of the
request. An application to modify, set aside, limit or revoke a
suspension order would not stay the effectiveness of the suspension
order.
Finally, paragraph (f) provides that sanctions issued under Rule
9400 would constitute final and immediately effective disciplinary
sanctions imposed by the Exchange, and that the right to have any
action under the Rule reviewed by the Commission would be governed by
Section 19 of the Act. The filing of an application for review would
not stay the effectiveness of a suspension order unless the Commission
otherwise ordered.
Rule 2170- Disruptive Quoting and Trading Activity Prohibited
The Exchange currently has authority to prohibit and take action
against manipulative trading activity, including disruptive quoting and
trading activity, pursuant to its general market
[[Page 44369]]
manipulation rules, including Rules 2110, 2111, 2120, and 2170. The
Exchange proposes to adopt a new rule at Chapter III, Section 16, which
would more specifically define and prohibit disruptive options quoting
and trading activity on the Exchange. As noted above, the Exchange also
proposes to apply the proposed suspension rules to Chapter III, Section
16.
Proposed Chapter III, Section 16 would prohibit Members from
engaging in or facilitating disruptive options quoting and trading
activity on the Exchange, as described in proposed Chapter III, Section
16(i) and (ii), including acting in concert with other persons to
effect such activity. The Exchange believes that it is necessary to
extend the prohibition to situations when persons are acting in concert
to avoid a potential loophole where disruptive quoting and trading
activity is simply split between several brokers or customers. The
Exchange believes, that with respect to persons acting in concert
perpetrating an abusive scheme, it is important that the Exchange have
authority to act against the parties perpetrating the abusive scheme,
whether it is one person or multiple persons.
To provide proper context for the situations in which the Exchange
proposes to utilize its authority, the Exchange believes it is
necessary to describe the types of disruptive options quoting and
trading activity that would cause the Exchange to use its authority.
Accordingly, the Exchange proposes to adopt Chapter III, Section 16(i)
and (ii) providing additional details regarding disruptive options
quoting and trading activity. Proposed Chapter III, Section 16(i)(a)
describes disruptive options quoting and trading activity containing
many of the elements indicative of layering. It would describe
disruptive options quoting and trading activity as a frequent pattern
in which the following facts are present: (i) A party enters multiple
limit orders on one side of the market at various price levels (the
``Displayed Orders''); and (ii) following the entry of the Displayed
Orders, the level of supply and demand for the security changes; and
(iii) the party enters one or more orders on the opposite side of the
market of the Displayed Orders (the ``Contra-Side Orders'') that are
subsequently executed; and (iv) following the execution of the Contra-
Side Orders, the party cancels the Displayed Orders. Proposed Chapter
III, Section 16(i)(b) describes disruptive options quoting and trading
activity containing many of the elements indicative of spoofing and
would describe disruptive quoting and trading activity as a frequent
pattern in which the following facts are present: (i) A party narrows
the spread for a security by placing an order inside the national best
bid or offer; and (ii) the party then submits an order on the opposite
side of the market that executes against another market participant
that joined the new inside market established by the order described in
proposed (b)(i) that narrowed the spread. The Exchange believes that
the proposed descriptions of disruptive quoting and trading activity
articulated in the rule are consistent with the activities that have
been identified and described in the client access cases described
above.\9\ The Exchange further believes that the proposed descriptions
will provide Members with clear descriptions of disruptive options
quoting and trading activity that will help them to avoid engaging in
such activities or allowing their clients to engage in such activities.
---------------------------------------------------------------------------
\9\ As previously noted herein, while the examples noted in the
Purpose Section of this 19b4 [sic] are related to the equities
market, the Exchange believes that this type of conduct should be
prohibited for all Exchange members, equities and options. The
Exchange believes that these patterns of disruptive and allegedly
manipulative quoting and trading activity need to be addressed and
the product should not limit the action taken by the Exchange. For
this reason, the Exchange now proposes a corresponding options rule.
---------------------------------------------------------------------------
The Exchange proposes to make clear in proposed Chapter III,
Section 16(ii), unless otherwise indicated, the descriptions of
disruptive options quoting and trading activity do not require the
facts to occur in a specific order in order for the rule to apply. For
instance, with respect to the pattern defined in proposed Chapter III,
Section 16(i)(a) it is of no consequence whether a party first enters
Displayed Orders and then Contra-side Orders or vice-versa. However, as
proposed, supply and demand must change following the entry of the
Displayed Orders. The Exchange also proposes to make clear that
disruptive options quoting and trading activity includes a pattern or
practice in which some portion of the disruptive options quoting and
trading activity is conducted on the Exchange and the other portions of
the disruptive options quoting and trading activity are conducted on
one or more other exchanges. The Exchange believes that this authority
is necessary to address market participants who would otherwise seek to
avoid the prohibitions of the proposed Rule by spreading their activity
amongst various execution venues. In sum, proposed Chapter III, Section
16 coupled with Rule 9400 would provide the Exchange with authority to
promptly act to prevent disruptive quoting and trading activity from
continuing on the Exchange.
Below is an example of how the proposed rule would operate.
Assume that through its surveillance program, Exchange staff
identifies a pattern of potentially disruptive options quoting and
trading activity. After an initial investigation the Exchange would
then contact the Member responsible for the orders that caused the
activity to request an explanation of the activity as well as any
additional relevant information, including the source of the activity.
If the Exchange were to continue to see the same pattern from the same
Member and the source of the activity is the same or has been
previously identified as a frequent source of disruptive options
quoting and trading activity then the Exchange could initiate an
expedited suspension proceeding by serving notice on the Member that
would include details regarding the alleged violations as well as the
proposed sanction. In such a case the proposed sanction would likely be
to order the Member to cease and desist providing access to the
Exchange to the client that is responsible for the disruptive quoting
and trading activity and to suspend such Member unless and until such
action is taken.
The Member would have the opportunity to be heard in front of a
Hearing Panel at a hearing to be conducted within 15 days of the
notice. If the Hearing Panel determined that the violation alleged in
the notice did not occur or that the conduct or its continuation would
not have the potential to result in significant market disruption or
other significant harm to investors, then the Hearing Panel would
dismiss the suspension order proceeding.
If the Hearing Panel determined that the violation alleged in the
notice did occur and that the conduct or its continuation is likely to
result in significant market disruption or other significant harm to
investors, then the Hearing Panel would issue the order including the
proposed sanction, ordering the Member to cease providing access to the
client at issue and suspending such Member unless and until such action
is taken. If such Member wished for the suspension to be lifted because
the client ultimately responsible for the activity no longer would be
provided access to the Exchange, then such Member could apply to the
Hearing Panel to have the order modified, set aside, limited or
revoked. The Exchange notes that the issuance of a suspension order
would not alter the Exchange's ability to further investigate the
matter and/or
[[Page 44370]]
later sanction the Member pursuant to the Exchange's standard
disciplinary process for supervisory violations or other violations of
Exchange rules or the Act.
The Exchange reiterates that it already has broad authority to take
action against a Member in the event that such Member is engaging in or
facilitating disruptive or manipulative trading activity on the
Exchange. For the reasons described above, and in light of recent cases
like the client access cases described above, as well as other cases
currently under investigation, the Exchange believes that it is equally
important for the Exchange to have the authority to promptly initiate
expedited suspension proceedings against any Member who has
demonstrated a clear pattern or practice of disruptive options quoting
and trading activity, as described above, and to take action including
ordering such Member to terminate access to the Exchange to one or more
of such Member's clients if such clients are responsible for the
activity.
The Exchange recognizes that its authority to issue a suspension
order is a powerful measure that should be used very cautiously.
Consequently, the rules have been designed to ensure that the
proceedings are used to address only the most clear and serious types
of disruptive quoting and trading activity and that the interests of
Respondents are protected. For example, to ensure that proceedings are
used appropriately and that the decision to initiate a proceeding is
made only at the highest staff levels, the rules require the CRO or
another senior officer of the Exchange to issue written authorization
before the Exchange can institute an expedited suspension proceeding.
In addition, the rule by its terms is limited to violations of Chapter
III, Section 16, when necessary to protect investors, other Members and
the Exchange. The Exchange will initiate disciplinary action for
violations of Chapter III, Section 16, pursuant to Rule 9400. Further,
the Exchange believes that the expedited suspension provisions
described above that provide the opportunity to respond as well as a
Hearing Panel determination prior to taking action will ensure that the
Exchange would not utilize its authority in the absence of a clear
pattern or practice of disruptive options quoting and trading activity.
The Exchange also notes that that it may impose temporary
restrictions upon the automated entry or updating of orders or quotes/
orders as the Exchange may determine to be necessary to protect the
integrity of the Exchange's systems pursuant to Rule 4611(c).\10\ Also,
pursuant to Rule 9555(a)(2) \11\ if a member, associated person, or
other person cannot continue to have access to services offered by the
Exchange or a member thereof with safety to investors, creditors,
members, or the Exchange, the Exchange's Regulation Department staff
may provide written notice to such member or person limiting or
prohibiting access to services offered by the Exchange or a member
thereof. This ability to impose a temporary restriction upon Members
assists the Exchange in maintaining the integrity of the market and
protecting investors and the public interest.
---------------------------------------------------------------------------
\10\ For example, such temporary restrictions may be necessary
to address a system problem at a particular NOM Market Maker, NOM
ECN or Order Entry Firm or at the Exchange, or an unexpected period
of extremely high message traffic.
\11\ See Rule 9555, entitled ``Failure to Meet the Eligibility
or Qualification Standards or Prerequisites for Access to
Services.''
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \12\ in general, and furthers the objectives of Section
6(b)(5) of the Act \13\ in particular, in that the rules of the
Exchange are designed to prevent fraudulent and manipulative acts and
practices, it is designed to promote just and equitable principles of
trade, to remove impediments to and perfect the mechanism of a free and
open market and a national market system, and, in general to protect
investors and the public interest. Pursuant to the proposal, the
Exchange will have a mechanism to promptly initiate expedited
suspension proceedings in the event the Exchange believes that it has
sufficient proof that a violation of Rule 2170 has occurred and is
ongoing.
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Further, the Exchange believes that the proposal is consistent with
Sections 6(b)(1) and 6(b)(6) of the Act,\14\ which require that the
rules of an exchange enforce compliance with, and provide appropriate
discipline for, violations of the Commission and Exchange rules. The
Exchange also believes that the proposal is consistent with the public
interest, the protection of investors, or otherwise in furtherance of
the purposes of the Act because the proposal helps to strengthen the
Exchange's ability to carry out its oversight and enforcement
responsibilities as a self-regulatory organization in cases where
awaiting the conclusion of a full disciplinary proceeding is unsuitable
in view of the potential harm to other Members and their customers.
Also, the Exchange notes that if this type of conduct is allowed to
continue on the Exchange, the Exchange's reputation could be harmed
because it may appear to the public that the Exchange is not acting to
address the behavior. The expedited process would enable the Exchange
to address the behavior with greater speed.
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78f(b)(1) and 78f(b)(6).
---------------------------------------------------------------------------
As explained above, the Exchange notes that it has defined the
prohibited disruptive quoting and trading activity by modifying the
traditional definitions of layering and spoofing \15\ to eliminate an
express intent element that would not be proven on an expedited basis
and would instead require a thorough investigation into the activity.
As noted throughout this filing, the Exchange believes it is necessary
for the protection of investors to make such modifications in order to
adopt an expedited process rather than allowing disruptive quoting and
trading activity to occur for several years.
---------------------------------------------------------------------------
\15\ See supra, notes 4 and 5.
---------------------------------------------------------------------------
Through this proposal, the Exchange does not intend to modify the
definitions of spoofing and layering that have generally been used by
the Exchange and other regulators in connection with actions like those
cited above. The Exchange believes that the pattern of disruptive and
allegedly manipulative quoting and trading activity was widespread
across multiple exchanges, and the Exchange, FINRA, and other SROs
identified clear patterns of the behavior in 2007 and 2008 in the
equities markets.\16\ The Exchange believes that this proposal will
provide the Exchange with the necessary means to enforce against such
behavior in an expedited manner while providing Members with the
necessary due process. The Exchange believes that its proposal is
consistent with the Act because it provides the Exchange with the
ability 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 from such ongoing behavior.
---------------------------------------------------------------------------
\16\ See Section 3 [sic] herein, the Purpose section, for
examples of conduct referred to herein.
---------------------------------------------------------------------------
Further, the Exchange believes that adopting a rule applicable to
Options Participants is consistent with the Act because the Exchange
believes that this type of behavior should be prohibited for all
members, not just equities members. The type of product should not be
the determining factor, rather the behavior which challenges the market
structure is the primary concern for the Exchange. While this behavior
may not be as prevalent on the options market
[[Page 44371]]
today, the Exchange does not believe that the possibility of such
behavior in the future would not have the same market impact and
thereby warrant an expedited process. The Exchange believes that
treating all members, equities and options, in a uniform manner with
respect to the type of disciplinary action that would be taken for
violations of manipulative quoting and trading activity is consistent
with the Act.
The Exchange further believes that the proposal is consistent with
Section 6(b)(7) of the Act,\17\ which requires that the rules of an
exchange ``provide a fair procedure for the disciplining of members and
persons associated with members . . . and the prohibition or limitation
by the exchange of any person with respect to access to services
offered by the exchange or a member thereof.'' Finally, the Exchange
also believes the proposal is consistent with Sections 6(d)(1) and
6(d)(2) of the Act,\18\ which require that the rules of an exchange
with respect to a disciplinary proceeding or proceeding that would
limit or prohibit access to or membership in the exchange require the
exchange to: Provide adequate and specific notice of the charges
brought against a member or person associated with a member, provide an
opportunity to defend against such charges, keep a record, and provide
details regarding the findings and applicable sanctions in the event a
determination to impose a disciplinary sanction is made. The Exchange
believes that each of these requirements is addressed by the notice and
due process provisions included within Rule 9400. Importantly, as noted
above, the Exchange will use the authority only in clear and egregious
cases when necessary to protect investors, other Members and the
Exchange, and in such cases, the Respondent will be afforded due
process in connection with the suspension proceedings.
---------------------------------------------------------------------------
\17\ 15 U.S.C. 78f(b)(7).
\18\ U.S.C. 78f(d)(1).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. To the contrary, the Exchange
believes that each self-regulatory organization should be empowered to
regulate trading occurring on its market consistent with the Act and
without regard to competitive issues. The Exchange is requesting
authority to take appropriate action if necessary for the protection of
investors, other Members and the Exchange. The Exchange also believes
that it is important for all exchanges to be able to take similar
action to enforce their rules against manipulative conduct thereby
leaving no exchange prey to such conduct.
The Exchange does not believe that the proposed rule change imposes
an undue burden on competition, rather this process will provide the
Exchange with the necessary means to enforce against violations of
manipulative quoting and trading activity in an expedited manner, while
providing Members with the necessary due process. The Exchange believes
that adopting a rule applicable to Options Participants does not impose
an undue burden on competition because this type of behavior should be
prohibited for all members, not just equities members. The Exchange's
proposal would treat all members, equities and options, in a uniform
manner with respect to the type of disciplinary action that would be
taken for violations of manipulative quoting and trading activity.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \19\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\20\
---------------------------------------------------------------------------
\19\ 15 U.S.C. 78s(b)(3)(a)(iii).
\20\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------
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 proposal 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 No. SR-NASDAQ-2016-092 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 No. SR-NASDAQ-2016-092. 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 No. SR-NASDAQ-2016-092, and should be
submitted on or before July 28, 2016.
[[Page 44372]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-16035 Filed 7-6-16; 8:45 am]
BILLING CODE 8011-01-P
