Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt Phlx Rule 765 (Prohibition Against Trading Ahead of Customer Orders), 75174-75178 [2016-26053]

Download as PDF 75174 Federal Register / Vol. 81, No. 209 / Friday, October 28, 2016 / Notices and a national market system by making the MIAX market, more transparent and accessible to market participants as MIAX begins to trade complex orders. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. On the contrary, the Exchange believes that the addition of information concerning complex orders to the various ports and market data products will enhance inter-market competition by supplementing existing ports and data products with information concerning complex orders traded on MIAX. This transparency and access should enable MIAX to compete with other exchanges for order flow in complex orders in the options markets. Additionally, respecting intra-market competition, the value-added features relating to complex orders in the various ports and data products are available to all subscribers at no additional cost, thus providing all subscribers to the ports and data products with an even playing field with respect to information and access to trade complex orders on MIAX. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action mstockstill on DSK3G9T082PROD with NOTICES 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) of the Act 17 and Rule 19b– 4(f)(6) thereunder.18 A proposed rule change filed under Rule 19b–4(f)(6) normally does not become operative for 30 days from the date of filing. However, pursuant to 17 15 U.S.C. 78s(b)(3)(A). 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. 18 17 VerDate Sep<11>2014 18:12 Oct 27, 2016 Jkt 241001 Rule 19b–4(f)(6)(iii),19 the Commission may designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has asked the Commission to waive the 30-day operative delay. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest. Such waiver will allow the Exchange to offer the features relating to the trading of complex orders that will be embedded in the Exchange’s enumerated ports and market data products on the date that coincides with the projected October 24, 2016 launch of the trading of complex orders on the Exchange.20 Accordingly, the Commission hereby waives the 30-day operative delay requirement and designates the proposed rule change as operative upon filing with the Commission. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest; for the protection of investors; or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– MIAX–2016–36 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–MIAX–2016–36. 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 19 17 CFR 240.19b–4(f)(6)(iii). purposes only of waiving the 30-day operative delay, the Commission has also considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 20 For PO 00000 Frm 00149 Fmt 4703 Sfmt 4703 Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–MIAX– 2016–36, and should be submitted on or before November 18, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.21 Robert W. Errett, Deputy Secretary. [FR Doc. 2016–26054 Filed 10–27–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–79145; File No. SR–Phlx– 2016–109] Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt Phlx Rule 765 (Prohibition Against Trading Ahead of Customer Orders) October 24, 2016. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on October 20, 2016, NASDAQ PHLX LLC (‘‘Phlx’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘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 21 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\28OCN1.SGM 28OCN1 Federal Register / Vol. 81, No. 209 / Friday, October 28, 2016 / Notices solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to adopt Phlx Rule 765 (Prohibition Against Trading Ahead of Customer Orders). Phlx also proposes to amend Rule 3404 (Recording of Order Information) to include an additional order reporting requirement related to one of the exceptions in Rule 765. The text of the proposed rule change is set forth below. Proposed new language is italicized; deleted text is in brackets. * * * * * Rules of the Exchange mstockstill on DSK3G9T082PROD with NOTICES * * * * * Rule 765 Prohibition Against Trading Ahead of Customer Orders (a) Phlx members and persons associated with a member shall comply with FINRA Rule 5320 as if such Rule were part of Phlx’s rules. (b) For purposes of this Rule: (1) References to FINRA Rules 5310, 5320 and 7440 shall be construed as references to Phlx Rules 764, 765 and 3404, respectively; (2) The reference in FINRA Rule 5320 to an ‘‘institutional account’’, as defined in FINRA Rule 4512(c), shall be construed to apply to accounts of customers that do not meet the definition of ‘‘non-institutional customer’’, as defined in Phlx Rule 763(c); (3) FINRA Rule 5320.02(b) and the reference to FINRA Rule 6420 therein shall be disregarded; (4) References to ‘‘FINRA’’ shall be construed as references to ‘‘Phlx’’. (c) Phlx members and persons associated with a member relying upon the exception set forth in FINRA Rule 5320.03 shall comply with the reporting requirements stated therein. Phlx and FINRA are parties to the Regulatory Contract pursuant to which FINRA has agreed to perform certain functions on behalf of Phlx. Therefore, Phlx members are complying with Phlx Rule 765 by complying with FINRA Rule 5320.03 as written, including, for example, reporting requirements and notifications. In addition, functions performed by FINRA, FINRA departments, and FINRA staff under Phlx Rule 765 are being performed by FINRA on behalf of Phlx. * * * * * Rule 3000 * * NASDAQ OMX PSX * VerDate Sep<11>2014 * * 18:12 Oct 27, 2016 Jkt 241001 Rule 3404 Recording of Order Information With respect to orders for securities listed on the NASDAQ Stock Market or the Exchange, member organizations and persons associated with a member organization shall comply with the following Rule: (a) No Change. (b) Order Origination and Receipt Unless otherwise indicated, the following order information must be recorded under this Rule when an order is received or originated. For purposes of this Rule, the order origination or receipt time is the time the order is received from the customer. (1) through (16) No Change. (17) an identification of the order as related to a Program Trade or an Index Arbitrage Trade; [and] (18) the type of account, i.e., retail, wholesale, employee, proprietary, or any other type of account designated by the Exchange, for which the order is submitted[.]; and (19) if the member is relying on the exception provided in FINRA Rule 5320.02 with respect to the order, the unique identification of any appropriate information barriers in place at the department within the member where the order was received or originated. * * * * * II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Phlx proposes to adopt Rule 765 (Prohibition Against Trading Ahead of Customer Orders). This rule will largely incorporate FINRA Rule 5320 (Prohibition Against Trading Ahead of Customer Orders), commonly known as the ‘‘Manning Rule’’, by reference. Phlx also proposes to adopt, as part of Rule 3404 (Recording of Order Information), language that specifies how members shall comply with the exception set PO 00000 Frm 00150 Fmt 4703 Sfmt 4703 75175 forth in FINRA Rule 5320.02 (NoKnowledge Exception) if the member implements information barriers in reliance on that exception. Phlx believes that Rule 765 will add important additional safeguards to the treatment of customer orders by members, and that the amendment to Rule 3404 will increase regulatory efficiency in conducting surveillance to ensure compliance with Rule 765. In addition, both The Nasdaq Stock Market LLC (‘‘Nasdaq’’) and NASDAQ BX, Inc. (‘‘BX’’) have previously adopted rules prohibiting the trading ahead of customer orders that reference FINRA Rule 5320, and so this proposal will further align the Phlx rules with Nasdaq and BX rules in this regard.3 Proposed Rule 765 contains three distinct elements. First, Rule 765 states that members shall be required to comply with FINRA Rule 5320 as if that rule were part of Phlx’s rules. As part of incorporating FINRA Rule 5320 by reference, Rule 765 states that references to FINRA shall be construed as references to Phlx, and replaces crossreferences to other FINRA rules with cross-references to corresponding Phlx rules. Second, Rule 765 exempts members from complying with FINRA Rule 5320.02(b) and the reference to FINRA Rule 6420 therein, as those provisions deal with trading in OTC equity securities, which Phlx does not regulate. Finally, Rule 765 addresses how members and persons associated with a member relying upon the exception set forth in FINRA Rule 5320.03 (relating to riskless principal transactions) shall comply with the reporting requirements stated therein. These elements are further discussed below. 3 FINRA Rule 5320 was previously codified as NASD IM–2110–2 (Trading Ahead of Customer Limit Order) and NASD Rule 2111 (Trading Ahead of Customer Market Orders). FINRA adopted FINRA Rule 5320 in 2011, which combined NASD IM– 2110–2 and NASD Rule 2111 into one rule and made several changes. See Securities Exchange Act Release No. 63895 (February 11, 2011), 76 FR 9386 (February 17, 2011) (SR–FINRA–2009–090). Nasdaq adopted IM–2110–2 as part of its Form 1 application that it submitted in 2001. See Securities Exchange Act Release No. 44396 (June 7, 2001), 66 FR 31952 (June 13, 2001) (File No. 10–131). Nasdaq subsequently amended that rule to reflect the adoption of FINRA Rule 5320. See Securities Exchange Act Release No. 68153 (November 5, 2012), 77 FR 67409 (November 9, 2012) (SR– NASDAQ–2012–124). In 2008, BX adopted IM– 2110–2 (Trading Ahead of Customer Limit Order), which incorporates NASD IM–2110–2 by reference, and Rule 2111 (Trading Ahead of Customer Market Orders), which incorporates NASD Rule 2111 by reference. See Securities and Exchange Act Release No. 59154 (December 23, 2008), 73 FR 80468 (December 31, 2008) (SR–BSE–2008–48). E:\FR\FM\28OCN1.SGM 28OCN1 75176 Federal Register / Vol. 81, No. 209 / Friday, October 28, 2016 / Notices mstockstill on DSK3G9T082PROD with NOTICES Compliance with FINRA Rule 5320 Rule 765 states that Phlx members and persons associated with a member shall comply with FINRA Rule 5320 as if such Rule were part of Phlx’s rules. As part of incorporating FINRA Rule 5320 by reference, Rule 765 states that references to ‘‘FINRA’’ shall be construed as references to ‘‘Phlx’’. Rule 765 also changes crossreferences from FINRA rules to Phlx rules. Specifically, FINRA Rule 5320 cross-references FINRA Rules 5310 (Best Execution and Interpositioning), 5320 (Prohibition Against Trading Ahead of Customer Orders) and 7440 (Recording of Order Information). Rule 765 changes those cross-references to references to Phlx Rules 764 (Best Execution and Interpositioning), 765 (Prohibition Against Trading Ahead of Customer Orders) and 3404 (Recording of Order Information), respectively. Finally, FINRA Rule 5320 contains an exception for large orders (10,000 shares or more, unless such orders are less than $100,000 in value) and for orders for customers that meet the definition of an ‘‘institutional account’’, as defined in FINRA Rule 4512(c). Phlx proposes to adopt a similar exception by crossreferencing Phlx Rule 763(c), which defines a ‘‘non-institutional customer’’ using the same criteria as FINRA Rule 4512(c).4 Although the two definitions use the same criteria, those criteria are used to define opposite concepts (‘‘institutional account’’ versus ‘‘noninstitutional customer’’). Since the same criteria is used to define opposite concepts, Rule 765 states that the reference in FINRA Rule 5320 to an ‘‘institutional account’’ as defined in FINRA Rule 4512(c) shall be construed to apply to accounts of customers that do not meet the definition of ‘‘noninstitutional customer’’, as defined in Rule 763(c). Phlx believes that it is appropriate to adopt a Manning rule that is substantively the same as the current FINRA rule, including the various exceptions to that rule. First, Phlx believes that the rationale for initially adopting the Manning rule continues to apply today. In initially approving NASD IM–2110–2, the Commission 4 Rule 763(c) defines a non-institutional customer as ‘‘a customer that is not (1) a bank, savings and loan association, insurance company, or registered investment company; (2) an investment adviser registered either with the Commission under Section 203 of the Investment Advisers Act of 1940 or with a state securities commission (or any agency or office performing like functions); or (3) any other entity (whether a natural person, corporation, partnership, trust, or otherwise) with total assets of at least $50 million.’’ FINRA Rule 4512(c) uses the same criteria to define an ‘‘institutional account’’. See FINRA Rule 4512(c). VerDate Sep<11>2014 18:12 Oct 27, 2016 Jkt 241001 found that the rule would enhance investor confidence by allowing more trade volume to be made available to customers by giving customer orders priority over the market maker’s proprietary trading, which would result in quicker and more frequent executions for customers.5 The Commission also found that the rule would improve the price discovery process, as market makers would be encouraged to handle customer limit orders in a timely fashion, which would provide investors with a more accurate indication of the buy and sell interest at a given moment.6 Phlx believes that the reasons justifying the proposal of the original NASD rule also apply here. Second, as noted above, both Nasdaq and BX have adopted rules prohibiting the trading ahead of customer orders that largely adopt FINRA Rule 5320 by reference, and so this proposal will further align the Phlx rules with Nasdaq and BX rules in this regard. Phlx also believes that it is appropriate to incorporate by reference the various exceptions set forth in the FINRA rule. With respect to incorporating FINRA’s definition of an institutional account, and that rule’s corresponding carve-out for institutional accounts, the SEC noted in originally approving NASD IM–2110–2 (which allowed members to set the specific terms and conditions for acceptance of institutional orders) that institutional orders may qualify for special treatment. The SEC found that, because most market makers cannot typically fill institutional-size orders out of inventory, institutions generally only hold market makers to a ‘‘best efforts’’ standard in return for the willingness of the market maker to put up substantial capital to provide liquidity for large orders.7 Phlx believes that a similar rationale applies here, and that this rationale justifies incorporating this exception by reference. Phlx also believes that it is appropriate to incorporate by reference the exception in FINRA Rule 5320 for riskless principal trades.8 In initially 5 See Securities Exchange Act Release No. 34279 (June 29, 1994), 59 FR 16369 (July 7, 1994) (SR– NASD–93–58). 6 Id. 7 See Securities Exchange Act Release No. 34279 (June 29, 1994), 59 FR 16369 (July 6, 1994) (SR– NASD–93–58). 8 FINRA Rule 5320.03 provides that the obligations under the rule ‘‘shall not apply to a member’s proprietary trade if such proprietary trade is for the purposes of facilitating the execution, on a riskless principal basis, of an order from a customer (whether its own customer or the customer of another broker-dealer) (the ‘‘facilitated order’’), provided that the member: (a) Submits a report, contemporaneously with the execution of PO 00000 Frm 00151 Fmt 4703 Sfmt 4703 proposing this exception, the NASD stated that it considered trades that met the standards of the riskless principal exception to be functionally equivalent to an agency trade and therefore did not materially implicate a market maker’s proprietary trading.9 According to NASD, this position was primarily based on the rule’s requirement that only trades where a market maker gives the customer a trade price that reflects the market maker’s actual cost in acquiring the stock would be eligible for the exception, as the requirement to ‘‘trade flat’’ effectively removed concerns that a member would breach its fiduciary duty to customer limit orders that it holds.10 Phlx believes that the same rationale applies here, and that this rationale justifies incorporating this exception by reference. Exception From Requirement To Comply With FINRA Rule 5320.02(b) Rule 765 excludes a provision of FINRA’s Manning rule that relates to the over-the-counter market. Specifically, Rule 765 provides that FINRA Rule 5320.02(b) and its reference to FINRA Rule 6420 therein shall be disregarded. FINRA Rule 5320.02 applies the Manning rule to OTC equity securities, which are defined in FINRA Rule 6420.11 Phlx is excluding FINRA Rule the facilitated order, identifying the trade as riskless principal to FINRA (or another self-regulatory organization if not required under FINRA rules); and (b) has written policies and procedures to ensure that riskless principal transactions for which the member is relying upon this exception comply with applicable FINRA rules. At a minimum these policies and procedures must require that the customer order was received prior to the offsetting principal transaction, and that the offsetting principal transaction is at the same price as the customer order exclusive of any markup or markdown, commission equivalent or other fee and is allocated to a riskless principal or customer account in a consistent manner and within 60 seconds of execution. Members must have supervisory systems in place that produce records that enable the member and FINRA to reconstruct accurately, readily, and in a time-sequenced manner all facilitated orders for which the member relies on this exception.’’ 9 See Securities Exchange Act Release No. 46006 (May 30, 2002), 67 FR 39455 (June 7, 2002) (SR– NASD–2002–66). NASD extended this exception to NASD Rule 2111 (Trading Ahead of Customer Market Orders) when NASD adopted that rule in 2005. See Securities Exchange Act Release No. 52226 (August 9, 2005), 70 FR 48219 (August 16, 2005) (SR–NASD–2004–045). 10 See Securities Exchange Act Release No. 46006 (May 30, 2002), 67 FR 39455 (June 7, 2002) (SR– NASD–2002–66). 11 FINRA Rule 5320.02 provides that, with respect to OTC equity securities, if a member implements and utilizes an effective system of internal controls, such as appropriate information barriers, that operate to prevent a non-market-making trading unit from obtaining knowledge of customer orders held by a separate trading unit, the non-marketmaking trading unit trading in a proprietary capacity may continue to trade at prices that would satisfy the customer orders held by the separate E:\FR\FM\28OCN1.SGM 28OCN1 Federal Register / Vol. 81, No. 209 / Friday, October 28, 2016 / Notices 5320.02(b) and its reference to FINRA Rule 6420 from Rule 765 because this provision relates to over-the-counter securities, and Phlx does not regulate the over-the-counter market.12 Compliance With FINRA Rule 5320.03 Finally, Phlx proposes to adopt language governing how Phlx members may comply with one of the exceptions to FINRA’s Manning rule; specifically, the exception for riskless principal trades.13 If a member relies upon the riskless principal exception, FINRA Rule 5320.03 requires that the member, among other things, submit a report contemporaneous with the execution of the customer trade identifying the trade as riskless principal, and have written policies and procedures in place to ensure that the riskless principal trades for which the member is relying upon the exception comply with applicable FINRA rules. Rule 765(c) states that members and persons associated with a member relying upon the exception set forth in FINRA Rule 5320.03 shall comply with the reporting requirements stated therein. The Rule further states that Phlx and FINRA are parties to the Regulatory Contract pursuant to which FINRA has agreed to perform certain functions on behalf of Phlx. Therefore, Phlx members are complying with Phlx Rule 765 by complying with FINRA Rule 5320.03 as written, including, for example, reporting requirements and notifications. In addition, Rule 765 states that functions performed by FINRA, FINRA departments, and FINRA staff under Phlx Rule 765 are being performed by FINRA on behalf of Phlx. Phlx believes that this provision provides useful clarification as to how members may comply with the rule’s riskless principal exception. mstockstill on DSK3G9T082PROD with NOTICES Rule 3404 and Compliance with the NoKnowledge Exception Phlx also proposes to adopt, as part of Rule 3404 (Recording of Order Information) language that specifies how members shall comply with the exception set forth in FINRA Rule 5320.02 (No-Knowledge Exception) if the member implements information barriers in reliance on that exception. trading unit. FINRA defines an OTC equity security as ‘‘any equity security that is not an ‘NMS stock’ as that term is defined in Rule 600(b)(47) of SEC Regulation NMS; provided, however, that the term ‘OTC Equity Security’ shall not include any Restricted Equity Security.’’ See FINRA Rule 6420(f). 12 Nasdaq proposed a similar exclusion when updating its Manning rule to reflect the adoption of FINRA Rule 5320. See Securities Exchange Act Release No. 68153 (November 5, 2012), 77 FR 67409 (November 9, 2012) (SR–NASDAQ–2012–124). 13 That exception is discussed in note 8 above. VerDate Sep<11>2014 18:12 Oct 27, 2016 Jkt 241001 Under this exception, if a member implements and utilizes an effective system of internal controls, such as appropriate information barriers, that operate to prevent one trading unit from obtaining knowledge of customer orders held by a separate trading unit, those other trading units trading in a proprietary capacity may continue to trade at prices that would satisfy the customer orders held by the separate trading unit.14 FINRA Rule 5320.02 further specifies that, if a member implements and utilizes appropriate information barriers in reliance on this exception, the member must uniquely identify such information barriers as prescribed in FINRA Rule 7440(b)(19).15 That rule states that, if the member is relying on the exception provided in FINRA Rule 5320.02 with respect to the order, the member must record the unique identification of any appropriate information barriers in place at the department within the member where the order was received or originated. Members must record this information when an order is received or originated, which means the time the order is received from the customer.16 As part of incorporating FINRA’s Manning rule, Phlx proposes to adopt, as Rule 3404(b)(19), corresponding language that sets forth how members shall comply with the no-knowledge exception if members utilize information barriers in reliance on that exception. Just as FINRA Rule 5320.02 references the applicable requirement in FINRA Rule 7440(b) that members identify the appropriate information barriers in place in connection with the order that is subject to the noknowledge exception, Rule 765 shall reference the corresponding requirement in Rule 3404. Phlx believes that it is appropriate to adopt a corresponding requirement that a member identify, at the time of order receipt or origination, the appropriate information barriers in place if a member is utilizing information barriers in reliance on the no-knowledge exception. In initially proposing this requirement as part of FINRA Rule 7440, FINRA stated that it would enhance regulatory efficiency by allowing FINRA to ascertain, on an automated basis, those firms that are claiming the no-knowledge exception, thereby reducing the number of ‘‘false 14 See FINRA Rule 5320.02. This exception applies to NMS stocks, as defined in Rule 600 of Regulation NMS. See 17 CFR 242.600(47). 15 FINRA Rule 7440(b)(19) has subsequently been re-numbered as Rule 7440(b)(20). See Securities Exchange Act Release No. 77523 (April 5, 2016), 81 FR 21427 (April 11, 2016) (SR–FINRA–2016–006). 16 See FINRA Rule 7440(b)(20). PO 00000 Frm 00152 Fmt 4703 Sfmt 4703 75177 positives’’ where trading ahead may otherwise be indicated.17 Phlx believes that the same rationale applies here. Phlx also notes that Nasdaq has incorporated the no-knowledge exception as part of its Manning rule and the corresponding language that sets forth how members shall comply with the no-knowledge exception if members utilize information barriers in reliance on that exception.18 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act,19 in general, and furthers the objectives of Section 6(b)(5) of the Act,20 in particular, in that it is designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general to protect investors and the public interest. Phlx believes that the proposed rule will add important additional safeguards to the treatment of customer orders by members, and notes that the SEC has previously found that the Manning rule may result in increased market quality for market participants. Phlx also notes that the SEC has previously approved the various exceptions to the rule, such as the exception for institutional accounts and the riskless principal exception, which Phlx proposes to incorporate by reference. Phlx believes that the proposed amendment to Rule 3404 will increase regulatory efficiency in conducting surveillance to ensure compliance with Rule 765. Finally, Nasdaq and BX already contain rules prohibiting trading ahead of customer orders that reference the applicable FINRA rule, and so this proposal will further align the Phlx rules with Nasdaq and BX rules in this regard. 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. The proposed rule will apply equally to all similarly-situated members, i.e., members that handle customer market and limit orders. To the extent that the rule contains exceptions for certain kinds of accounts (such as trades for accounts of customers that do not meet the definition of ‘‘non-institutional 17 See Securities Exchange Act Release No. 65692 (November 4, 2011), 76 FR 70195 (November 10, 2011) (Notice of filing of SR–FINRA–2011–063). 18 See Nasdaq Rule 5320A and Rule 7440A. 19 15 U.S.C. 78f(b). 20 15 U.S.C. 78f(b)(5). E:\FR\FM\28OCN1.SGM 28OCN1 75178 Federal Register / Vol. 81, No. 209 / Friday, October 28, 2016 / Notices customer’’) and certain kinds of trades (such as riskless principal trades), and additional reporting requirements for firms that use information barriers pursuant to the no-knowledge exception, these exceptions and requirements will also apply equally to all similarly-situated market participants. In addition, the SEC has previously found that such exceptions and requirements are consistent with the Act. 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 21 and subparagraph (f)(6) of Rule 19b–4 thereunder.22 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 mstockstill on DSK3G9T082PROD with NOTICES Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: 21 15 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. 22 17 VerDate Sep<11>2014 18:12 Oct 27, 2016 Jkt 241001 Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SRPhlx-2016–109 on the subject line. Paper Comments All submissions should refer to File Number SR–Phlx–2016–109. 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 (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–Phlx–2016–109 and should be submitted on or before November 18, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.23 Robert W. Errett, Deputy Secretary. [FR Doc. 2016–26053 Filed 10–27–16; 8:45 am] BILLING CODE 8011–01–P PO 00000 CFR 200.30–3(a)(12). Frm 00153 Fmt 4703 [Investment Company Act Release No. 32324; 812–14542] ALAIA Market Linked Trust and Beech Hill Securities, Inc.; Notice of Application October 24, 2016. • Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. 23 17 SECURITIES AND EXCHANGE COMMISSION Sfmt 4703 Securities and Exchange Commission (‘‘Commission’’). ACTION: Notice of an application under (a) section 6(c) of the Investment Company Act of 1940 (‘‘Act’’) for an exemption from sections 2(a)(32), 2(a)(35), 14(a), 19(b), 22(d) and 26(a)(2)(C) of the Act and rules 19b–1 and rule 22c–1 thereunder and (b) sections 11(a) and 11(c) of the Act for approval of certain exchange and rollover privileges. AGENCY: Applicants: ALAIA Market Linked Trust and Beech Hill Securities Inc. (‘‘BHSI’’).1 Summary of Application: Applicants request an order to permit certain unit investment trusts (‘‘UIT’’) to: (a) Impose sales charges on a deferred basis and waive the deferred sales charge in certain cases; (b) offer unitholders certain exchange and rollover options; (c) publicly offer units without requiring the Depositor to take for its own account $100,000 worth of units; and (d) distribute capital gains resulting from the sale of portfolio securities within a reasonable time after receipt. Filing Dates: The application was filed on September 3, 2015, and amended on January 6, 2016, and October 17, 2016. Hearing or Notification of Hearing: An order granting the requested relief will be issued unless the Commission orders a hearing. Interested persons may request a hearing by writing to the Commission’s Secretary and serving applicants with a copy of the request, personally or by mail. Hearing requests should be received by the Commission by 5:30 p.m. on November 17, 2016, and should be accompanied by proof of service on applicants, in the form of an affidavit, or for lawyers, a certificate of service. Pursuant to rule 0–5 under the Act, hearing requests should state the nature of the writer’s interest, any facts 1 Applicants also request relief for future unit investment trusts (collectively, with ALAIA Market Linked Trust, the ‘‘Trusts’’) and series of the Trusts (‘‘Series’’) that are sponsored by BHSI or any entity controlling, controlled by or under common control with BHSI (together with BHSI, the ‘‘Depositors’’). Any future Trust and Series that relies on the requested order will comply with the terms and conditions of the application. All existing entities that currently intend to rely on the requested order are named as applicants. E:\FR\FM\28OCN1.SGM 28OCN1

Agencies

[Federal Register Volume 81, Number 209 (Friday, October 28, 2016)]
[Notices]
[Pages 75174-75178]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-26053]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79145; File No. SR-Phlx-2016-109]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Adopt Phlx Rule 
765 (Prohibition Against Trading Ahead of Customer Orders)

October 24, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 20, 2016, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``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

[[Page 75175]]

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 to adopt Phlx Rule 765 (Prohibition Against 
Trading Ahead of Customer Orders). Phlx also proposes to amend Rule 
3404 (Recording of Order Information) to include an additional order 
reporting requirement related to one of the exceptions in Rule 765.
    The text of the proposed rule change is set forth below. Proposed 
new language is italicized; deleted text is in brackets.
* * * * *

Rules of the Exchange

* * * * *

Rule 765 Prohibition Against Trading Ahead of Customer Orders

    (a) Phlx members and persons associated with a member shall comply 
with FINRA Rule 5320 as if such Rule were part of Phlx's rules.
    (b) For purposes of this Rule:
    (1) References to FINRA Rules 5310, 5320 and 7440 shall be 
construed as references to Phlx Rules 764, 765 and 3404, respectively;
    (2) The reference in FINRA Rule 5320 to an ``institutional 
account'', as defined in FINRA Rule 4512(c), shall be construed to 
apply to accounts of customers that do not meet the definition of 
``non-institutional customer'', as defined in Phlx Rule 763(c);
    (3) FINRA Rule 5320.02(b) and the reference to FINRA Rule 6420 
therein shall be disregarded;
    (4) References to ``FINRA'' shall be construed as references to 
``Phlx''.
    (c) Phlx members and persons associated with a member relying upon 
the exception set forth in FINRA Rule 5320.03 shall comply with the 
reporting requirements stated therein. Phlx and FINRA are parties to 
the Regulatory Contract pursuant to which FINRA has agreed to perform 
certain functions on behalf of Phlx. Therefore, Phlx members are 
complying with Phlx Rule 765 by complying with FINRA Rule 5320.03 as 
written, including, for example, reporting requirements and 
notifications. In addition, functions performed by FINRA, FINRA 
departments, and FINRA staff under Phlx Rule 765 are being performed by 
FINRA on behalf of Phlx.
* * * * *

Rule 3000 NASDAQ OMX PSX

* * * * *

Rule 3404 Recording of Order Information

    With respect to orders for securities listed on the NASDAQ Stock 
Market or the Exchange, member organizations and persons associated 
with a member organization shall comply with the following Rule:
    (a) No Change.
    (b) Order Origination and Receipt
    Unless otherwise indicated, the following order information must be 
recorded under this Rule when an order is received or originated. For 
purposes of this Rule, the order origination or receipt time is the 
time the order is received from the customer.
    (1) through (16) No Change.
    (17) an identification of the order as related to a Program Trade 
or an Index Arbitrage Trade; [and]
    (18) the type of account, i.e., retail, wholesale, employee, 
proprietary, or any other type of account designated by the Exchange, 
for which the order is submitted[.]; and
    (19) if the member is relying on the exception provided in FINRA 
Rule 5320.02 with respect to the order, the unique identification of 
any appropriate information barriers in place at the department within 
the member where the order was received or originated.
* * * * *

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    Phlx proposes to adopt Rule 765 (Prohibition Against Trading Ahead 
of Customer Orders). This rule will largely incorporate FINRA Rule 5320 
(Prohibition Against Trading Ahead of Customer Orders), commonly known 
as the ``Manning Rule'', by reference. Phlx also proposes to adopt, as 
part of Rule 3404 (Recording of Order Information), language that 
specifies how members shall comply with the exception set forth in 
FINRA Rule 5320.02 (No-Knowledge Exception) if the member implements 
information barriers in reliance on that exception.
    Phlx believes that Rule 765 will add important additional 
safeguards to the treatment of customer orders by members, and that the 
amendment to Rule 3404 will increase regulatory efficiency in 
conducting surveillance to ensure compliance with Rule 765. In 
addition, both The Nasdaq Stock Market LLC (``Nasdaq'') and NASDAQ BX, 
Inc. (``BX'') have previously adopted rules prohibiting the trading 
ahead of customer orders that reference FINRA Rule 5320, and so this 
proposal will further align the Phlx rules with Nasdaq and BX rules in 
this regard.\3\
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    \3\ FINRA Rule 5320 was previously codified as NASD IM-2110-2 
(Trading Ahead of Customer Limit Order) and NASD Rule 2111 (Trading 
Ahead of Customer Market Orders). FINRA adopted FINRA Rule 5320 in 
2011, which combined NASD IM-2110-2 and NASD Rule 2111 into one rule 
and made several changes. See Securities Exchange Act Release No. 
63895 (February 11, 2011), 76 FR 9386 (February 17, 2011) (SR-FINRA-
2009-090). Nasdaq adopted IM-2110-2 as part of its Form 1 
application that it submitted in 2001. See Securities Exchange Act 
Release No. 44396 (June 7, 2001), 66 FR 31952 (June 13, 2001) (File 
No. 10-131). Nasdaq subsequently amended that rule to reflect the 
adoption of FINRA Rule 5320. See Securities Exchange Act Release No. 
68153 (November 5, 2012), 77 FR 67409 (November 9, 2012) (SR-NASDAQ-
2012-124). In 2008, BX adopted IM-2110-2 (Trading Ahead of Customer 
Limit Order), which incorporates NASD IM-2110-2 by reference, and 
Rule 2111 (Trading Ahead of Customer Market Orders), which 
incorporates NASD Rule 2111 by reference. See Securities and 
Exchange Act Release No. 59154 (December 23, 2008), 73 FR 80468 
(December 31, 2008) (SR-BSE-2008-48).
---------------------------------------------------------------------------

    Proposed Rule 765 contains three distinct elements. First, Rule 765 
states that members shall be required to comply with FINRA Rule 5320 as 
if that rule were part of Phlx's rules. As part of incorporating FINRA 
Rule 5320 by reference, Rule 765 states that references to FINRA shall 
be construed as references to Phlx, and replaces cross-references to 
other FINRA rules with cross-references to corresponding Phlx rules. 
Second, Rule 765 exempts members from complying with FINRA Rule 
5320.02(b) and the reference to FINRA Rule 6420 therein, as those 
provisions deal with trading in OTC equity securities, which Phlx does 
not regulate. Finally, Rule 765 addresses how members and persons 
associated with a member relying upon the exception set forth in FINRA 
Rule 5320.03 (relating to riskless principal transactions) shall comply 
with the reporting requirements stated therein. These elements are 
further discussed below.

[[Page 75176]]

Compliance with FINRA Rule 5320
    Rule 765 states that Phlx members and persons associated with a 
member shall comply with FINRA Rule 5320 as if such Rule were part of 
Phlx's rules. As part of incorporating FINRA Rule 5320 by reference, 
Rule 765 states that references to ``FINRA'' shall be construed as 
references to ``Phlx''.
    Rule 765 also changes cross-references from FINRA rules to Phlx 
rules. Specifically, FINRA Rule 5320 cross-references FINRA Rules 5310 
(Best Execution and Interpositioning), 5320 (Prohibition Against 
Trading Ahead of Customer Orders) and 7440 (Recording of Order 
Information). Rule 765 changes those cross-references to references to 
Phlx Rules 764 (Best Execution and Interpositioning), 765 (Prohibition 
Against Trading Ahead of Customer Orders) and 3404 (Recording of Order 
Information), respectively.
    Finally, FINRA Rule 5320 contains an exception for large orders 
(10,000 shares or more, unless such orders are less than $100,000 in 
value) and for orders for customers that meet the definition of an 
``institutional account'', as defined in FINRA Rule 4512(c). Phlx 
proposes to adopt a similar exception by cross-referencing Phlx Rule 
763(c), which defines a ``non-institutional customer'' using the same 
criteria as FINRA Rule 4512(c).\4\ Although the two definitions use the 
same criteria, those criteria are used to define opposite concepts 
(``institutional account'' versus ``non-institutional customer''). 
Since the same criteria is used to define opposite concepts, Rule 765 
states that the reference in FINRA Rule 5320 to an ``institutional 
account'' as defined in FINRA Rule 4512(c) shall be construed to apply 
to accounts of customers that do not meet the definition of ``non-
institutional customer'', as defined in Rule 763(c).
---------------------------------------------------------------------------

    \4\ Rule 763(c) defines a non-institutional customer as ``a 
customer that is not (1) a bank, savings and loan association, 
insurance company, or registered investment company; (2) an 
investment adviser registered either with the Commission under 
Section 203 of the Investment Advisers Act of 1940 or with a state 
securities commission (or any agency or office performing like 
functions); or (3) any other entity (whether a natural person, 
corporation, partnership, trust, or otherwise) with total assets of 
at least $50 million.'' FINRA Rule 4512(c) uses the same criteria to 
define an ``institutional account''. See FINRA Rule 4512(c).
---------------------------------------------------------------------------

    Phlx believes that it is appropriate to adopt a Manning rule that 
is substantively the same as the current FINRA rule, including the 
various exceptions to that rule. First, Phlx believes that the 
rationale for initially adopting the Manning rule continues to apply 
today. In initially approving NASD IM-2110-2, the Commission found that 
the rule would enhance investor confidence by allowing more trade 
volume to be made available to customers by giving customer orders 
priority over the market maker's proprietary trading, which would 
result in quicker and more frequent executions for customers.\5\ The 
Commission also found that the rule would improve the price discovery 
process, as market makers would be encouraged to handle customer limit 
orders in a timely fashion, which would provide investors with a more 
accurate indication of the buy and sell interest at a given moment.\6\ 
Phlx believes that the reasons justifying the proposal of the original 
NASD rule also apply here.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 34279 (June 29, 
1994), 59 FR 16369 (July 7, 1994) (SR-NASD-93-58).
    \6\ Id.
---------------------------------------------------------------------------

    Second, as noted above, both Nasdaq and BX have adopted rules 
prohibiting the trading ahead of customer orders that largely adopt 
FINRA Rule 5320 by reference, and so this proposal will further align 
the Phlx rules with Nasdaq and BX rules in this regard.
    Phlx also believes that it is appropriate to incorporate by 
reference the various exceptions set forth in the FINRA rule. With 
respect to incorporating FINRA's definition of an institutional 
account, and that rule's corresponding carve-out for institutional 
accounts, the SEC noted in originally approving NASD IM-2110-2 (which 
allowed members to set the specific terms and conditions for acceptance 
of institutional orders) that institutional orders may qualify for 
special treatment. The SEC found that, because most market makers 
cannot typically fill institutional-size orders out of inventory, 
institutions generally only hold market makers to a ``best efforts'' 
standard in return for the willingness of the market maker to put up 
substantial capital to provide liquidity for large orders.\7\ Phlx 
believes that a similar rationale applies here, and that this rationale 
justifies incorporating this exception by reference.
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release No. 34279 (June 29, 
1994), 59 FR 16369 (July 6, 1994) (SR-NASD-93-58).
---------------------------------------------------------------------------

    Phlx also believes that it is appropriate to incorporate by 
reference the exception in FINRA Rule 5320 for riskless principal 
trades.\8\ In initially proposing this exception, the NASD stated that 
it considered trades that met the standards of the riskless principal 
exception to be functionally equivalent to an agency trade and 
therefore did not materially implicate a market maker's proprietary 
trading.\9\ According to NASD, this position was primarily based on the 
rule's requirement that only trades where a market maker gives the 
customer a trade price that reflects the market maker's actual cost in 
acquiring the stock would be eligible for the exception, as the 
requirement to ``trade flat'' effectively removed concerns that a 
member would breach its fiduciary duty to customer limit orders that it 
holds.\10\ Phlx believes that the same rationale applies here, and that 
this rationale justifies incorporating this exception by reference.
---------------------------------------------------------------------------

    \8\ FINRA Rule 5320.03 provides that the obligations under the 
rule ``shall not apply to a member's proprietary trade if such 
proprietary trade is for the purposes of facilitating the execution, 
on a riskless principal basis, of an order from a customer (whether 
its own customer or the customer of another broker-dealer) (the 
``facilitated order''), provided that the member: (a) Submits a 
report, contemporaneously with the execution of the facilitated 
order, identifying the trade as riskless principal to FINRA (or 
another self-regulatory organization if not required under FINRA 
rules); and (b) has written policies and procedures to ensure that 
riskless principal transactions for which the member is relying upon 
this exception comply with applicable FINRA rules. At a minimum 
these policies and procedures must require that the customer order 
was received prior to the offsetting principal transaction, and that 
the offsetting principal transaction is at the same price as the 
customer order exclusive of any markup or markdown, commission 
equivalent or other fee and is allocated to a riskless principal or 
customer account in a consistent manner and within 60 seconds of 
execution. Members must have supervisory systems in place that 
produce records that enable the member and FINRA to reconstruct 
accurately, readily, and in a time-sequenced manner all facilitated 
orders for which the member relies on this exception.''
    \9\ See Securities Exchange Act Release No. 46006 (May 30, 
2002), 67 FR 39455 (June 7, 2002) (SR-NASD-2002-66). NASD extended 
this exception to NASD Rule 2111 (Trading Ahead of Customer Market 
Orders) when NASD adopted that rule in 2005. See Securities Exchange 
Act Release No. 52226 (August 9, 2005), 70 FR 48219 (August 16, 
2005) (SR-NASD-2004-045).
    \10\ See Securities Exchange Act Release No. 46006 (May 30, 
2002), 67 FR 39455 (June 7, 2002) (SR-NASD-2002-66).
---------------------------------------------------------------------------

Exception From Requirement To Comply With FINRA Rule 5320.02(b)
    Rule 765 excludes a provision of FINRA's Manning rule that relates 
to the over-the-counter market. Specifically, Rule 765 provides that 
FINRA Rule 5320.02(b) and its reference to FINRA Rule 6420 therein 
shall be disregarded. FINRA Rule 5320.02 applies the Manning rule to 
OTC equity securities, which are defined in FINRA Rule 6420.\11\ Phlx 
is excluding FINRA Rule

[[Page 75177]]

5320.02(b) and its reference to FINRA Rule 6420 from Rule 765 because 
this provision relates to over-the-counter securities, and Phlx does 
not regulate the over-the-counter market.\12\
---------------------------------------------------------------------------

    \11\ FINRA Rule 5320.02 provides that, with respect to OTC 
equity securities, if a member implements and utilizes an effective 
system of internal controls, such as appropriate information 
barriers, that operate to prevent a non-market-making trading unit 
from obtaining knowledge of customer orders held by a separate 
trading unit, the non-market-making trading unit trading in a 
proprietary capacity may continue to trade at prices that would 
satisfy the customer orders held by the separate trading unit. FINRA 
defines an OTC equity security as ``any equity security that is not 
an `NMS stock' as that term is defined in Rule 600(b)(47) of SEC 
Regulation NMS; provided, however, that the term `OTC Equity 
Security' shall not include any Restricted Equity Security.'' See 
FINRA Rule 6420(f).
    \12\ Nasdaq proposed a similar exclusion when updating its 
Manning rule to reflect the adoption of FINRA Rule 5320. See 
Securities Exchange Act Release No. 68153 (November 5, 2012), 77 FR 
67409 (November 9, 2012) (SR-NASDAQ-2012-124).
---------------------------------------------------------------------------

Compliance With FINRA Rule 5320.03
    Finally, Phlx proposes to adopt language governing how Phlx members 
may comply with one of the exceptions to FINRA's Manning rule; 
specifically, the exception for riskless principal trades.\13\ If a 
member relies upon the riskless principal exception, FINRA Rule 5320.03 
requires that the member, among other things, submit a report 
contemporaneous with the execution of the customer trade identifying 
the trade as riskless principal, and have written policies and 
procedures in place to ensure that the riskless principal trades for 
which the member is relying upon the exception comply with applicable 
FINRA rules. Rule 765(c) states that members and persons associated 
with a member relying upon the exception set forth in FINRA Rule 
5320.03 shall comply with the reporting requirements stated therein. 
The Rule further states that Phlx and FINRA are parties to the 
Regulatory Contract pursuant to which FINRA has agreed to perform 
certain functions on behalf of Phlx. Therefore, Phlx members are 
complying with Phlx Rule 765 by complying with FINRA Rule 5320.03 as 
written, including, for example, reporting requirements and 
notifications. In addition, Rule 765 states that functions performed by 
FINRA, FINRA departments, and FINRA staff under Phlx Rule 765 are being 
performed by FINRA on behalf of Phlx. Phlx believes that this provision 
provides useful clarification as to how members may comply with the 
rule's riskless principal exception.
---------------------------------------------------------------------------

    \13\ That exception is discussed in note 8 above.
---------------------------------------------------------------------------

Rule 3404 and Compliance with the No-Knowledge Exception
    Phlx also proposes to adopt, as part of Rule 3404 (Recording of 
Order Information) language that specifies how members shall comply 
with the exception set forth in FINRA Rule 5320.02 (No-Knowledge 
Exception) if the member implements information barriers in reliance on 
that exception. Under this exception, if a member implements and 
utilizes an effective system of internal controls, such as appropriate 
information barriers, that operate to prevent one trading unit from 
obtaining knowledge of customer orders held by a separate trading unit, 
those other trading units trading in a proprietary capacity may 
continue to trade at prices that would satisfy the customer orders held 
by the separate trading unit.\14\ FINRA Rule 5320.02 further specifies 
that, if a member implements and utilizes appropriate information 
barriers in reliance on this exception, the member must uniquely 
identify such information barriers as prescribed in FINRA Rule 
7440(b)(19).\15\ That rule states that, if the member is relying on the 
exception provided in FINRA Rule 5320.02 with respect to the order, the 
member must record the unique identification of any appropriate 
information barriers in place at the department within the member where 
the order was received or originated. Members must record this 
information when an order is received or originated, which means the 
time the order is received from the customer.\16\
---------------------------------------------------------------------------

    \14\ See FINRA Rule 5320.02. This exception applies to NMS 
stocks, as defined in Rule 600 of Regulation NMS. See 17 CFR 
242.600(47).
    \15\ FINRA Rule 7440(b)(19) has subsequently been re-numbered as 
Rule 7440(b)(20). See Securities Exchange Act Release No. 77523 
(April 5, 2016), 81 FR 21427 (April 11, 2016) (SR-FINRA-2016-006).
    \16\ See FINRA Rule 7440(b)(20).
---------------------------------------------------------------------------

    As part of incorporating FINRA's Manning rule, Phlx proposes to 
adopt, as Rule 3404(b)(19), corresponding language that sets forth how 
members shall comply with the no-knowledge exception if members utilize 
information barriers in reliance on that exception. Just as FINRA Rule 
5320.02 references the applicable requirement in FINRA Rule 7440(b) 
that members identify the appropriate information barriers in place in 
connection with the order that is subject to the no-knowledge 
exception, Rule 765 shall reference the corresponding requirement in 
Rule 3404.
    Phlx believes that it is appropriate to adopt a corresponding 
requirement that a member identify, at the time of order receipt or 
origination, the appropriate information barriers in place if a member 
is utilizing information barriers in reliance on the no-knowledge 
exception. In initially proposing this requirement as part of FINRA 
Rule 7440, FINRA stated that it would enhance regulatory efficiency by 
allowing FINRA to ascertain, on an automated basis, those firms that 
are claiming the no-knowledge exception, thereby reducing the number of 
``false positives'' where trading ahead may otherwise be indicated.\17\ 
Phlx believes that the same rationale applies here. Phlx also notes 
that Nasdaq has incorporated the no-knowledge exception as part of its 
Manning rule and the corresponding language that sets forth how members 
shall comply with the no-knowledge exception if members utilize 
information barriers in reliance on that exception.\18\
---------------------------------------------------------------------------

    \17\ See Securities Exchange Act Release No. 65692 (November 4, 
2011), 76 FR 70195 (November 10, 2011) (Notice of filing of SR-
FINRA-2011-063).
    \18\ See Nasdaq Rule 5320A and Rule 7440A.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\19\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\20\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest. Phlx believes that the proposed rule will add important 
additional safeguards to the treatment of customer orders by members, 
and notes that the SEC has previously found that the Manning rule may 
result in increased market quality for market participants. Phlx also 
notes that the SEC has previously approved the various exceptions to 
the rule, such as the exception for institutional accounts and the 
riskless principal exception, which Phlx proposes to incorporate by 
reference. Phlx believes that the proposed amendment to Rule 3404 will 
increase regulatory efficiency in conducting surveillance to ensure 
compliance with Rule 765. Finally, Nasdaq and BX already contain rules 
prohibiting trading ahead of customer orders that reference the 
applicable FINRA rule, and so this proposal will further align the Phlx 
rules with Nasdaq and BX rules in this regard.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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. The proposed rule will apply 
equally to all similarly-situated members, i.e., members that handle 
customer market and limit orders. To the extent that the rule contains 
exceptions for certain kinds of accounts (such as trades for accounts 
of customers that do not meet the definition of ``non-institutional

[[Page 75178]]

customer'') and certain kinds of trades (such as riskless principal 
trades), and additional reporting requirements for firms that use 
information barriers pursuant to the no-knowledge exception, these 
exceptions and requirements will also apply equally to all similarly-
situated market participants. In addition, the SEC has previously found 
that such exceptions and requirements are consistent with the Act.

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 \21\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\22\
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \22\ 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 proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2016-109 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2016-109. 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 (http://www.sec.gov/rules/sro.shtml).
    Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE., Washington, 
DC 20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.
    All submissions should refer to File Number SR-Phlx-2016-109 and 
should be submitted on or before November 18, 2016.
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    \23\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-26053 Filed 10-27-16; 8:45 am]
 BILLING CODE 8011-01-P