In the Matter of the Application of MIAX PEARL, LLC for Registration as a National Securities Exchange; Findings, Opinion, and Order of the Commission, 92901-92916 [2016-30538]

Download as PDF Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices mstockstill on DSK3G9T082PROD with NOTICES exercise or conversion thereof, pursuant to an executive compensation plan which meets the requirements of section 61(a)(3)(B) of the Act. Applicant submits that the issuance of Restricted Stock pursuant to the Plan poses no greater risk to stockholders than the issuances permitted by section 57(j)(1) of the Act. Section 23(c) 13. Section 23(c) of the Act, which is made applicable to BDCs by section 63 of the Act, generally prohibits a BDC from purchasing any securities of which it is the issuer except in the open market pursuant to tenders, or under other circumstances as the Commission may permit to ensure that the purchases are made in a manner or on a basis that does not unfairly discriminate against any holders of the class or classes of securities to be purchased. Applicant states that the withholding or purchase of shares of Restricted Stock and common stock in payment of applicable withholding tax obligations or of common stock in payment for the exercise price of an Option might be deemed to be purchases by the Fund of its own securities within the meaning of section 23(c) and therefore prohibited by the Act. 14. Section 23(c)(3) of the Act permits a BDC to purchase securities of which it is the issuer in circumstances in which the repurchase is made in a manner or on a basis that does not unfairly discriminate against any holders of the class or classes of securities to be purchased. Applicant believes that the requested relief meets the standards of section 23(c)(3). 15. Applicant submits that these purchases will be made in a manner that does not unfairly discriminate against Applicant’s stockholders because Applicant will use the closing sales price of its shares of common stock on the New York Stock Exchange (or any primary exchange on which its shares of common stock may be traded in the future) as the ‘‘fair market value’’ of its common stock under the Plan (i.e., the public market price on the date of grant of Restricted Stock and the date of grant of Options). Applicant submits that because all transactions with respect to the Plan will take place at the public market price for the Fund’s common stock, these transactions will not be significantly different than could be achieved by any stockholder selling in a transaction on the New York Stock Exchange. Applicant represents that no transactions will be conducted pursuant to the requested order on days where there are no reported market transactions involving Applicant’s shares. VerDate Sep<11>2014 19:36 Dec 19, 2016 Jkt 241001 16. Applicant represents that the withholding provisions in the Plan do not raise concerns about preferential treatment of Applicant’s insiders because the Plan is a bona fide compensation plan of the type that is common among corporations generally. Furthermore, the vesting schedule is determined at the time of the initial grant of the Restricted Stock and the option exercise price is determined at the time of the initial grant of the Options. Applicant represents that all purchases may be made only as permitted by the Plan, which has been approved by the Fund’s stockholders. Applicant believes that granting the requested relief would be consistent with the policies underlying the provisions of the Act permitting the use of equity compensation as well as prior exemptive relief granted by the Commission under section 23(c) of the Act. Applicant’s Conditions Applicant agrees that the order granting the requested relief will be subject to the following conditions: 1. The Plan will be authorized by the Fund’s shareholders. 2. Each issuance of Restricted Stock to a Participant will be approved by the Required Majority on the basis that such grant is in the best interest of the Fund and its shareholders. 3. The amount of voting securities that would result from the exercise of all of the Fund’s outstanding warrants, Options and rights, together with any Restricted Stock issued pursuant to the Plan, at the time of issuance shall not exceed 25% of the outstanding voting securities of the Fund, except that if the amount of voting securities that would result from the exercise of all of the Fund’s outstanding warrants, Options and rights issued to the Fund’s directors, officers and employees, together with any Restricted Stock issued pursuant to the Plan, would exceed 15% of the outstanding voting securities of the Fund, then the total amount of voting securities that would result from the exercise of all outstanding warrants, Options and rights, together with any Restricted Stock issued pursuant to the Plan, at the time of issuance shall not exceed 20% of the outstanding voting securities of the Fund. 4. The maximum amount of shares of Restricted Stock that may be issued under the Plan will be 10% of the outstanding shares of common stock of the Fund on the effective date of the Plan plus 10% of the number of shares of the Fund’s common stock issued or delivered by the Fund (other than PO 00000 Frm 00132 Fmt 4703 Sfmt 4703 92901 pursuant to compensation plans) during the term of the Plan. 5. The Board will review the Plan at least annually. In addition, the Board will review periodically the potential impact that the issuance of Restricted Stock under the Plan could have on the Fund’s earnings and net asset value per share, such review to take place prior to any decisions to grant Restricted Stock under the Plan, but in no event less frequently than annually. Adequate procedures and records will be maintained to permit such review. The Board will be authorized to take appropriate steps to ensure that the issuance of Restricted Stock under the Plan will be in the best interest of the Fund and its shareholders. This authority will include the authority to prevent or limit the granting of additional Restricted Stock under the Plan. All records maintained pursuant to this condition will be subject to examination by the Commission and its staff. For the Commission, by the Division of Investment Management, under delegated authority. Brent J. Fields, Secretary. [FR Doc. 2016–30539 Filed 12–19–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–79543; File No. 10–227] In the Matter of the Application of MIAX PEARL, LLC for Registration as a National Securities Exchange; Findings, Opinion, and Order of the Commission December 13, 2016. I. Introduction On August 12, 2016, MIAX PEARL, LLC (‘‘MIAX PEARL’’ or ‘‘Exchange’’) submitted to the Securities and Exchange Commission (‘‘Commission’’) an application for Registration as a National Securities Exchange (‘‘Form 1 Application’’) under Section 6 of the Securities Exchange Act of 1934 (‘‘Exchange Act’’), seeking registration as a national securities exchange under Section 6 of the Exchange Act.1 Notice of the Form 1 Application was published for comment in the Federal Register on September 14, 2016,2 and the Commission received no comments. 1 15 U.S.C. 78f. Securities Exchange Act Release No. 78793 (September 8, 2016), 81 FR 63238 (‘‘Notice’’). 2 See E:\FR\FM\20DEN1.SGM 20DEN1 92902 Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices II. Statutory Standards Under Sections 6(b) and 19(a) of the Act,3 the Commission shall by order grant an application for registration as a national securities exchange if the Commission finds, among other things, that the proposed exchange is so organized and has the capacity to carry out the purposes of the Act and to comply, and to enforce compliance by its members and persons associated with its members, with the provisions of the Act, the rules and regulations thereunder, and the rules of the exchange. As discussed in greater detail below, the Commission finds that MIAX PEARL’s application for exchange registration meets the requirements of the Act and the rules and regulations thereunder. Further, the Commission finds that the proposed rules of MIAX PEARL are consistent with Section 6 of the Act in that, among other things, they assure a fair representation of the Exchange’s members in the selection of its directors and administration of its affairs and provide that one or more directors will be representative of issuers and investors and not be associated with a member of the exchange, or with a broker or dealer; 4 and that they are designed to prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, and remove impediments to and perfect the mechanisms of a free and open market and a national market system and, in general, protect investors and the public interest and are not designed to permit unfair discrimination between customers, issuers, or broker-dealers.5 Finally, the Commission finds that MIAX PEARL’s proposed rules do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act.6 III. Discussion mstockstill on DSK3G9T082PROD with NOTICES A. Governance of MIAX PEARL 1. MIAX PEARL Board of Directors The board of directors of MIAX PEARL (‘‘Exchange Board’’ or ‘‘MIAX PEARL Board’’) will be its governing body and will possess all of the powers necessary for the management of its 3 15 U.S.C. 78f(b) and 15 U.S.C. 78s(a), respectively. 4 See 15 U.S.C. 78f(b)(3). 5 See 15 U.S.C. 78f(b)(5). 6 See 15 U.S.C. 78f(b)(8). VerDate Sep<11>2014 19:36 Dec 19, 2016 Jkt 241001 business and affairs, including governance of MIAX PEARL as a selfregulatory organization (‘‘SRO’’).7 Under the By-Laws of MIAX PEARL (‘‘MIAX PEARL By-Laws’’): 8 • The Exchange Board will be composed of not less than ten directors; 9 • One director will be the Chief Executive Officer of MIAX PEARL; 10 • The number of Non-Industry Directors,11 including at least one Independent Director,12 will equal or exceed the sum of the number of Industry Directors 13 and Member Representative Directors; 14 and 7 See MIAX PEARL By-Laws, Section 2.1. See also MIAX PEARL LLC Agreement, Section 8(b). 8 The MIAX PEARL By-Laws are included in the Amended and Restated Limited Liability Company Agreement of MIAX PEARL (‘‘MIAX PEARL LLC Agreement’’). 9 See MIAX PEARL By-Laws, Article II, Section 2.2(a). 10 See MIAX PEARL By-Laws, Article II, Section 2.2(b). 11 ‘‘Non-Industry Director’’ means a Director who is an Independent Director or any other individual who would not be an Industry Director. See MIAX PEARL By-Laws, Article I(aa). 12 ‘‘Independent Director’’ means a ‘‘Director who has no material relationship with [MIAX PEARL] or any affiliate of [MIAX PEARL], or any [MIAX PEARL member] or any affiliate of any such [MIAX PEARL member]; provided, however, that an individual who otherwise qualifies as an Independent Director shall not be disqualified from serving in such capacity solely because such Director is a Director of [MIAX PEARL] or [Miami Holdings].’’ See MIAX PEARL By-Laws, Article I(p). 13 An ‘‘Industry Director’’ is, among other things, a Director that is or has served within the prior three years as an officer, director, employee, or owner of a broker or dealer, as well as any Director who has, or has had, a consulting or employment relationship with MIAX PEARL or any affiliate of MIAX PEARL within the prior three years. See MIAX PEARL By-Laws, Article I(r). This definition is consistent with what the Commission has approved for other exchanges. See Securities Exchange Act Release Nos. 68341 (December 3, 2012), 77 FR 73065 (December 7, 2012) (File No. 10–207) (order granting the registration of MIAX Exchange) (‘‘MIAX Order’’); 58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (File No. 10– 182) (order granting the registration of BATS Exchange, Inc.) (‘‘BATS Order’’); and 66871 (April 27, 2012), 77 FR 26323 (May 3, 2012) (File No. 10– 206) (order granting the registration of BOX Options Exchange LLC) (‘‘BOX Order’’). 14 See MIAX PEARL By-Laws, Article II, Section 2.2 (b)(i). ‘‘Member Representative Director’’ means a Director who has been appointed by Miami International Holdings, Inc. as an initial Director pursuant to Section 2.5 of the MIAX PEARL ByLaws to serve until the first annual meeting or who ‘‘has been elected by the Miami International Holdings, Inc. after having been nominated by the Member Nominating Committee or by an Exchange Member pursuant to [the] By-Laws and confirmed as the nominee of Exchange Members after majority vote of Exchange Members, if applicable. A Member Representative Director may, but is not required to be, an officer, director, employee, or agent of an Exchange Member.’’ See MIAX PEARL By-Laws, Article I(x). See also MIAX PEARL By-Laws Article II, Section 2.5. PO 00000 Frm 00133 Fmt 4703 Sfmt 4703 • At least 20% of the directors on the Exchange Board will be Member Representative Directors.15 For the interim board (discussed below), and subsequently at the first annual meeting and each annual meeting thereafter, Miami International Holdings, Inc. (‘‘Miami Holdings’’), as the sole LLC Member of MIAX PEARL, will elect the MIAX PEARL Board pursuant to the MIAX PEARL ByLaws.16 In addition, Miami Holdings will appoint the initial Nominating Committee 17 and Member Nominating Committee,18 consistent with each committee’s compositional requirements,19 to nominate candidates for election to the Exchange Board. Each of the Nominating Committee and Member Nominating Committee, after completion of its respective duties for nominating directors for election to the Board for that year, shall nominate candidates to serve on the succeeding year’s Nominating Committee or Member Nominating Committee, as applicable. Additional candidates for the Member Nominating Committee may be nominated and elected by MIAX PEARL members pursuant to a petition process.20 The Nominating Committee will nominate candidates for each director position, and Miami Holdings, as the sole LLC Member, will elect those directors. For Member Representative Director positions, the Nominating Committee will nominate those candidates submitted to it, and approved, by the Member Nominating Committee.21 Additional candidates, 15 See MIAX PEARL By-Laws, Article II, Section 2.2(b)(ii). 16 See MIAX PEARL By-Laws, Article II, Section 2.4. See also MIAX PEARL LLC Agreement, Section 9(a). 17 The Nominating Committee will be comprised of at least three directors, and the number of NonIndustry members on the Nominating Committee must equal or exceed the number of Industry members. See MIAX PEARL By-Laws, Article V, Section 5.2. See also MIAX PEARL By-Laws, Article IV, Section 4.2(a). 18 The Member Nominating Committee will be comprised of at least three directors, and each member of the Member Nominating Committee shall be a Member Representative member and shall not be required to be a Director of the Exchange. See MIAX PEARL By-Laws, Article V, Section 5.3. See also MIAX PEARL By-Laws, Article IV, Section 4.2(a). Pursuant to MIAX PEARL By-Laws, Article I(y), a ‘‘Member Representative member’’ is a member of any committee or hearing panel appointed by the Exchange Board who has been elected or appointed after having been nominated by the Member Nominating Committee pursuant to the By-Laws and who is an officer, director, employee, or agent of an Exchange Member. 19 See MIAX PEARL By-Laws, Article V, Section 5.1. 20 See id. 21 The Member Nominating Committee will solicit comments from MIAX PEARL members for E:\FR\FM\20DEN1.SGM 20DEN1 Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices mstockstill on DSK3G9T082PROD with NOTICES however, may be nominated for the Member Representative Director positions by MIAX PEARL members pursuant to a petition process.22 If no candidates are nominated pursuant to a petition process, then the initial nominees submitted by the Member Nominating Committee will be nominated as Member Representative Directors by the Nominating Committee. If a petition process produces additional candidates, then the candidates nominated pursuant to the petition process, together with those nominated by the Member Nominating Committee, will be presented to MIAX PEARL members for a run-off election to determine the final slate of candidates for the vacant Member Representative Director positions.23 In the event of a contested run-off election, the candidates who receive the most votes will be nominated as the final slate of Member Representative Director candidates by the Nominating Committee.24 Miami Holdings, as the sole LLC Member, is obligated to elect the final slate of the Member Representative Director candidates that are nominated by the Nominating Committee.25 The Commission believes that the requirement in the MIAX PEARL ByLaws that 20% of the directors be Member Representative Directors and the means by which they will be chosen by MIAX PEARL members provide for the fair representation of members in the selection of directors and the administration of MIAX PEARL and therefore is consistent with Section 6(b)(3) of the Act.26 The Commission notes that this requirement helps to ensure that members have a voice in the use of self-regulatory authority by MIAX PEARL.27 the purpose of approving and submitting names of candidates for election to the position of Member Representative Director. See MIAX PEARL ByLaws, Article II, Section 2.4(b). 22 See MIAX PEARL By-Laws, Article II, Section 2.4(c). The petition must be signed by executive representatives of 10% or more of the MIAX PEARL members. No MIAX PEARL member, together with its affiliates, may account for more than 50% of the signatures endorsing a particular candidate. See id. 23 See MIAX PEARL By-Laws, Article II, Sections 2.4(e) and (f). Each MIAX PEARL Member shall have the right to cast one vote for each available Member Representative Director nomination, provided that any such vote must be cast for a person on the List of Candidates and that no MIAX PEARL member, together with its affiliates, may account for more than 20% of the votes cast for a candidate. See MIAX PEARL By-Laws, Article II, Section 2.4(f). 24 See MIAX PEARL By-Laws, Article II, Section 2.4(f). 25 See id. 26 15 U.S.C. 78f(b)(3). 27 See, e.g., MIAX Order, supra note 13, at 73067; Securities Exchange Act Release Nos. 76998 VerDate Sep<11>2014 19:36 Dec 19, 2016 Jkt 241001 92903 becoming members in the new Exchange.32 Such persons and firms will be allowed 14 days to submit the names of alternative candidates.33 Voting will occur no sooner than 5 days after the interim election notice is delivered to confirm the final slate of candidates to become an interim Member Representative Director.34 All other interim directors, except for the interim Member Representative Directors, will be appointed and elected by Miami Holdings, and must meet the MIAX PEARL board composition requirements as set forth in the MIAX PEARL By-Laws.35 Once these interim Member Representative Directors are seated on the Interim Exchange Board, then the Interim Exchange Board will meet the board composition requirements set forth in the governing documents of MIAX PEARL. The Interim Exchange Board will serve until the first initial Exchange Board is elected pursuant to the full nomination, petition, and voting process set forth in the MIAX PEARL By-Laws.36 MIAX PEARL will complete such process within 90 days after its application for registration as a national securities exchange is granted by the Commission.37 The Commission believes that the process for electing the Interim Exchange Board, as proposed, is consistent with the requirements of the 2. Interim Exchange Board Act, including that the rules of the exchange assure fair representation of Prior to commencing operations, Miami Holdings will appoint an interim the exchange’s members in the selection of its directors and administration of its Exchange board of directors (‘‘Interim affairs.38 As noted above, MIAX PEARL Exchange Board’’), which will include represents that the initial members of interim Member Representative Directors.31 With respect to the selection MIAX PEARL will consist substantially of the current group of persons and of the interim Member Representative firms that have begun the membership Directors for the Interim Exchange Board, prior to the commencement of 32 See MIAX PEARL By-Laws, Section 2.5(b). operations as an exchange, Miami Specifically, Miami Holdings will submit the names Holdings will submit the names of its of its nominees for the interim Member nominees for the interim Member Representative Director positions to persons who have submitted the initial documents for Representative Directors positions to membership in the Exchange who would meet the persons that have begun the process of qualifications for membership. See MIAX PEARL In addition, with respect to the requirement that the number of NonIndustry Directors, including at least one Independent Director, will equal or exceed the sum of the number of Industry Directors and Member Representative Directors, the Commission believes that the proposed composition of the Exchange Board satisfies the requirements in Section 6(b)(3) of the Act,28 which requires in part that one or more directors be representative of issuers and investors and not be associated with a member of the exchange, or with a broker or dealer. The Commission notes that the inclusion of public, non-industry representatives on exchange oversight bodies is an important mechanism to support an exchange’s ability to protect the public interest.29 Further, the presence of public, non-industry representatives can help to ensure that no single group of market participants has the ability to systematically disadvantage other market participants through the exchange governance process. The Commission believes that public, non-industry directors can provide unique, unbiased perspectives, which are designed to enhance the ability of the Exchange Board to address issues in a non-discriminatory fashion and foster the integrity of the Exchange.30 (January 29, 2016), 81 FR 6066, 6068 (February 4, 2016) (File No. 10–221) (order granting exchange registration of ISE Mercury, LLC) (‘‘ISE Mercury Order’’); 70050 (July 26, 2013), 78 FR 46622, 46624 (August 1, 2013) (File No. 10–209) (order granting the exchange registration of ISE Gemini, LLC) (‘‘ISE Gemini Order’’); 53128 (January 13, 2006), 71 FR 3550, 3553 (January 23, 2006) (granting the exchange registration of Nasdaq Stock Market, Inc.) (‘‘Nasdaq Order’’); and BATS Order, supra note 13. 28 15 U.S.C. 78f(b)(3). 29 See, e.g., Regulation of Exchanges and Alternative Trading Systems, Securities Exchange Act Release No. 40760 (December 8, 1998), 63 FR 70844, 70882 (December 22, 1998) (‘‘Regulation ATS Release’’). 30 See MIAX Order, supra note 13, at 73067; BATS Order, supra note 13, at 49501; and Nasdaq Order, supra note 27, at 3553. 31 See MIAX PEARL By-Laws, Section 2.5. PO 00000 Frm 00134 Fmt 4703 Sfmt 4703 By-Laws, Section 2.5(b). MIAX PEARL additionally represents that the initial members of MIAX PEARL will consist substantially of the current group of persons and firms that have begun the membership application process with MIAX PEARL. See MIAX PEARL Form 1 Application, Exhibit J. 33 See MIAX PEARL By-Laws, Section 2.5(b). 34 See MIAX PEARL By-Laws, Section 2.5(d). 35 See MIAX PEARL By-Laws, Section 2.5(a). 36 See MIAX PEARL By-Laws, Sections 2.2(e) and 2.5(a). 37 See MIAX PEARL By-Laws, Sections 2.5(a). The 90-day period is consistent with what the Commission recently approved for ISE Mercury, LLC. See ISE Mercury Order, supra note 27, at 6068 (allowing ISE Mercury, LLC to appoint an initial interim board to enable it to commence operations as a registered exchange). See also MIAX Order, supra note 13, at 73067; and BOX Order, supra note 13, at 26325. 38 See 15 U.S.C. 78f(b)(3). E:\FR\FM\20DEN1.SGM 20DEN1 92904 Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices application process with MIAX PEARL.39 MIAX PEARL will engage these persons and firms in the interim board election process by, prior to the commencement of operations as an exchange, providing each of them with the opportunity to participate in the selection of interim Member Representative Directors consistent with the MIAX PEARL By-Laws. Further, MIAX PEARL represents that it will complete the full nomination, petition, and voting process as set forth in the MIAX PEARL By-Laws, which will provide persons that are approved as members after the effective date of this Order with the opportunity to participate in the selection of the Member Representative Directors, within 90 days of when MIAX PEARL’s application for registration as a national securities exchange is granted.40 Therefore, the Commission believes that MIAX PEARL’s initial interim board process is consistent with the Act, including Section 6(b)(3), in that it is designed to provide representation among the persons and firms likely to become members when MIAX PEARL commences operations and is sufficient to allow MIAX PEARL to commence operations for an interim period prior to going through the process to elect a new Exchange Board pursuant to the full nomination, petition, and voting process set forth in the MIAX PEARL By-Laws. 3. Exchange Committees mstockstill on DSK3G9T082PROD with NOTICES In the MIAX PEARL By-Laws, the Exchange proposed to establish several standing committees, which would be divided into two categories: Committees of the Board (composed of MIAX PEARL directors) and Committees of the Exchange (composed of a mixture of MIAX PEARL directors and persons that are not MIAX PEARL directors).41 The standing Committees of the Board would be the Audit, Compensation, Appeals, and Regulatory Oversight Committees.42 In addition, the Exchange Chairman, with approval of the Exchange Board, may appoint an Executive Committee and a Finance Committee, which also would be Committees of the Board.43 The Audit Committee will consist of three or more directors, a majority of 39 See supra note 32. PEARL’s proposed timeline for the interim board process follows a process identical to what the Commission recently approved for ISE Mercury, LLC. See ISE Mercury Order, supra note 27, at 6068. 41 See MIAX PEARL By-Laws, Section 4.1. 42 See MIAX PEARL By-Laws, Section 4.1(a). 43 See MIAX PEARL By-Laws, Section 4.5(e) and (f), respectively. 40 MIAX VerDate Sep<11>2014 19:36 Dec 19, 2016 Jkt 241001 which will be Non-Industry Directors.44 Each of the Compensation and Regulatory Oversight Committees will consist of three or more directors, all of which will be required to be NonIndustry Directors.45 The Appeals Committee will consist of one Independent Director, one Industry Director, and one Member Representative Director.46 If established, the Finance Committee will consist of at least three persons (who may, but are not required to, be directors) a majority of whom will be Non-Industry Directors.47 The Executive Committee, if established, will consist of at least three directors. Because the Executive Committee will have the powers and authority of the Exchange Board in the management of the business and affairs of the Exchange between meetings of the Exchange Board, its composition must reflect that of the Exchange Board. Accordingly, the number of NonIndustry Directors on the Executive Committee must equal or exceed the number of Industry Directors and the percentages of Independent Directors and Member Representative Directors must be at least as great as the corresponding percentages on the Exchange Board as a whole.48 With respect to Committees of MIAX PEARL, the Exchange has proposed to establish a Nominating Committee 49 and a Member Nominating Committee.50 As discussed above, these committees will have responsibility for, among other things, nominating candidates for election to the Exchange Board. On an annual basis, the members of these committees will nominate candidates for the succeeding year’s respective committees to be elected by Miami Holdings, as the sole LLC Member.51 In addition, MIAX PEARL has proposed to establish a Quality of 44 See MIAX PEARL By-Laws, Section 4.5(b). A Non-Industry Director shall serve as Chairman of the Committee. See id. See also MIAX PEARL ByLaws, Section 4.2(a) (requiring that each committee be comprised of at least three people). 45 See MIAX PEARL By-Laws, Section 4.5(a) and 4.5(c). 46 See MIAX PEARL By-Laws, Section 4.5(d). 47 See MIAX PEARL By-Laws, Section 4.5(f). See also MIAX PEARL By-Laws, Section 4.2(a) (providing that except as otherwise provided in the MIAX PEARL By-Laws, committees may include persons who are not members of the Board). 48 See MIAX PEARL By-Laws, Section 4.5(e). 49 See MIAX PEARL By-Laws, Article V, Section 5.2, and supra note 17. 50 See MIAX PEARL By-Laws, Article V, Section 5.3, and supra note 18. 51 See MIAX PEARL By-Laws, Article V, Section 5.1, and supra note 20. Additional candidates for the Member Nominating Committee may be nominated and elected by MIAX PEARL members pursuant to a petition process. See supra note 22 and accompanying text. PO 00000 Frm 00135 Fmt 4703 Sfmt 4703 Markets Committee,52 which will provide advice and guidance to the Exchange Board on issues related to the fairness, integrity, efficiency and competiveness of the information, order handling and execution mechanisms of the Exchange from the perspective of individual and institutional investors, retail and market making firms, and other market participants. The Quality of Markets Committee will include a broad representation of participants in the Exchange. Additionally, at least 20% of the members of the committee will be Member Representative members, and the number of NonIndustry members must equal or exceed the total number of Industry and Member Representative members. MIAX PEARL also has proposed to establish a Business Conduct Committee, which shall be appointed by the Chairman of the Exchange Board.53 Specifically, the Business Conduct Committee, which will not be a Board committee, will have a minimum of three members and will be composed of a number of individuals as determined by the Exchange Chairman, none of whom shall be Directors of MIAX PEARL. In addition, at least one member of the Business Conduct Committee and any panel thereof must be an officer, director or employee of a MIAX PEARL member. The Commission believes that MIAX PEARL’s proposed committees, which are similar to the committees maintained by other exchanges,54 are designed to help enable MIAX PEARL to carry out its responsibilities under the Act and are consistent with the Act, including Section 6(b)(1), which requires, in part, an exchange to be so organized and have the capacity to carry out the purposes of the Act.55 B. Regulation of MIAX PEARL When MIAX PEARL commences operations as a national securities exchange, the Exchange will have all the attendant regulatory obligations under the Act. In particular, MIAX PEARL will be responsible for the operation and regulation of its trading system and the regulation of its members. Certain provisions in the MIAX PEARL and Miami Holdings governance documents are designed to facilitate the ability of MIAX PEARL and the Commission to fulfill their regulatory obligations. The 52 See MIAX PEARL By-Laws, Article IV, Section 4.6. 53 See MIAX PEARL By-Laws, Article IV, Section 4.7. 54 See, e.g., MIAX Order and BATS Order, supra note 13, and ISE Mercury Order, ISE Gemini Order, Nasdaq Order, supra note 27. 55 15 U.S.C. 78f(b)(1). E:\FR\FM\20DEN1.SGM 20DEN1 Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices discussion below summarizes some of these key provisions. mstockstill on DSK3G9T082PROD with NOTICES 1. Ownership Structure: Ownership and Voting Limitations MIAX PEARL will be structured as a Delaware limited liability company, which will be wholly owned by the sole member of the LLC, Miami Holdings. The Miami Holdings’ proposed Amended and Restated Certificate of Incorporation (‘‘Miami Holdings Certificate’’) includes restrictions on the ability to own and vote shares of capital stock of Miami Holdings.56 These limitations are designed to prevent any Miami Holdings shareholder from exercising undue control over the operation of MIAX PEARL and to assure that MIAX PEARL and the Commission are able to carry out their regulatory obligations under the Act. In particular, for so long as Miami Holdings (directly or indirectly) controls MIAX PEARL, no person, either alone or together with its related persons,57 may beneficially own more than 40% of any class of capital stock of Miami Holdings.58 There would be a more conservative restriction for MIAX PEARL members, wherein MIAX PEARL members, either alone or together with their related persons, are prohibited from beneficially owning more than 20% of shares of any class of capital stock of Miami Holdings.59 If any stockholder violates these ownership limits, Miami Holdings would redeem the shares in excess of the applicable ownership limit at their par value.60 In addition, no person, alone or together 56 These provisions are consistent with ownership and voting limits approved by the Commission for other SROs. See, e.g., ISE Mercury Order and ISE Gemini Order, supra note 27; MIAX Order and BATS Order, supra note 13. See also Securities Exchange Act Release Nos. 62158 (May 24, 2010), 75 FR 30082 (May 28, 2010) (CBOE–2008–88) (‘‘CBOE Demutualization Approval Order’’); 53963 (June 8, 2006), 71 FR 34660 (June 15, 2006) (SR– NSX–2006–03) (‘‘NSX Demutualization Order’’); 51149 (February 8, 2005), 70 FR 7531 (February 14, 2005) (SR–CHX–2004–26) (‘‘CHX Demutualization Order’’); and 49098 (January 16, 2004), 69 FR 3974 (January 27, 2004) (SR–Phlx–2003–73) (‘‘Phlx Demutualization Order’’). 57 See Miami Holdings Certificate, Article NINTH (a)(ii) (defining ‘‘related persons’’). 58 See Miami Holdings Certificate, Article NINTH (b)(i)(A). 59 See Miami Holdings Certificate, Article NINTH (b)(i)(B). 60 See Miami Holdings Certificate, Article NINTH (e). Any shares which have been called for redemption shall not be deemed outstanding shares for the purpose of voting or determining the total number of shares entitled to vote. Once redeemed by Miami Holdings, such shares shall become treasury shares and shall no longer be deemed to be outstanding. See id. Furthermore, if any redemption results in another stockholder owning shares in violation of the ownership limits described above, Miami Holdings shall redeem such shares. See id. VerDate Sep<11>2014 19:36 Dec 19, 2016 Jkt 241001 with its related persons, may vote or cause the voting of more than 20% of the voting power of the then issued and outstanding capital stock of Miami Holdings.61 If any stockholder purports to vote, or cause the voting of, shares that would violate this voting limit, Miami Holdings would not honor such vote in excess of the voting limit.62 Any person that proposes to own shares of capital stock in excess of the 40% ownership limitation, or vote or grant proxies or consents with respect to shares of capital stock in excess of the 20% voting limitation, must deliver written notice to the Miami Holdings board to notify the Board of its intention.63 The notice must be delivered to the Board not less than 45 days before the proposed ownership of such shares or proposed exercise of such voting rights or the granting of such proxies or consents.64 The Miami Holdings board may waive the 40% ownership limitation and the 20% voting limitation, pursuant to a resolution duly adopted by the Board of Directors, if it makes certain findings,65 except that the Miami Holdings board cannot waive the voting and ownership limits above 20% for MIAX PEARL members and their related persons.66 61 See Miami Holdings Certificate, Article NINTH (b)(i)(C). 62 See Miami Holdings Certificate, Article NINTH (d). The Miami Holdings Certificate also prohibits the payment of any stock dividends and conversions that would violate the ownership and voting limitations. See Miami Holdings Certificate, Article FOURTH A.(b) and (e), and D.7. 63 See Miami Holdings Certificate, Article NINTH (b)(iv). 64 See id. 65 See Miami Holdings Certificate, Article NINTH (b)(ii)(B). The required findings include determinations that (A) such waiver will not impair the ability of MIAX PEARL to carry out its functions and responsibilities under the Act and the rules and regulations promulgated thereunder, (B) such waiver is otherwise in the best interests of MIAX PEARL and Miami Holdings, (C) such waiver will not impair the ability of the Commission to enforce the Act and (D) the transferee in such transfer and its related persons are not subject to any applicable ‘‘statutory disqualification’’ (within the meaning of Section 3(a)(39) of the Act). See Miami Holdings Certificate, Article NINTH (b)(ii)(B) and (b)(iii). The Commission has previously approved the rules of other exchanges that provide for the ability of the exchange to waive the ownership and voting limitations discussed above for non-members of the exchange. See, e.g., ISE Mercury Order and ISE Gemini Order, supra note 27; MIAX Order, supra note 13; and Securities Exchange Act Release No. 61698 (March 12, 2010), 75 FR 13151 (March 18, 2010) (order approving DirectEdge exchanges) (‘‘DirectEdge Exchanges Order’’). 66 See Miami Holdings Certificate, Article NINTH (b)(ii)(B). These provisions are generally consistent with waiver of ownership and voting limits approved by the Commission for other SROs. See, e.g., ISE Mercury Order, supra note 27; MIAX Order, supra note 13; BATS Order, supra note 13; NSX Demutualization Order, supra note 56; CHX Demutualization Order, supra note 56; and Securities Exchange Act Release No. 49718 (May PO 00000 Frm 00136 Fmt 4703 Sfmt 4703 92905 Any such waiver would not be effective unless and until approved by the Commission pursuant to Section 19 of the Act.67 The Miami Holdings Certificate also contains provisions that are designed to further safeguard the ownership and voting limitation described above, or are otherwise related to direct and indirect changes in control. Specifically, any person that, either alone or together with its related persons owns, directly or indirectly, of record or beneficially, 5% or more of the capital stock of Miami Holdings will be required to immediately notify Miami Holdings in writing upon acquiring knowledge of such ownership.68 Thereafter, such persons will be required to update Miami Holdings of any increase or decrease of 1% or more in their previously reported ownership percentage.69 The MIAX PEARL LLC Agreement does not include change of control provisions that are similar to those in the Miami Holdings Certificate; however the MIAX PEARL LLC Agreement explicitly provides that Miami Holdings is the sole LLC Member of MIAX PEARL.70 Thus, if Miami Holdings ever proposes to no longer be the sole LLC Member of MIAX PEARL (and therefore no longer its sole owner), MIAX PEARL would be required to amend the MIAX PEARL LLC Agreement and the MIAX 17, 2004), 69 FR 29611 (May 24, 2004) (SR–PCX– 2004–08). 67 See Miami Holdings Certificate, Article NINTH (b)(ii)(B). 68 See Miami Holdings Certificate, Article NINTH(c)(i). The notice will require the person’s full legal name; the person’s title or status; the person’s approximate ownership interest in Miami Holdings; and whether the person has power, directly or indirectly, to direct the management or policies of Miami Holdings. See id. 69 See Miami Holdings Certificate, Article NINTH(c)(ii). Changes of less than 1% must also be reported to Miami Holdings if they result in such person crossing a 20% or 40% ownership threshold. See id. In addition, the MIAX PEARL rules also impose limits on affiliation between MIAX PEARL and a member of MIAX PEARL. See MIAX PEARL Rule 201(g) (‘‘Without prior Commission approval, the Exchange or any entity with which it is affiliated shall not directly or indirectly through one or more intermediaries acquire or maintain an ownership interest in an Exchange Member. In addition, without prior Commission approval, no Member shall be or become affiliated with (1) the Exchange; or (2) any affiliate of the Exchange. Nothing herein shall prohibit a Member from acquiring or holding an equity interest in (i) Miami International Holdings, Inc. that is permitted by the Certificate of Incorporation of Miami International Holdings, Inc. or (ii) Miami International Securities Exchange, LLC that is permitted by the Amended and Restated Limited Liability Company Agreement of Miami International Securities Exchange, LLC.’’). 70 See MIAX PEARL LLC Agreement and MIAX PEARL By-Laws, Article I(v) (both of which define ‘‘LLC Member’’ to mean Miami Holdings, as the sole member of MIAX PEARL). E:\FR\FM\20DEN1.SGM 20DEN1 mstockstill on DSK3G9T082PROD with NOTICES 92906 Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices PEARL By-Laws. Any changes to the MIAX PEARL LLC Agreement or the MIAX PEARL By-Laws, including any change in the provisions that identify Miami Holdings as the sole owner of MIAX PEARL, must be filed with, or filed with and approved by, the Commission pursuant to Section 19 of the Act, as the case may be.71 Further, pursuant to the MIAX PEARL By-Laws, Miami Holdings may not transfer or assign, in whole or in part, its ownership interest in MIAX PEARL, unless such transfer is filed with and approved by the Commission pursuant to Section 19 of the Act.72 As described above, the provisions applicable to direct and indirect changes in control of Miami Holdings and MIAX PEARL, as well as the voting limitation imposed on owners of Miami Holdings who also are MIAX PEARL members, are designed to help prevent any owner of Miami Holdings from exercising undue influence or control over the operation of MIAX PEARL. In addition, these limitations are designed to address the conflicts of interests that might result from a member of a national securities exchange owning interests in the exchange. A member’s interest in an exchange, including an entity that controls an exchange, could become so large as to cast doubts on whether the exchange may fairly and objectively exercise its self-regulatory responsibilities with respect to such member.73 A member that is a controlling shareholder of an exchange could seek to exercise that controlling influence by directing the exchange to refrain from, or the exchange may hesitate to, diligently monitor and conduct surveillance of the member’s conduct or diligently enforce the exchange’s rules and the federal securities laws with respect to conduct by the member that violates such provisions. As such, the Commission believes that these voting and ownership limitations are designed to minimize the potential that a person or entity can improperly interfere with or restrict the ability of MIAX PEARL to effectively carry out its regulatory oversight responsibilities under the Act. The Commission believes that MIAX PEARL’s and Miami Holding’s proposed governance provisions are consistent with the Act, including Section 6(b)(1), which requires, in part, an exchange to 71 See 15 U.S.C. 78s. See also MIAX PEARL LLC Agreement, Section 28(b). 72 See MIAX PEARL By-Laws, Article III, Section 3.4. 73 See, e.g., ISE Mercury Order, supra note 27; MIAX Order, supra note 13; BATS Order, supra note 13; and DirectEdge Exchanges Order, supra note 65. VerDate Sep<11>2014 19:36 Dec 19, 2016 Jkt 241001 be so organized and have the capacity to carry out the purposes of the Act.74 In particular, these requirements are designed to minimize the potential that a person could improperly interfere with or restrict the ability of the Commission or MIAX PEARL to effectively carry out their regulatory oversight responsibilities under the Act. 2. Regulatory Independence and Oversight Although Miami Holdings will not itself carry out regulatory functions, its activities with respect to the operation of MIAX PEARL must be consistent with, and must not interfere with, MIAX PEARL’s self-regulatory obligations. In this regard, MIAX PEARL and Miami Holdings propose to adopt certain provisions in their respective governing documents that are designed to help maintain the independence of the regulatory functions of MIAX PEARL. These proposed provisions are substantially similar to those included in the governing documents of other exchanges that recently have been granted registration.75 Specifically: • The directors, officers, employees, and agents of Miami Holdings must give due regard to the preservation of the independence of the self-regulatory function of MIAX PEARL and must not take actions that would interfere with the effectuation of decisions by the MIAX PEARL Board relating to its regulatory functions or that would interfere with MIAX PEARL’s ability to carry out its responsibilities under the Act.76 74 15 U.S.C. 78f(b)(1). See also ISE Mercury Order, supra note 27; MIAX Order, supra note 13; and BOX Order, supra note 13. 75 See, e.g., DirectEdge Exchanges Order, supra note 65, and BATS Order, supra note 13. See also Securities Exchange Act Release No. 61152 (December 10, 2009), 74 FR 66699 (December 16, 2009) (‘‘C2 Order’’). 76 See Amended and Restated By-Laws of Miami Holdings (‘‘Miami Holdings By-Laws’’), Article VII, Section 1. Similarly, Article II, Section 2.1(d) of the MIAX PEARL By-Laws requires the MIAX PEARL Board to, when managing the business and affairs of MIAX PEARL and evaluating any proposal, consider the requirements of Section 6(b) of the Act. Section 2.1(e) also requires the MIAX PEARL Board, when evaluating any proposal to take into account (among other things and to the extent relevant), the potential impact on the integrity, continuity and stability of the national securities exchange operated by MIAX PEARL and the other operations of MIAX PEARL, on the ability to prevent fraudulent and manipulative acts and practices and on investors and the public, and whether such would promote just and equitable principles of trade, foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to and facilitating transactions in securities or assist in the removal of impediments to or perfection of the mechanisms for a free and open market and a national market system. See, e.g., Fourth Amended PO 00000 Frm 00137 Fmt 4703 Sfmt 4703 • Miami Holdings must comply with federal securities laws and the rules and regulations promulgated thereunder, and agrees to cooperate with the Commission and MIAX PEARL pursuant to, and to the extent of, their respective regulatory authority. In addition, Miami Holdings’ officers, directors, employees, and agents must comply with federal securities laws and the rules and regulations promulgated thereunder and agree to cooperate with the Commission and MIAX PEARL in respect of the Commission’s oversight responsibilities regarding MIAX PEARL and the self-regulatory functions and responsibilities of MIAX PEARL.77 • Miami Holdings, and its officers, directors, employees, and agents are deemed to irrevocably submit to the jurisdiction of the U.S. federal courts, the Commission, and MIAX PEARL, for purposes of any action, suit, or proceeding pursuant to U.S. federal securities laws, and the rules and regulations thereunder, arising out of, or relating to, MIAX PEARL activities.78 • All books and records of MIAX PEARL reflecting confidential information pertaining to the selfregulatory function of MIAX PEARL (including but not limited to disciplinary matters, trading data, trading practices, and audit information) shall be retained in confidence by MIAX PEARL and its personnel and will not be used by MIAX PEARL for any nonregulatory purpose and shall not be made available to persons (including, without limitation, any MIAX PEARL member) other than to personnel of the Commission, and those personnel of MIAX PEARL, members of committees of MIAX PEARL, members of the MIAX PEARL Board, or hearing officers and other agents of MIAX PEARL, to the extent necessary or appropriate to properly discharge the self-regulatory function of MIAX PEARL.79 • The books and records of MIAX PEARL and Miami Holdings must be and Restated By-Laws of BATS, Article III, Section 1. 77 See Miami Holdings By-Laws, Article VII, Section 4. 78 See Miami Holdings By-Laws, Article VII, Section 5. 79 See MIAX PEARL By-Laws Article X, Section 10.4. The Commission notes that the Miami Holdings By-Laws also provide that all books and records of MIAX PEARL reflecting confidential information pertaining to the self-regulatory function of MIAX PEARL will be subject to confidentiality restrictions. See Miami Holdings ByLaws Article VII, Section 2. The requirement to keep such information confidential shall not limit the Commission’s ability to access and examine such information or limit the ability of officers, directors, employees, or agent of Miami Holdings to disclose such information to the Commission. See id. E:\FR\FM\20DEN1.SGM 20DEN1 Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices mstockstill on DSK3G9T082PROD with NOTICES maintained in the United States 80 and, to the extent they are related to the operation or administration of MIAX PEARL, Miami Holdings books and records will be subject at all times to inspection and copying by the Commission.81 • Furthermore, to the extent they relate to the activities of MIAX PEARL, the books, records, premises, officers, directors, employees, and agents of Miami Holdings will be deemed to be the books, records, premises, officers, directors, employees, and agents of MIAX PEARL, for purposes of, and subject to oversight pursuant to, the Act.82 • Miami Holdings will take necessary steps to cause its officers, directors, employees, and agents, prior to accepting a position as an officer, director, employee or agent (as applicable) to consent in writing to the applicability of provisions regarding books and records, confidentiality, jurisdiction, and regulatory obligations, with respect to their activities related to MIAX PEARL.83 • Miami Holdings Certificate and ByLaws require that, so long as Miami Holdings controls MIAX PEARL, any changes to those documents be submitted to the MIAX PEARL Board, and, if such change is required to be filed with the Commission pursuant to Section 19(b) of the Act and the rules and regulations thereunder, such change shall not be effective until filed with, or filed with and approved by, the Commission.84 The Commission believes that the provisions discussed in this section, which are designed to help maintain the independence of MIAX PEARL’s regulatory function and help facilitate the ability of MIAX PEARL to carry out its regulatory responsibilities and operate in a manner consistent with the Act, are appropriate and consistent with the requirements of the Act, particularly with Section 6(b)(1), which requires, in part, an exchange to be so organized and have the capacity to carry out the purposes of the Act.85 Whether MIAX PEARL operates in compliance with the Act, however, depends on how it and Miami Holdings in practice implement the governance and other provisions that are the subject of this Order. Further, Section 19(h)(1) of the Act 86 provides the Commission with the authority ‘‘to suspend for a period not exceeding twelve months or revoke the registration of [an SRO], or to censure or impose limitations upon the activities, functions, and operations of [an SRO], if [the Commission] finds, on the record after notice and opportunity for hearing, that [the SRO] has violated or is unable to comply with any provision of the Act, the rules or regulations thereunder, or its own rules or without reasonable justification or excuse has failed to enforce compliance’’ with any such provision by its members (including associated persons thereof).87 If Commission staff were to find, or become aware of, through staff review and inspection or otherwise, facts indicating any violations of the Act, including without limitation Sections 6(b)(1) and 19(g)(1), these matters could provide the basis for a disciplinary proceeding under Section 19(h)(1) of the Act. The Commission also notes that, even in the absence of the governance provisions described above, under Section 20(a) of the Act, any person with a controlling interest in MIAX PEARL would be jointly and severally liable with and to the same extent that MIAX PEARL is liable under any provision of the Act, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.88 In addition, Section 20(e) of the Act creates aiding and abetting liability for any person who knowingly provides substantial assistance to another person in violation of any provision of the Act or rule thereunder.89 Further, Section 21C of the Act authorizes the Commission to enter a cease-and-desist order against any person who has been ‘‘a cause of’’ a violation of any provision of the Act through an act or omission that the person knew or should have known would contribute to the violation.90 These provisions are applicable to all entities’ dealings with MIAX PEARL, including Miami Holdings. 80 See MIAX PEARL By-Laws, Article X, Section 10.4; and Miami Holdings By-Laws, Article VII, Section 3. 81 See Miami Holdings By-Laws, Article VII, Section 3. 82 See Miami Holdings By-Laws, Article VII, Section 3. 83 See Miami Holdings By-Laws, Article VII, Section 6. 84 See Miami Holdings Certificate, Article VIII; and Miami Holdings By-Laws, Article XII, Section 1. 85 15 U.S.C. 78f(b)(1). 3. Regulation of MIAX PEARL As a prerequisite to the Commission’s granting of an exchange’s application for registration, an exchange must be so organized and have the capacity to carry VerDate Sep<11>2014 19:36 Dec 19, 2016 Jkt 241001 86 See 15 U.S.C. 78s(h)(1). id. 88 15 U.S.C. 78t(a). 89 15 U.S.C. 78t(e). 90 15 U.S.C. 78u–3. 87 See PO 00000 Frm 00138 Fmt 4703 Sfmt 4703 92907 out the purposes of the Act.91 Specifically, an exchange must be able to enforce compliance by its members, and persons associated with its members, with the Act and the rules and regulations thereunder and the rules of the exchange.92 The discussion below summarizes how MIAX PEARL proposes to structure and conduct its regulatory operations. a. Regulatory Oversight Committee The regulatory operations of MIAX PEARL will be monitored by the Regulatory Oversight Committee of the Exchange Board. The Regulatory Oversight Committee will consist of at least three directors, all of whom will be Non-Industry Directors. The Regulatory Oversight Committee will be responsible for overseeing the adequacy and effectiveness of MIAX PEARL’s regulatory and SRO responsibilities, assessing MIAX PEARL’s regulatory performance, and assisting the Exchange Board (and committees of the Exchange Board) in reviewing MIAX PEARL’s regulatory plan and the overall effectiveness of MIAX PEARL’s regulatory functions.93 Further, a Chief Regulatory Officer (‘‘CRO’’) of MIAX PEARL will have general day-to-day supervision over MIAX PEARL’s regulatory operations.94 The Regulatory Oversight Committee also will be responsible for recommending compensation and personnel actions involving the CRO and senior regulatory personnel to the Compensation Committee of MIAX PEARL for action.95 The CRO will report to the Regulatory Oversight Committee.96 b. Regulatory Funding To help assure the Commission that it has and will continue to have adequate funding to be able to meet its responsibilities under the Act, MIAX PEARL represents in its Form 1 Application that, prior to beginning operations as a national securities exchange, Miami Holdings will provide sufficient funding to MIAX PEARL for the exchange to carry out its 91 See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1). 92 See id. See also Section 19(g) of the Act, 15 U.S.C. 78s(g). 93 See MIAX PEARL By-Laws, Article IV, Section 4.5(c). The Regulatory Oversight Committee is responsible for reviewing MIAX PEARL’s regulatory budget, and also will meet regularly with the Chief Regulatory Officer. See id. 94 See MIAX PEARL By-Laws, Article VI, Section 6.10. 95 See MIAX PEARL By-Laws, Article IV, Section 4.5(c). 96 See MIAX PEARL By-Laws, Article VI, Section 6.10. E:\FR\FM\20DEN1.SGM 20DEN1 92908 Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices responsibilities under the Act.97 Specifically, MIAX PEARL represents that Miami Holdings has allocated sufficient operational assets to enable its operation and that prior to launching operations, Miami Holdings will make a capital contribution of not less than $5,000,000 into MIAX PEARL’s capital account, in addition to any previouslyprovided in-kind contributions, such as legal, regulatory, and infrastructurerelated services.98 MIAX PEARL represents that such cash and in-kind contributions by Miami Holdings will be adequate to begin operation of the Exchange, including the regulation of the Exchange. MIAX PEARL also represents in its Form 1 application that there is a written agreement between MIAX PEARL and Miami Holdings that requires Miami Holdings to provide adequate funding for MIAX PEARL’s ongoing operations, including the regulation of MIAX PEARL. This agreement provides that MIAX PEARL will receive all fees, including regulatory fees and trading fees, payable by MIAX PEARL’s members, as well as any funds received from any applicable market data fees and OPRA tape revenue. The agreement further provides that Miami Holdings will reimburse MIAX PEARL for its costs and expenses to the extent MIAX PEARL’s assets are insufficient to meets its costs and expenses.99 Further, any revenues received by MIAX PEARL from fees derived from its regulatory function or regulatory penalties will not be used for nonregulatory purposes.100 Any excess funds, as determined by MIAX PEARL, may be remitted to Miami Holdings, however ‘‘Regulatory Funds’’ will not be remitted to Miami Holdings.101 97 See MIAX PEARL Form 1 Application, Exhibit I. 98 See id. id. 100 See MIAX PEARL By-Laws, Article IX, Section 9.4. 101 See MIAX PEARL Form 1 Application, Exhibit I. See also MIAX PEARL LLC Agreement, Section 16; and MIAX PEARL By-Laws, Article IX, Section 9.4. MIAX PEARL By-Laws, Article 1(gg) defines ‘‘Regulatory Funds’’ as ‘‘fees, fines, or penalties derived from the regulatory operations of [MIAX PEARL]’’, but such term does not include ‘‘revenues derived from listing fees, market data revenues, transaction revenues, or any other aspect of the commercial operations of [MIAX PEARL], even if such revenues are used to pay costs associated with the regulatory operations of [MIAX PEARL].’’ This definition is consistent with the rules of other SROs. See, e.g., By-Laws of MIAX Exchange, Article I(ll); By-Laws of NASDAQ PHLX LLC, Article I(ii); and By-Laws of NASDAQ BX, Inc., Article I(ii). mstockstill on DSK3G9T082PROD with NOTICES 99 See VerDate Sep<11>2014 19:36 Dec 19, 2016 Jkt 241001 c. Rule 17d–2 Agreements; Regulatory Contract With FINRA Unless the SRO is relieved of this responsibility pursuant to Section 17(d) or Section 19(g)(2) of the Act,102 Section 19(g)(1) of the Act, among other things, requires every SRO registered as a national securities exchange, absent reasonable justification or excuse, to enforce compliance by its members and persons associated with its members with the Act, the rules and regulations thereunder, and the SRO’s own rules.103 Section 17(d) of the Act and Rule 17d– 2 thereunder permit SROs to propose joint plans to allocate regulatory responsibilities among themselves for their common rules with respect to their common members.104 These agreements, which must be filed with and declared effective by the Commission, generally cover areas where each SRO’s rules substantively overlap, including such regulatory functions as personnel registration and sales practices. Without this relief, the statutory obligation of each individual SRO could result in a pattern of multiple examinations of broker-dealers that maintain memberships in more than one SRO.105 Such regulatory duplication would add unnecessary expense for common members and their SROs. A 17d–2 plan that is declared effective by the Commission relieves the specified SRO of those regulatory responsibilities allocated by the plan to another SRO.106 Many SROs have entered into Rule 17d–2 agreements.107 102 15 U.S.C. 78q(d) and 15 U.S.C. 78s(g)(2), respectively. 103 15 U.S.C. 78s(g)(1). 104 See Section 17(d)(1) of the Act and Rule 17d– 2 thereunder, 15 U.S.C. 78q(d)(1) and 17 CFR 240.17d–2. Section 17(d)(1) of the Act allows the Commission to relieve an SRO of certain responsibilities with respect to members of the SRO who are also members of another SRO. Specifically, Section 17(d)(1) allows the Commission to relieve an SRO of its responsibilities to: (i) Receive regulatory reports from such members; (ii) examine such members for compliance with the Act and the rules and regulations thereunder, and the rules of the SRO; or (iii) carry out other specified regulatory responsibilities with respect to such members. 105 Section 17(d) was intended, in part, to eliminate unnecessary multiple examinations and regulatory duplication with respect to Common Members. See Securities Exchange Act Release No. 12935 (October 28, 1976), 41 FR 49091 (November 8, 1976). 106 See id. 107 See, e.g., Securities Exchange Act Release Nos. 77321 (March 8, 2016), 81 FR 13434 (March 14, 2016) (File No. 4–697) (Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’)/ISE Mercury, LLC), 73641 (November 19, 2014), 79 FR 70230 (November 25, 2014) (File No. 4–678) (FINRA/ MIAX Exchange); 70053 (July 26, 2013), 78 FR 46656 (August 1, 2013) (File No. 4–663) (FINRA/ISE Gemini, LLC); 59218 (January 8, 2009), 74 FR 2143 (January 14, 2009) (File No. 4–575) (FINRA/Boston Stock Exchange, Inc.); 58818 (October 20, 2008), 73 PO 00000 Frm 00139 Fmt 4703 Sfmt 4703 A 17d–2 plan that is declared effective by the Commission relieves the specified SRO of those regulatory responsibilities allocated by the plan to another SRO.108 MIAX PEARL has represented to the Commission that it intends to become a party to the existing multiparty options Rule 17d–2 plans concerning sales practice regulation and market surveillance.109 MIAX PEARL has also represented that it will enter into a bi-lateral 17d–2 agreement to allocate regulatory responsibility to FINRA for common rules of dual members between MIAX PEARL and FINRA. Under these agreements, the examining SROs will examine firms that are common members of MIAX PEARL and the particular examining SRO for compliance with certain provisions of the Act, certain rules and regulations adopted thereunder, and certain MIAX PEARL Rules. In addition, MIAX PEARL has represented that it will enter into a Regulatory Services Agreement (‘‘RSA’’) with FINRA, under which FINRA will perform certain regulatory functions on behalf of MIAX PEARL.110 Pursuant to the RSA, FINRA, in its capacity as service provider to MIAX PEARL, will perform various services on MIAX PEARL’s behalf, including assisting MIAX PEARL with member registration and related administrative support services; certain cross-market surveillance services; certain options trading examinations; at MIAX PEARL’s request, investigating potential violations of enumerated MIAX PEARL market rules, as well as federal securities laws, and rules and regulations thereunder, related to MIAX PEARL market activity; performing examinations of options, including routine and for cause examinations of FR 63752 (October 27, 2008) (File No. 4–569) (FINRA/BATS Exchange, Inc.); 55755 (May 14, 2007), 72 FR 28087 (May 18, 2007) (File No. 4–536) (National Association of Securities Dealers, Inc. (‘‘NASD’’) (n/k/a FINRA) and Chicago Board of Options Exchange, Inc. concerning the CBOE Stock Exchange, LLC); 55367 (February 27, 2007), 72 FR 9983 (March 6, 2007) (File No. 4–529) (NASD/ International Securities Exchange, LLC); and 54136 (July 12, 2006), 71 FR 40759 (July 18, 2006) (File No. 4–517) (NASD/The Nasdaq Stock Market LLC). 108 See supra notes 104–105. 109 See MIAX PEARL Form 1 Application, Exhibit L. See also Securities Exchange Act Release No. 68363 (December 5, 2012), 77 FR 73711 (December 11, 2012) (File No. S7–966) (notice of filing and order approving and declaring effective an amendment to the multiparty 17d–2 plan concerning options-related sales practice matters); and 68362 (December 5, 2012), 77 FR 73719 (December 11, 2012) (File No. 4–551) (notice of filing and order approving and declaring effective an amendment to the multiparty 17d–2 plan concerning options-related market surveillance). 110 See MIAX PEARL Form 1 Application, Exhibit L. E:\FR\FM\20DEN1.SGM 20DEN1 Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices MIAX PEARL members under certain MIAX PEARL rules and federal securities laws; bringing formal disciplinary actions, including hearing officer services; and providing arbitration, mediation, and other dispute resolution services to MIAX PEARL member firms.111 Notwithstanding the RSA, MIAX PEARL, as an SRO, has the ultimate legal responsibility for the regulation of its members and market. The Commission believes that it is consistent with the Act for MIAX PEARL to contract with other SROs to perform certain examination, enforcement, and disciplinary functions.112 This regulatory structure would be consistent with that of other SROs.113 These functions are fundamental elements of a regulatory program, and constitute core selfregulatory functions. The Commission believes that FINRA, as an SRO that provides contractual services to other SROs, should have the capacity to perform these functions for MIAX PEARL.114 However, MIAX PEARL, unless relieved by the Commission of its responsibility,115 bears the ultimate responsibility for self-regulatory responsibilities and primary liability for self-regulatory failures, not the SRO retained to perform regulatory functions on MIAX PEARL’s behalf. In performing these regulatory functions, however, the SRO retained to perform regulatory functions may nonetheless bear liability for causing or aiding and abetting the failure of MIAX PEARL to perform its regulatory functions.116 Accordingly, 111 See id. e.g., Regulation ATS Release, supra note 29. See also Securities Exchange Act Release Nos. 50122 (July 29, 2004), 69 FR 47962 (August 6, 2004) (SR–Amex–2004–32) (order approving rule that allowed Amex to contract with another SRO for regulatory services) (‘‘Amex Regulatory Services Approval Order’’); 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR–NASDAQ–2007–004) (‘‘NOM Approval Order’’); Nasdaq Order, supra note 27; and BATS Order, supra note 13. 113 For example, MIAX Exchange, ISE Mercury, EDGA Exchange, Inc., EDGX Exchange Inc., and BATS have entered into 17d–2 Plans and RSAs with FINRA. 114 See, e.g., Amex Regulatory Services Approval Order, supra note 112; NOM Approval Order, supra note 112; and Nasdaq Order, supra note 27. The Commission notes that the RSA is not before the Commission and, therefore, the Commission is not acting on them. 115 See supra note 104. 116 For example, if failings by the SRO retained to perform regulatory functions have the effect of leaving an exchange in violation of any aspect of the exchange’s self-regulatory obligations, the exchange will bear direct liability for the violation, while the SRO retained to perform regulatory functions may bear liability for causing or aiding and abetting the violation. See, e.g., Nasdaq Order, supra note 27; BATS Order, supra note 13; and Release No. 42455 (February 24, 2000), 65 FR 11388 mstockstill on DSK3G9T082PROD with NOTICES 112 See, VerDate Sep<11>2014 19:36 Dec 19, 2016 Jkt 241001 although FINRA will not act on its own behalf in carrying out these regulatory services for MIAX PEARL, as the SRO retained to perform certain regulatory functions, FINRA may have secondary liability if, for example, the Commission finds that the contracted functions are being performed so inadequately as to cause a violation of the federal securities laws by MIAX PEARL. C. Trading System 1. Access to MIAX PEARL Access to MIAX PEARL will be granted to individuals or organizations who are approved to become Members.117 Approved Members will be issued Trading Permits that grant the Member the ability to transact on MIAX PEARL through its electronic systems.118 Trading Permits will not convey upon Members any ownership interest in MIAX PEARL, and they will not be transferable except in cases where a Member experiences a change in control or corporate reorganization.119 Membership will be open to any broker-dealer that: (1) Is registered under Section 15 of the Act; 120 and (2) has and maintains membership in another registered options exchange (other than the MIAX Exchange) or FINRA.121 As explained below, a holder of a MIAX Exchange trading permit will not be required to submit a full application for membership on MIAX PEARL.122 There will be no limit to the number of Trading Permits that MIAX PEARL can issue, although MIAX PEARL could determine in the future a limit or decrease in the number of Trading (March 2, 2000) (File No. 10–127) (approval of registration of International Securities Exchange Act, LLC (‘‘ISE’’) as a national securities exchange). 117 A ‘‘Member’’ is defined as an individual or organization that is registered with the Exchange pursuant to Chapter II of the MIAX PEARL Rules for purposes of trading on the Exchange as an ‘‘Electronic Exchange Member’’ (‘‘EEM’’) or ‘‘Market Maker.’’ Members are deemed ‘‘members’’ under the Exchange Act. See MIAX PEARL Rule 100. 118 See MIAX PEARL Rule 200(a). MIAX PEARL represents that it has designed its systems to allow its Members to individually determine the best method for accessing the Exchange, whether by using customized front-end software using protocols determined by the Exchange or through third-party vendors who route orders to MIAX PEARL through a front-end or service bureau configuration. See MIAX PEARL Form 1 Application, Exhibit E. 119 See MIAX PEARL Rule 200(e). 120 See MIAX PEARL Rule 200(b). 121 See MIAX PEARL Rule 200(d). If such other options exchange has not been designated by the Commission to examine Members for compliance with financial responsibility rules, then the brokerdealer must have and maintain a membership in FINRA. Id. 122 See MIAX PEARL Rule 200(c) and infra notes 127–128 and accompanying text. PO 00000 Frm 00140 Fmt 4703 Sfmt 4703 92909 Permits issued.123 Members of MIAX PEARL may be Market Makers,124 or they may be EEMs.125 A holder of a MIAX Exchange trading permit in good standing will be eligible to receive one MIAX PEARL Trading Permit.126 MIAX Exchange member applicants will not be required to submit a full application for membership on MIAX PEARL, but rather will only need to complete selected MIAX PEARL forms concerning their election to trade on MIAX PEARL, consent to MIAX PEARL’s jurisdiction, and other operational matters.127 This waive-in application process is similar to arrangements in place at other exchanges.128 Non-MIAX Exchange members seeking to become members of MIAX PEARL would submit a full application in accordance with procedures established by the Exchange.129 Entities that become members, and their associated persons, will be required to meet and maintain certain qualification and registration criteria similar to what is required by other options exchanges.130 In addition, MIAX PEARL proposes further requirements on members that seek to do business with 123 See MIAX PEARL Rule 200(a). MIAX PEARL would announce in advance any limitation or decrease it plans to impose pursuant to Rule 200(a). See id. In the event that MIAX PEARL imposes a limitation or decrease, MIAX PEARL, in doing so, may not eliminate the ability of an existing member to trade on the Exchange unless MIAX PEARL is permitted to do so pursuant to a rule filing submitted to the Commission under Section 19(b) of the Act. See id. In addition, MIAX PEARL’s exercise of authority under proposed Rule 200 would be subject to the provisions of Section 6(c)(4) of the Act. See id. See also Chicago Board Options Exchange, Incorporated (‘‘CBOE’’) Rule 3.1(a)(vi) and MIAX Exchange Rule 200(a) (concerning limiting or reducing the number of trading permits). Further, MIAX PEARL’s exercise of authority under proposed Rule 200 would be subject to the provisions of Section 6(b)(2) of the Act, which requires the rules of an exchange to provide that any registered broker or dealer or any natural person associated with a registered broker or dealer may become a member of such exchange and any person may become associated with a member thereof. See 15 U.S.C. 78f(b)(2). 124 See MIAX PEARL Rule 600. Market Maker registration is discussed in greater detail below, infra Section III.C.3. 125 See supra note 117. 126 See MIAX PEARL Rule 200(c)(1). 127 See id. 128 See, e.g., C2 Options Exchange, Inc. Rule 3.1(c)(1) (containing similar expedited waive-in membership process for members of CBOE) and ISE Mercury, LLC Rule 302(a) (containing similar expedited waive-in membership process for members of the ISE and ISE Gemini, LLC). 129 See MIAX PEARL Rule 200(c)(2). 130 See MIAX PEARL Rules Chapter II. Such criteria include, but are not limited to, capital maintenance requirements. See, e.g., MIAX Exchange Rule 200 Series and C2 Options Exchange, Inc. Rules 3.1 and 3.2 (containing similar criteria). E:\FR\FM\20DEN1.SGM 20DEN1 92910 Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices mstockstill on DSK3G9T082PROD with NOTICES the public.131 Applicants who are denied membership may appeal MIAX PEARL’s decision pursuant to MIAX PEARL’s rules governing Hearings, Review, and Arbitration.132 Every Member will be subject to MIAX PEARL’s regulatory jurisdiction, including MIAX PEARL’s disciplinary jurisdiction.133 The Commission finds that MIAX PEARL’s proposed membership rules are consistent with the Act, including Section 6(b)(2) of the Act, which requires the rules of an exchange to provide that any registered broker or dealer or natural person associated with a broker or dealer may become a member of such exchange or associated with a member thereof.134 MIAX PEARL’s proposed rules with respect to exchange membership are substantively similar to the rules of other exchanges. The Commission notes that pursuant to Section 6(c) of the Act,135 an exchange must deny membership to any person, other than a natural person, that is not a registered broker or dealer, any natural person that is not, or is not associated with, a registered broker or dealer, and registered broker-dealers that do not satisfy certain standards, such as financial responsibility or operational capacity. As a registered exchange, MIAX PEARL must independently determine if an applicant satisfies the standards set forth in the Act, regardless of whether an applicant is a member of another SRO.136 In addition, Members may enter into arrangements with other parties, including non-Members and other Members, to provide ‘‘Sponsored Access’’ to trading on MIAX PEARL.137 Members who provide such Sponsored Access will be responsible for all trading conducted pursuant to the access agreement, and to the same extent as if the Member were trading directly.138 Accordingly, Members that provide Sponsored Access must 131 See MIAX PEARL Rules Chapter XIII (incorporating by reference Chapter XIII of the MIAX Exchange Rules). Chapter XIII of the MIAX Exchange Rules also are similar to the rules of other exchanges. See, e.g., ISE Rules Chapter 6. 132 See MIAX PEARL Rules Chapter XI (incorporating by reference Chapter XI of the MIAX Exchange Rules). 133 See MIAX PEARL Rule 200(g). For MIAX PEARL’s rules concerning discipline, see Chapter X of the MIAX PEARL Rules. 134 15 U.S.C. 78f(b)(2). 135 15 U.S.C. 78f(c). 136 See, e.g., ISE Mercury Order, supra note 27, at 6076; ISE Gemini Order, supra note 27, at 46633; MIAX Order, supra note 13, at 73074; BOX Order, supra note 14, at 26337; BATS Order, supra note 13, at 49502; and Nasdaq Order, supra note 27, at 3555. 137 See MIAX PEARL Rule 210. 138 See MIAX PEARL Rule 210(b). VerDate Sep<11>2014 19:36 Dec 19, 2016 Jkt 241001 maintain and implement policies and procedures to supervise and monitor sponsored trading activity.139 Additionally, non-Members who seek to trade on MIAX PEARL through Sponsored Access agreements will need to agree to comply with all applicable federal securities laws and rules and Exchange rules.140 MIAX PEARL’s rules governing Sponsored Access arrangements are similar to the rules of other exchanges.141 2. Linkage MIAX PEARL intends to become a participant in the Plan Relating to Options Order Protection and Locked/ Crossed Markets or any successor plan (‘‘Linkage Plan’’).142 If admitted as a participant to the Linkage Plan, other plan participants would be able to send orders to MIAX PEARL in accordance with the terms of the plan as applied to the Exchange. The MIAX PEARL Rules include relevant definitions, establish the conditions pursuant to which members may enter orders in accordance with the Linkage Plan, impose obligations on the Exchange regarding how it must process incoming orders, establish a general standard that members and MIAX PEARL should avoid trade-throughs, establish potential regulatory liability for members that engage in a pattern or practice of trading through other exchanges, and establish obligations with respect to locked and crossed markets. The Commission believes that MIAX PEARL has proposed rules that are designed to comply with the requirements of the Linkage Plan.143 Further, as provided below, before MIAX PEARL can commence operations as a national securities exchange, it must become a participant in the Linkage Plan. 3. Market Makers a. Registration of Market Makers MIAX PEARL Members may register as Market Makers for the purpose of making markets in options contracts 139 See MIAX PEARL Rule 210(b)–(c). MIAX PEARL Rule 210(b). See also, e.g., 17 CFR 240.15c3–5. 141 See, e.g., MIAX Exchange Rule 210 and NASDAQ Stock Market LLC Rule 4615. 142 See MIAX PEARL Form 1 Application, Exhibit E. See also Securities Exchange Act Release No. 60405 (July 30, 2009), 74 FR 39362 (August 6, 2009) (File No. 4–546) (order approving the national market system Plan Relating to Options Order Protection and Locked/Crossed Markets Submitted by the Chicago Board Options Exchange, Incorporated, ISE, The NASDAQ Stock Market LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX, Inc., NYSE Amex LLC, and NYSE Arca, Inc.). 143 See Chapter XIV of the MIAX PEARL Rules (incorporating by reference Chapter XIV of the MIAX Exchange Rules). 140 See PO 00000 Frm 00141 Fmt 4703 Sfmt 4703 traded on the Exchange.144 Market Makers are entitled to receive certain benefits and privileges in exchange for fulfilling certain affirmative and negative market-making obligations. To begin the process of registering as a Market Maker, a Member will be required to file a written application with MIAX PEARL.145 MIAX PEARL will consider an applicant’s market making ability and other factors it deems appropriate in determining whether to approve an applicant’s registration.146 All Market Makers will be designated as specialists on MIAX PEARL for all purposes under the Act and rules thereunder.147 The Exchange will not place any limit on the number of entities that may become Market Makers.148 The good standing of a Market Maker may be suspended, terminated or otherwise withdrawn if the conditions for approval cease to be maintained or the Market Maker violates any of its agreements with MIAX PEARL or any provisions of the MIAX PEARL Rules.149 A Member that has qualified as a Market Maker may register to make markets in individual series of options.150 The Commission finds that the MIAX PEARL qualification requirements are consistent with the Act. MIAX PEARL’s rules provide an objective process by which a Member could become a Market Maker on MIAX PEARL. The Commission notes that MIAX PEARL’s proposed Market Maker qualification requirements are similar to those of other options exchanges.151 b. Market Maker Obligations Pursuant to MIAX PEARL rules, there will be one class of Market Makers. All Market Makers will be subject to a number of general obligations. In particular, the transactions of a Market Maker must constitute a course of dealings reasonably calculated to contribute to the maintenance of a fair and orderly market.152 Among other things, a Market Maker must: (1) 144 See MIAX PEARL Rule 600. MIAX PEARL Rule 600(a). 146 See id. The provision permitting MIAX PEARL to consider ‘‘such other factors as [it] deems appropriate’’ must be applied in a manner that is consistent with the Act, including provisions that prohibit an exchange from acting in an unfairly discriminatory manner. See 15 U.S.C. 78f(b)(5); see also C2 Order, supra note 75. 147 See MIAX PEARL Rule 600. 148 See MIAX PEARL Rule 600(c). 149 See MIAX PEARL Rule 603(b). 150 See MIAX PEARL Rule 602(a). 151 See, e.g., Bats BZX Exchange, Inc. (‘‘Bats BZX’’) Rules 22.2, 22.3 and 22.4, and NASDAQ Options Market Rules, Chapter VII, Sections 2, 3, and 4. 152 See MIAX PEARL Rule 604(a). 145 See E:\FR\FM\20DEN1.SGM 20DEN1 Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices Maintain a two-sided market during trading hours, in a manner that enhances the depth, liquidity, and competitiveness of the market; (2) engage in dealings for its own account when there is a lack of price continuity, a temporary disparity between the supply of (or demand for) a particular option contract, or a temporary distortion of the price relationships between option contracts of the same series; (3) compete with other market makers; (4) make markets that will be honored for the number of contracts entered; (5) update quotations in response to changed market conditions; and (6) maintain active markets.153 Market Makers must provide continuous two-sided quotes throughout the trading day 90% of the time in 75% of the series in which the Market Maker is registered.154 Further, a Market Maker may be called upon by MIAX PEARL to submit a single bid or offer or maintain continuous bid and offers in one or more series to which it is registered whenever, in the judgment of the Exchange, it is necessary to do so in the interest of fair and orderly markets.155 In addition, Market Makers must maintain minimum net capital in accordance with the federal securities laws.156 In options classes other than to which it is registered, the total number of contracts executed during a quarter by a Market Maker in series in which it is not registered may not exceed 25% of the total number of all contracts executed by such Market Maker.157 If MIAX PEARL finds any failure by a Market Maker to properly perform as a Market Maker, such Market Maker may be subject to suspension or termination of registration.158 Market Makers will receive certain benefits in return for satisfying their responsibilities.159 For example, a broker-dealer or other lender may extend ‘‘good faith’’ credit to a member of a national securities exchange or registered broker-dealer to finance its activities as a market maker or 153 See MIAX PEARL Rule 604(a). MIAX PEARL Rule 605(d)(1) and (d)(3). Immediate-or-Cancel Orders from Market Makers will not be counted for the continuous quoting obligations of Market Makers. See MIAX PEARL Rule 605, Interpretations and Policies .01. 155 See MIAX PEARL Rule 605(d)(2). 156 See MIAX PEARL Rule 608. 157 See MIAX PEARL Rule 605(e). See also Bats BZX Rule 22.6(e) and NASDAQ Options Market Rules, Chapter VII, Section 6(e). 158 See MIAX PEARL Rule 600(b). 159 See, e.g., NOM Approval Order, supra note 112, at 14526 and Securities Exchange Act Release No. 61419 (January 26, 2010), 75 FR 5157, 5159 (February 1, 2010) (‘‘BATS Options Approval Order’’) (discussing the benefits and obligations of market makers). mstockstill on DSK3G9T082PROD with NOTICES 154 See VerDate Sep<11>2014 19:36 Dec 19, 2016 Jkt 241001 specialist.160 In addition, market makers are excepted from the prohibition in Section 11(a) of the Act.161 The Commission believes that a market maker must be subject to sufficient and commensurate affirmative obligations, including the obligation to hold itself out as willing to buy and sell options for its own account on a regular or continuous basis, to justify favorable treatment.162 The Commission further believes that the rules of all U.S. options markets need not provide the same standards for market maker participation, so long as they impose affirmative obligations that are consistent with the Act.163 Market Makers on MIAX PEARL will not receive special trading allocations or ` similar rights vis-a-vis other Members.164 The Commission believes that MIAX PEARL’s Market Maker participation requirements impose sufficient affirmative obligations on MIAX PEARL’s Market Makers and, accordingly, that MIAX PEARL’s requirements are consistent with the Act. The Commission believes that while Market Makers may become an important source of liquidity on MIAX PEARL, they will likely not be the only source as MIAX PEARL is designed to match buying and selling interest of all MIAX PEARL participants. Therefore, the Commission believes that MIAX PEARL’s proposed structure is consistent with the Exchange Act. 4. Order Display, Execution, and Priority MIAX PEARL will operate a fully automated electronic options marketplace. Liquidity will be derived from orders to buy and orders to sell, including orders from Market Makers,165 submitted to MIAX PEARL electronically by its members from remote locations. There will be no physical trading floor. Options traded on the Exchange will be subject to Minimum Price Variations (‘‘MPV’’) that will begin at $0.05 for option contracts trading at less than $3.00 per option, 160 See 12 CFR 221.5 and 12 CFR 220.7; see also 17 CFR 240.15c3–1(a)(6) (capital requirements for market makers). 161 15 U.S.C. 78k(a). See also, infra Section III.C.5. 162 See NOM Approval Order, supra note 112, at 14526 and BATS Options Approval Order, supra note 159, at 5159. 163 See id. 164 See MIAX PEARL Rule 514; see also MIAX PEARL Form 1 Application, Exhibit E at 2. 165 The definition of ‘‘quote’’ or ‘‘quotation’’ means a bid or offer entered by a Market Maker as a firm order that updates the Market Maker’s previous bid or offer, if any. An order entered by the Market Maker in the options series to which such Market maker is registered shall, as applicable, constitute a quote or quotation on MIAX PEARL. See MIAX PEARL Rule 100. PO 00000 Frm 00142 Fmt 4703 Sfmt 4703 92911 and $.10 for option contracts trading at $3.00 per option or higher.166 In addition, MIAX PEARL will participate in the penny pilot program pursuant to which it will permit certain options with premiums under $3 (as well as heavily traded options on certain indices) to be quoted and traded in increments as low as $.01.167 Orders submitted to MIAX PEARL will be displayed unless the order is an immediately marketable order or is a contingent order, such as an immediate or cancel order. Additionally, orders may have a non-displayed price that is different than the displayed price, as further described below. Displayed orders and quotes will be displayed on an anonymous basis at a specified price. Non-displayed prices associated with orders will not be displayed to any participant. Members may submit the following types of orders: Market; Marketable Limit; Cancel-Replacement; Immediateor-Cancel; Intermarket Sweep; Do Not Route; Day Limit; Good ‘Til Cancelled; and Post-Only.168 All of these order types are based on similar order types available on other options exchanges.169 The Commission believes that these order types are substantially similar to order types approved by the Commission on other exchanges and thus raise no new regulatory issues. After the opening, trades will execute on MIAX PEARL when a buy order and a sell order match one another on the MIAX PEARL order book (‘‘MIAX PEARL Book’’ or ‘‘Book’’). The MIAX PEARL system will continuously and automatically match orders pursuant to price-time priority.170 The highest bid 166 See MIAX PEARL Rule 510(a). MIAX PEARL Rule 510, Interpretations and Policies .01. MIAX PEARL has established a scheduled expiration date of December 31, 2016. However, MIAX PEARL may not be operational before December 31, 2016, thus the Exchange may need to file a proposed rule change under Section 19(b) of the Exchange Act to update this proposed rule. 168 See MIAX PEARL Rule 516 for a description of each of the order types. MIAX PEARL notes that some of these order types will be valid only during certain portions of the trading day (e.g., after the opening). MIAX PEARL further notes that not all order types will be available for use on each of the MEO interface and the FIX interface, and that the Exchange will issue a Regulatory Circular listing which order types, among the order types listed above, are available for delivery via the MEO interface and which are available for delivery via the FIX interface. 169 See, e.g., Bats BZX Rule 21.1(d)(8) (Post Only Order); NASDAQ Options Market Rules, Chapter VI, Section 1(e)(8) (Intermarket Sweep Order) and (1)(e)(1) (Cancel-replacement Order); NASDAQ PHLX LLC Rule 1080(m)(iv)(A) (Do Not Route Order and Immediate or Cancel Order); NYSE MKT LLC Rule 900.3NY(m) (Day Order) and (n) (GoodTil-Cancelled Order). 170 See MIAX PEARL Rule 514(b). 167 See E:\FR\FM\20DEN1.SGM 20DEN1 92912 Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices and lowest offer shall have priority on the Exchange. Within each price level, if there are two or more orders at the best price, trading interest will be executed in time priority.171 MIAX PEARL proposes to make available order processing and matching features, which are based on those features available on MIAX Exchange.172 MIAX PEARL’s system will automatically execute incoming orders that are executable against orders in its system, provided that such incoming orders will not be executed at prices inferior to the NBBO.173 MIAX PEARL Rule 515 sets forth how the MIAX PEARL system will handle incoming orders that cannot be executed in part or in full. In particular, MIAX PEARL Rule 515 specifies a ‘‘price protection process,’’ a Managed Interest Process, and a Post Only Process, each discussed more fully below. The MIAX PEARL system offers a ‘‘price protection’’ process for all orders.174 Price protection prevents an order from being executed beyond the price designated in the order’s price protection instructions (‘‘the price protection limit’’). The price protection limit is expressed in units of MPV away from the national best bid and offer (‘‘NBBO’’) at the time of the order’s receipt, or the MIAX PEARL Best Bid and Offer (‘‘PBBO’’) if the best bid or offer on away markets (‘‘ABBO’’) is crossing the PBBO.175 When triggered, price protection will cancel an order or the remaining contracts of an order. The MIAX PEARL system will not execute such orders at prices inferior to the current NBBO.176 The MIAX PEARL price protection process is substantially similar to that adopted by MIAX Exchange.177 The 171 See id. infra discussion of MIAX PEARL’s proposed price protection process and managed interest process, which are based on substantially similar order processing and matching features on MIAX Exchange. 173 See MIAX PEARL Rule 515(a) and (b). 174 See MIAX PEARL Rule 515(c). 175 See MIAX PEARL Rule 515(c). The Exchange will publish a Regulatory Circular setting a minimum and maximum number of MPVs away from the NBBO (or PBBO if the ABBO is crossing the PBBO) that a market participant may designate for its price protection limit. The Exchange will also set, and announce by Regulatory Circular, a default price protection limit within 1 to 5 MPVs away from the NBBO (or PBBO if the ABBO is crossing the PBBO). 176 See MIAX PEARL Rule 515(c). 177 See MIAX Exchange Rule 515(c)(1). The MIAX Exchange price protection process applies only to non-market maker orders, whereas the MIAX PEARL price protection process applies to all market participants, including market makers. The Commission believes that this is consistent with the price protection rules of other exchanges. See, e.g., NYSE Arca, Inc. Rules 6.60 (Price Protection— Orders) and 6.61 (Price Protection—Quotes). mstockstill on DSK3G9T082PROD with NOTICES 172 See VerDate Sep<11>2014 19:36 Dec 19, 2016 Jkt 241001 Commission believes that this price protection functionality can benefit all market participants. The Exchange’s rules also provide for a ‘‘Managed Interest Process’’ that would apply to non-routable orders 178 that would either lock or cross the current opposite side NBBO where the PBBO is inferior to the NBBO.179 The MIAX PEARL system will not execute such orders at prices inferior to the current NBBO.180 The managed order would be displayed at one MPV away from the current opposite side NBBO and placed on the MIAX PEARL Book at a price equal to the opposite side NBBO.181 Should the NBBO price change to an inferior price level, the order’s displayed price will continue to re-price so that it is displayed one MPV away from the new NBBO, and the order’s Book price will continuously reprice to lock the new NBBO.182 Such re-pricing will continue until the managed order is fully executed, reaches its limit price, reaches its price protection limit, or is cancelled.183 During the Managed Interest Process, if the Exchange receives a new order or quote on the opposite side of the market from the managed order that could be executed, the MIAX PEARL system will immediately execute the remaining contracts to the extent possible at the initiating order’s current booked bid or offer price, provided that it does not trade through the current NBBO.184 The Commission believes that the MIAX PEARL’s Managed Interest Process is consistent with the managed interest process that the Commission approved for MIAX Exchange.185 With regard to the treatment of Post-Only Orders under MIAX PEARL’s Managed Interest Process, the Commission believes that the rules are consistent with rules that have been adopted by other exchanges governing the execution of Post-Only Orders.186 MIAX PEARL will have a process for the handling of certain Post-Only Orders (‘‘POP Process’’).187 The POP Process 178 Non-routable orders would include, for example, orders marked ‘‘Do Not Route’’ or PostOnly orders being handled under the Managed Interest Process. 179 See MIAX PEARL Rule 515(d)(2). 180 See MIAX PEARL Rule 515(d)(2). 181 See MIAX PEARL Rule 515(d)(2)(ii). See also MIAX Exchange Rule 515(c)(1)(ii) (providing for the same Managed Interest Process on MIAX Exchange). 182 See id. 183 See id. 184 See MIAX PEARL Rule 515(d)(2)(iii)(A). See also MIAX Exchange Rule 515(c)(1)(ii). 185 See MIAX Exchange Rule 515(c)(1)(ii). 186 See, e.g., Bats BZX Rule 21.1(h) and Securities Exchange Act Release No. 77818 (May 12, 2016), 81 FR 31283 (May 18, 2016) (SR–BatsBZX–2016–16). 187 See MIAX PEARL Rule 515(g). PO 00000 Frm 00143 Fmt 4703 Sfmt 4703 will apply to Post-Only Orders where the limit price of the Post-Only Order locks or crosses the current opposite side PBBO where the PBBO is the NBBO (i.e., locks or crosses an order on the MIAX PEARL Book).188 The MIAX PEARL system will display and book such Post-Only Orders one MPV away from the current opposite side PBBO.189 Should the PBBO price change to an inferior price level, the Post-Only Order’s Book price and displayed price would continuously re-price to one MPV away from new PBBO until PostOnly Order is fully executed, reaches its limit price, reaches its price protection limit, or is cancelled.190 Under the POP Process, if the Exchange receives a new order or quote on the opposite side of the market from the Post-Only Order that could be executed, the MIAX PEARL system will immediately execute the remaining contracts to the extent possible at the Post-Only Order’s current booked bid or offer price, provided that it does not trade through the current NBBO.191 If the Exchange receives a new Post-Only Order on the opposite side of the market from a Post-Only Order being managed under the POP Process, and the new Post-Only Order locks or crosses the book price of the resting Post-Only Order, the Exchange will book and display the new Post-Only Order one MPV away from the current opposite side PBBO.192 The POP Process under MIAX PEARL’s rules is substantially similar to the Managed Interest Process described above for MIAX PEARL and that the Commission approved for the MIAX Exchange.193 The primary difference is that, under the POP Process, Post-Only Orders are booked and displayed at the same price—one MPV away from the current opposite side PBBO. This aspect of the POP Process is consistent with the treatment of Post-Only Orders on other exchanges.194 188 Post-Only Orders that lock or cross the current opposite side NBBO and the PBBO is inferior to the NBBO would be handled through the Managed Interest Process under Rule 515(d)(2) as described above. 189 See MIAX PEARL Rule 515(g)(ii). 190 Id. 191 See MIAX PEARL Rule 515(g)(iii)(A). 192 See MIAX PEARL Rule 515(g)(iii)(B). 193 See MIAX PEARL Rule 515(d)(2) and MIAX Exchange Rule 515(c)(1)(ii). 194 See, e.g., Bats BZX Rule 21.1(i) (Price Adjust) (providing that an order that, at the time of entry, would lock or cross a protected quotation of another options exchange or Bats BZX will be ranked and displayed by the Bats BZX system at one MPV below the current NBO (for bids) or to one MPV above the current NBB (for offers)); NASDAQ Options Market Rules, Chapter VI, Section 1(e)(11) (providing that if a Post-Only Order would lock or cross an order on the NASDAQ Options Market E:\FR\FM\20DEN1.SGM 20DEN1 Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices The Commission believes that MIAX PEARL’s proposed display, execution, and priority rules discussed above in this section are consistent with the Act. In particular, the Commission finds that the proposed rules are consistent with Section 6(b)(5) of the Act,195 which, among other things, requires that the rules of a national securities exchange be designed to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest, and to not permit unfair discrimination between customers, issuers, or dealers. The Commission also finds that the proposed rules are consistent with Section 6(b)(8) of the Act,196 which requires that the rules of an exchange not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The trading rules of MIAX PEARL are substantially similar to the current trading rules of MIAX Exchange and other exchanges, as noted above, which were filed with and approved by the Commission (or otherwise became effective) pursuant to Section 19(b) of the Act.197 Therefore, the Commission believes that these rules raise no new regulatory issues and are consistent with the Act. mstockstill on DSK3G9T082PROD with NOTICES 5. Section 11(a) of the Act Section 11(a)(1) of the Act 198 prohibits a member of a national securities exchange from effecting transactions on that exchange for its own account, the account of an associated person, or an account over which it or its associated person exercises investment discretion (collectively, ‘‘covered accounts’’), unless an exception applies. The Exchange has represented that it has analyzed its rules proposed hereunder, and believes that they are consistent with Section 11(a) of the Act and rules thereunder.199 For the reasons set forth system, the order will be re-priced to $.01 below the current low offer (for bids) or above the current best bid (for offers) and displayed at one MPV below the current low offer (for bids) or above the current best bid (for offers)). 195 15 U.S.C. 78f(b)(5). 196 15 U.S.C. 78f(b)(8). 197 Many of MIAX Exchange’s rules were approved at the time that MIAX Exchange’s registration as a national securities exchanged was granted. See MIAX Order, supra note 13. 198 15 U.S.C. 78k(a)(1). 199 See Letter from Barbara J. Comly, EVP, General Counsel and Corporate Secretary, Miami Holdings, to Brent J. Fields, Secretary, Commission, and John VerDate Sep<11>2014 19:36 Dec 19, 2016 Jkt 241001 below, based on MIAX PEARL’s representations, the Commission believes that MIAX PEARL’s order execution algorithm will allow members to meet the requirements of Rule 11a2– 2(T) for executions on MIAX PEARL. Rule 11a2–2(T) under the Act,200 known as the ‘‘effect versus execute’’ rule, provides exchange members with an exemption from the Section 11(a)(1) prohibition. Rule 11a2–2(T) permits an exchange member, subject to certain conditions, to effect transactions for covered accounts by arranging for an unaffiliated member to execute the transactions on the exchange. To comply with Rule 11a2–2(T)’s conditions, a member: (i) May not be associated with the executing member; (ii) must transmit the order from off the exchange floor; (iii) may not participate in the execution of the transaction once it has been transmitted to the member performing the execution; 201 and (iv) with respect to an account over which the member or an associated person has investment discretion, neither the member nor its associated person may retain any compensation in connection with effecting the transaction except as provided in the Rule. In a letter to the Commission,202 MIAX PEARL requested that the Commission concur with its conclusion that MIAX PEARL members that enter orders into the MIAX PEARL trading system satisfy the requirements of Rule 11a2–2(T). For the reasons set forth below, the Commission believes that MIAX PEARL members entering orders into the MIAX PEARL trading system will satisfy the conditions of Rule 11a2– 2(T). First, Rule 11a2–2(T) requires that orders for covered accounts be transmitted from off the exchange floor. MIAX PEARL will not have a physical trading floor, and like other automated systems, the MIAX PEARL trading system will receive orders from members electronically through remote terminals or computer-to-computer interfaces. In the context of other automated trading systems, the Commission has found that the off-floor transmission requirement is met if a C. Roeser, Associate Director, Office of Market Supervision, Division of Trading and Markets, Commission, dated November 4, 2016 (‘‘MIAX PEARL 11(a) Request Letter’’). 200 17 CFR 240.11a2–2(T). 201 This prohibition also applies to associated persons. See 15 U.S.C. 78f(b)(8). The member may, however, participate in clearing and settling the transaction. See Securities Exchange Act Release No. 14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) (regarding the NYSE’s Designated Order Turnaround System) (‘‘1978 Release’’). 202 See MIAX PEARL 11(a) Request Letter, supra note 199. PO 00000 Frm 00144 Fmt 4703 Sfmt 4703 92913 covered account order is transmitted from a remote location directly to an exchange’s floor by electronic means.203 Since the MIAX PEARL trading system receives all orders electronically through remote terminals or computerto-computer interfaces, the Commission believes that the MIAX PEARL trading system satisfies the off-floor transmission requirement. Second, Rule 11a2–2(T) requires that the member not participate in the execution of its order once it has been transmitted to the member performing the execution. MIAX PEARL has represented that the MIAX PEARL trading system will at no time following the submission of an order allow a member or an associated person of such member to acquire control or influence over the result or timing of an order’s execution.204 According to MIAX PEARL, the execution of a member’s order is determined solely by what orders, bids, or offers are present in the MIAX PEARL trading system at the time the member submits the order and the order priority based on MIAX PEARL rules.205 Accordingly, the Commission believes that a MIAX PEARL member will not participate in the execution of its order submitted into the trading system. Rule 11a2–2(T)’s third condition is that the order be executed by an 203 See, e.g., Securities Exchange Act Release Nos. 59154 (December 23, 2008), 73 FR 80468 (December 31, 2008) (SR–BSE–2008–48) (order approving proposed rules of BX); 49068, (January 13, 2004), 69 FR 2775 (January 20, 2004) (establishing, among other things, BOX as an options trading facility of BSE); 44983 (October 25, 2001), 66 FR 55225 (November 1, 2001) (approving the PCX’s use of the Archipelago Exchange as its equity trading facility); 29237 (May 24, 1991), 56 FR 24853 (May 31, 1991) (regarding NYSE’s Off-Hours Trading Facility). See 1978 Release, supra note 201. See also Securities Exchange Act Release No. 15533 (January 29, 1979), 44 FR 6084 (January 31, 1979) (regarding the American Stock Exchange (‘‘Amex’’) Post Execution Reporting System, the Amex Switching System, the Intermarket Trading System, the Multiple Dealer Trading Facility of the Cincinnati Stock Exchange, the PCX Communications and Execution System, and the Philadelphia Stock Exchange Automated Communications and Execution System) (‘‘1979 Release’’). 204 See MIAX PEARL 11(a) Request Letter, supra note 199. Members may change or cancel an order or quote at any time before the order is executed on the Exchange. See MIAX PEARL Form 1 Application, Exhibit E. The Commission has stated that the non-participation requirement is satisfied under such circumstances, so long as such modifications or cancellations are also transmitted from off the floor. See 1978 Release, supra note 201 (stating that the ‘‘non-participation requirement does not prevent initiating members from canceling of modifying orders (or the instructions pursuant to which the initiating member wishes orders to be executed) after the orders have been transmitted to the executing member, provided that any such instructions are also transmitted from off the floor’’). 205 See MIAX PEARL 11(a) Request Letter, supra note 199. E:\FR\FM\20DEN1.SGM 20DEN1 92914 Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices mstockstill on DSK3G9T082PROD with NOTICES exchange member who is unaffiliated with the member initiating the order. The Commission has stated that the requirement is satisfied when automated exchange facilities, such as the MIAX PEARL trading system, are used, as long as the design of these systems ensures that members do not possess any special or unique trading advantages over non-members in handling their orders after transmitting them to the Exchange.206 MIAX PEARL has represented that the design of its trading system ensures that no member has any special or unique trading advantage over non-members in the handling of its orders after transmitting its orders to MIAX PEARL.207 Based on MIAX PEARL’s representation, the Commission believes that the MIAX PEARL trading system satisfies this requirement. Fourth, in the case of a transaction effected for an account with respect to which the initiating member or an associated person thereof exercises investment discretion, neither the initiating member nor any associated person thereof may retain any compensation in connection with effecting the transaction, unless the person authorized to transact business for the account has expressly provided otherwise by written contract referring to Section 11(a) of the Act and Rule 11a2–2(T).208 MIAX PEARL members trading for covered accounts over which they exercise investment discretion 206 In considering the operation of automated execution systems operated by an exchange, the Commission noted that while there is no independent executing exchange member, the execution of an order is automatic once it has been transmitted into each system. Because the design of these systems ensures that members do not possess any special or unique trading advantages in handling their orders after transmitting them to the exchange, the Commission has stated that executions obtained through these systems satisfy the independent execution requirement of Rule 11a2–2(T). See 1979 Release, supra note 203. 207 See MIAX PEARL 11(a) Request Letter, supra note 199. 208 17 CFR 240.11a2–2(T)(a)(2)(iv). In addition, Rule 11a2–2(T)(d) requires a member or associated person authorized by written contract to retain compensation, in connection with effecting transactions for covered accounts over which such member or associated person thereof exercises investment discretion, to furnish at least annually to the person authorized to transact business for the account a statement setting forth the total amount of compensation retained by the member in connection with effecting transactions for the account during the period covered by the statement. See 17 CFR 240.11a2–2(T)(d). See also 1978 Release, supra note 201 (stating ‘‘[t]he contractual and disclosure requirements are designed to assure that accounts electing to permit transaction-related compensation do so only after deciding that such arrangements are suitable to their interests’’). VerDate Sep<11>2014 19:36 Dec 19, 2016 Jkt 241001 must comply with this condition in order to rely on the rule’s exemption.209 D. Discipline and Oversight of Members As noted above, one prerequisite for the Commission’s grant of an exchange’s application for registration is that a proposed exchange must be so organized and have the capacity to be able to carry out the purposes of the Act.210 Specifically, an exchange must be able to enforce compliance by its members and persons associated with its members with the Act and the rules and regulations thereunder and the rules of the exchange.211 MIAX PEARL’s rules codify MIAX PEARL’s disciplinary jurisdiction over its members, thereby facilitating its ability to enforce its members’ compliance with its rules and the federal securities laws.212 MIAX PEARL’s rules permit it to sanction members for violations of its rules and violations of any provision of the Exchange Act or the rules and regulations promulgated thereunder, by, among other things, expelling or suspending members; limiting members’ activities, functions, or operations; fining or censuring members; suspending or barring a person from being associated with a member; or any other fitting sanction in accordance with MIAX rules.213 MIAX PEARL’s disciplinary and oversight functions will be administered in accordance with Chapter X of the MIAX PEARL rules, which governs disciplinary actions. Unless delegated to another SRO pursuant to the terms of any effective 17d–2 plan,214 MIAX PEARL regulatory staff (including regulatory staff of another SRO that may be acting on MIAX PEARL’s behalf pursuant to a regulatory services agreement) will, among other things, investigate potential securities laws violations and initiate charges pursuant to MIAX PEARL rules.215 Upon a finding of probable cause of a violation within the disciplinary jurisdiction of MIAX PEARL and where further proceedings are warranted,216 209 See MIAX PEARL 11(a) Request Letter, supra note 199. 210 See 15 U.S.C. 78f(b)(1). 211 See id. 212 See MIAX PEARL Rule 1000. 213 See id. See also MIAX Rule 1000, CBOE Rule 17.1(a), and ISE Rule 1600(a) (containing similar provisions). 214 See supra Section III.B.3.c (concerning the 17d–2 plans to which MIAX PEARL has committed to join). 215 See MIAX PEARL Rules 1002 and 1004. As noted above, MIAX PEARL has entered into an RSA with FINRA under which FINRA will perform certain regulatory functions on behalf of MIAX PEARL. See MIAX PEARL Rule 1015. 216 See MIAX PEARL Rule 1004. PO 00000 Frm 00145 Fmt 4703 Sfmt 4703 MIAX PEARL will conduct a hearing on disciplinary matters before a professional hearing officer 217 and two members of the Business Conduct Committee 218 (the ‘‘Panel’’).219 The MIAX PEARL member (or their associated person) or the MIAX PEARL regulatory staff may petition for review of the decision of the Panel by the MIAX PEARL Board.220 Any review would be conducted by the MIAX PEARL Board or a committee thereof composed of at least three Directors of the MIAX PEARL Board 221 (whose decision must be ratified by the MIAX PEARL Board) and such decision will be final.222 In addition, the MIAX PEARL Board on its own motion may order review of a disciplinary decision.223 Appeals from any determination that impacts access to MIAX PEARL, such as termination or suspension of membership, will be instituted under, and governed by, the provisions in the Chapter XI of the MIAX PEARL Rules which incorporates by reference Chapter XI of the MIAX Exchange Rules. MIAX PEARL’s Chapter XI applies to persons economically aggrieved by any of the following actions of MIAX PEARL including, but not limited to: (a) Denial of an application to become a Member; (b) barring a person from becoming associated with a Member; (c) limiting or prohibiting services provided by MIAX PEARL or services of any exchange member.224 217 See MIAX PEARL Rule 1015, Interpretation and Policy .01. 218 See MIAX PEARL By-Laws, Article IV, Section 4.7. 219 See MIAX PEARL Rule 1006. 220 See MIAX PEARL Rule 1010. 221 Specifically, the Chairman of the MIAX PEARL Board, with the approval of the Board, shall appoint an Appeals Committee to preside over all appeals related to disciplinary and adverse action determinations. See note 46 and accompanying text (detailing the composition of the Appeals Committee). If the Independent Director serving on the Appeals Committee recuses himself or herself from an appeal, due to conflict of interest or otherwise, the Independent Director may be replaced by a Non-Industry Director for purposes of the applicable appeal if there is no other Independent Director able to serve as the replacement. See MIAX PEARL By-Laws, Article IV, Section 4.5(d). See also MIAX Exchange Amended and Restated By-Laws, Article IV, Section 4.5(d). 222 See MIAX PEARL Rule 1010. 223 See id. 224 See MIAX PEARL Rule 1100 (which incorporates by reference MIAX Exchange Rule 1100). As noted above, MIAX PEARL has entered into a RSA with FINRA under which FINRA will perform certain regulatory functions on behalf of MIAX PEARL. MIAX PEARL may perform some or all of the functions specified in the Chapter XI of the MIAX PEARL Rules, which incorporates by reference Chapter XI of the MIAX Exchange Rules. See supra note 110. See also MIAX PEARL Rule 1106 (which incorporates by reference MIAX Exchange Rule 1106). E:\FR\FM\20DEN1.SGM 20DEN1 Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices mstockstill on DSK3G9T082PROD with NOTICES Any person aggrieved by an action of MIAX PEARL within the scope of Chapter XI may file a written application to be heard within thirty days 225 after such action has been taken.226 Applications for hearing and review will be referred to the Business Conduct Committee, which will appoint a hearing panel of no less than three members of such Committee.227 The decision of the hearing panel made pursuant to Chapter XI of the MIAX PEARL rules is subject to review by the MIAX PEARL Board, either on its own motion within 30 days after issuance of the decision, or upon written request submitted by the applicant or the President of MIAX PEARL within 15 days after issuance of the decision.228 The review would be conducted by the MIAX PEARL Board or a committee of the MIAX PEARL Board composed of at least three directors.229 The Commission finds that MIAX PEARL’s proposed disciplinary and oversight rules and structure, as well as its proposed process for persons economically aggrieved by certain MIAX PEARL actions, are consistent with the requirements of Sections 6(b)(6) and 6(b)(7) of the Act 230 in that they provide fair procedures for the disciplining of members and persons 225 An applicant may file for an extension of time as allowed by the Chairman of the Business Conduct Committee within thirty days of MIAX PEARL’s action. An application for an extension will be ruled upon by the Chairman of the Business Conduct Committee, and his ruling will be given in writing. Rulings on applications for extensions of time are not subject to appeal. See MIAX PEARL Rule 1101 (which incorporates by reference MIAX Exchange Rule 1101). 226 The application must include: (1) The action for which review is sought; (2) the specific reasons for the applicant’s exception to such action; (3) the relief sought; and (4) whether the applicant intends to submit any documents, statements, arguments or other material in support of the application, with a description of any such materials. See MIAX PEARL Rule 1101(a) (which incorporates by reference MIAX Exchange Rule 1101(a)). 227 See MIAX PEARL Rule 1102 (which incorporates by reference MIAX Exchange Rule 1102). The decision of the hearing panel will be made in writing and sent to the parties to the proceedings. See MIAX PEARL Rule 1103(d) (which incorporates by reference MIAX Exchange Rule 1103(d)). 228 See MIAX PEARL Rule 1104(a) (which incorporates by reference MIAX Exchange Rule 1104(a)). The MIAX PEARL Board, or a committee of the MIAX PEARL Board, will have sole discretion to grant or deny either request. See id. 229 See MIAX PEARL Rule 1104(b) (which incorporates by reference MIAX Exchange Rule 1104(b)). The MIAX PEARL Board or its designated committee may affirm, reverse, or modify in whole or in part, the decision of the hearing panel. The decision of the MIAX PEARL Board or its designated committee would be final, and must be in writing and would be sent to the parties to the proceeding. See MIAX PEARL Rule 1104(c) (which incorporates by reference MIAX Exchange Rule 1104(c)). 230 15 U.S.C. 78f(b)(6) and (b)(7), respectively. VerDate Sep<11>2014 19:36 Dec 19, 2016 Jkt 241001 associated with members. The Commission further finds that the proposed MIAX PEARL rules are designed to provide MIAX PEARL with the ability to comply, and with the authority to enforce compliance by its members and persons associated with its members, with the provisions of the Act, the rules and regulations thereunder, and the rules of MIAX PEARL.231 The Commission notes that MIAX PEARL’s proposed disciplinary and oversight rules and structures are similar to the rules of other exchanges.232 E. Listing Requirements MIAX PEARL does not intend to initially list or trade common stock or non-option securities of operating companies but rather intends to initially only trade option contracts that meet the options listing standards of the Exchange.233 The Commission finds that MIAX PEARL’s proposed initial and continued listing rules are consistent with the Act, including Section 6(b)(5),234 in that they are designed to protect investors and the public interest, prevent fraudulent and manipulative acts and practices, and promote just and equitable principles of trade. Before beginning operation, MIAX PEARL will need to become a participant in the Plan for the Purpose of Developing and Implementing Procedures Designed to Facilitate the Listing and Trading of Standardized Options Submitted Pursuant to Section 11A(a)(3)(B) of the Securities Exchange Act of 1934 (‘‘OLPP’’).235 In addition, before beginning operation, MIAX PEARL will need to become a participant in the Options Clearing Corporation. IV. Exemption From Section 19(b) of the Act With Regard to MIAX Exchange, CBOE, New York Stock Exchange (‘‘NYSE’’) and FINRA Rules Incorporated by Reference MIAX PEARL proposes to incorporate by reference certain MIAX Exchange, 231 See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1). 232 See, e.g., ISE Mercury Order, supra note 27, ISE Gemini Order, supra note 27 and MIAX Order, supra note 13. 233 See MIAX PEARL Form 1 Application, Exhibit H. MIAX PEARL’s listing rules, including the criteria for the underlying securities of the options to be traded, are substantially similar to the listing rules of MIAX Exchange. See MIAX PEARL Rules Chapter IV (Option Contracts Traded on the Exchange); MIAX Exchange Rules Chapter IV. See also ISE Gemini LLC Rule 500 Series and BOX Options Exchange LLC Rule 5000 Series. 234 15 U.S.C. 78f(b)(5). 235 15 U.S.C. 78k–1(a)(3)(B). PO 00000 Frm 00146 Fmt 4703 Sfmt 4703 92915 CBOE, NYSE and FINRA rules.236 Thus, for certain MIAX PEARL rules, MIAX PEARL members will comply with a MIAX PEARL rule by complying with the referenced MIAX Exchange, CBOE, NYSE and FINRA rules. In connection with the proposal to incorporate MIAX Exchange, CBOE, NYSE and FINRA rules by reference, MIAX PEARL requests, pursuant to Rule 240.0–12 under the Act,237 an exemption under Section 36 of the Act from the rule filing requirements of Section 19(b) of the Act for changes to the MIAX PEARL rules that are effected solely by virtue of a change to a crossreferenced MIAX Exchange, CBOE, NYSE or FINRA rule.238 MIAX PEARL proposes to incorporate by reference categories of rules, rather than individual rules within a category, that are not trading rules. In addition, MIAX PEARL agrees to provide written notice to its members whenever MIAX Exchange, CBOE, NYSE or FINRA proposes a change to a cross-referenced rule 239 and whenever any such proposed changes are approved by the Commission or otherwise become effective.240 Using the authority under Section 36 of the Act, the Commission previously exempted certain SROs from the requirement to file proposed rule changes under Section 19(b) of the Act.241 The Commission is hereby 236 Specifically, MIAX PEARL proposes to incorporate by reference the following MIAX Exchange Rules: Chapter III (Business Conduct), Chapter VII (Exercises and Deliveries), Chapter VIII (Records, Reports and Audits), Chapter IX (Summary Suspension), Chapter XI (Hearings, Review and Arbitration), Chapter XIII (Doing Business With the Public), Chapter XIV (Order Protection, Locked and Crossed Markets), Chapter XV (Margins), Chapter XVI (Net Capital Requirements). The following rules are crossreferenced in the MIAX Exchange rules: MIAX Exchange Rule 1107 (Arbitration) incorporates by reference the Rule 12000 Series and Rule 13000 Series of the FINRA Manual and FINRA Rule 2268; MIAX Exchange Rule 1321 (Transfer of Accounts) cross-references FINRA Rule 11870; MIAX Exchange Rule 1502 (Margin Requirements) crossreferences the CBOE and NYSE rules concerning initial and maintenance margin requirements that may be in effect from time to time. 237 17 CFR 240.0–12. 238 See Letter from Barbara J. Comly, EVP, General Counsel and Corporate Secretary, Miami Holdings, to Brent J. Fields, Secretary, Commission, dated November 4, 2016. 239 See id. 240 MIAX PEARL will provide such notice through a posting on the same Web site location where MIAX PEARL posts its own rule filings pursuant to Rule 19b–4 under the Act, within the required time frame. The Web site posting will include a link to the location on the MIAX Exchange, CBOE, NYSE or FINRA Web site where MIAX Exchange, CBOE, NYSE or FINRA’s proposed rule change is posted. See id. 241 See, e.g., Mercury Order, supra note 27, BATS Order, supra note 13, C2 Order, supra note 75, E:\FR\FM\20DEN1.SGM Continued 20DEN1 92916 Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Notices mstockstill on DSK3G9T082PROD with NOTICES granting MIAX PEARL’s request for exemption, pursuant to Section 36 of the Act, from the rule filing requirements of Section 19(b) of the Act with respect to the rules that MIAX PEARL proposes to incorporate by reference. The exemption is conditioned upon MIAX PEARL providing written notice to MIAX PEARL members whenever MIAX Exchange, CBOE, NYSE or FINRA proposes to change an incorporated by reference rule and when the Commission approves any such changes. The Commission believes that the exemption is appropriate in the public interest and consistent with the protection of investors because it will promote more efficient use of Commission’s and SROs’ resources by avoiding duplicative rule filings based on simultaneous changes to identical rule text sought to be implemented by more than one SRO. V. Conclusion It is ordered that the application of MIAX PEARL for registration as a national securities exchange be, and it hereby is, granted. It is furthered ordered that operation of MIAX PEARL is conditioned on the satisfaction of the requirements below: A. Participation in National Market System Plans Relating to Options Trading. MIAX PEARL must join: (1) The Plan for the Reporting of Consolidated Options Last Sale Reports and Quotation Information (Options Price Reporting Authority); (2) the OLPP; (3) the Linkage Plan; (4) the Plan of the Options Regulatory Surveillance Authority; and (5) the Plan Governing the Consolidated Audit Trail; B. Participation in Multiparty Rule 17d–2 Plans. MIAX PEARL must become a party to the multiparty Rule 17d–2 agreements concerning options sales practice regulation and market surveillance, and covered Regulation NMS rules; C. Participation in the Options Clearing Corporation. MIAX PEARL must become an Options Clearing Corporation participant exchange; and D. Participation in the Intermarket Surveillance Group. MIAX PEARL must join the Intermarket Surveillance Group. It is further ordered, pursuant to Section 36 of the Act,242 that MIAX PEARL shall be exempted from the rule filing requirements of Section 19(b) of the Act with respect to the MIAX Exchange, CBOE, NYSE and FINRA rules that MIAX PEARL proposes to incorporate by reference, subject to the Nasdaq Order, supra note 27, and NOM Approval Order, supra note 112. 242 15 U.S.C. 78mm. VerDate Sep<11>2014 19:36 Dec 19, 2016 Jkt 241001 conditions specified in this order that MIAX PEARL provide written notice to MIAX PEARL members whenever MIAX Exchange, CBOE, NYSE or FINRA proposes to change an incorporated by reference rule and when the Commission approves any such changes. By the Commission. Brent J. Fields, Secretary. [FR Doc. 2016–30538 Filed 12–19–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–79545; File No. SR–Phlx– 2016–118] Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rule 3317 (Compliance With Regulation NMS Plan To Implement a Tick Size Pilot) December 14, 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 November 30, 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 and II 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 to amend Phlx Rule 3317 to modify the Web site data publication requirements relating to the Regulation NMS Plan to Implement a Tick Size Pilot Program (‘‘Plan’’) and to clarify a provision related to the reporting of certain Market Maker profitability data. Phlx also proposes to amend Rule 3317(b)(5) to clarify the timing and format of publication of data related to Market Maker registration. The text of the proposed rule change is available on the Exchange’s Web site at https://nasdaqphlx.cchwallstreet. com/, at the principal office of the Exchange, and at the Commission’s Public Reference Room. 1 15 2 17 PO 00000 U.S.C. 78s(b)(1). CFR 240.19b–4. Frm 00147 Fmt 4703 Sfmt 4703 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 On August 25, 2014, Phlx and several other self-regulatory organizations (the ‘‘Participants’’) filed with the Commission, pursuant to Section 11A of the Act 3 and Rule 608 of Regulation NMS thereunder,4 the Plan to Implement a Tick Size Pilot Program.5 The Participants filed the Plan to comply with an order issued by the Commission on June 24, 2014.6 The Plan was published for comment in the Federal Register on November 7, 2014, and approved by the Commission, as modified, on May 6, 2015.7 The Commission approved the Pilot on a two-year basis, with implementation to begin no later than May 6, 2016.8 On November 6, 2015, the SEC exempted the Participants from implementing the Pilot until October 3, 2016.9 Under the revised Pilot implementation date, the Pre-Pilot data collection period commenced on April 4, 2016. On September 13, 2016, the SEC exempted the Participants from the requirement to fully implement the Pilot on October 3, 2016, to permit the Participants to implement the pilot on a phased-in basis, as described in the Participants’ exemptive request.10 3 15 U.S.C. 78k–1. CFR 242.608. 5 See Letter from Brendon J. Weiss, Vice President, Intercontinental Exchange, Inc., to Secretary, Commission, dated August 25, 2014. 6 See Securities Exchange Act Release No 72460 (June 24, 2014), 79 FR 36840 (June 30, 2014). 7 See Securities Exchange Act Release No. 74892 (May 6, 2015), 80 FR 27513 (May 13, 2015) (‘‘Approval Order’’). 8 See Approval Order at 27533 and 27545. 9 See Securities Exchange Act Release No. 76382 (November 6, 2015), 80 FR 70284 (November 13, 2015). 10 See Letter from David S. Shillman, Associate Director, Division of Trading and Markets, Commission, to Eric Swanson, EVP, General 4 17 E:\FR\FM\20DEN1.SGM 20DEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 81, Number 244 (Tuesday, December 20, 2016)]
[Notices]
[Pages 92901-92916]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30538]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79543; File No. 10-227]


In the Matter of the Application of MIAX PEARL, LLC for 
Registration as a National Securities Exchange; Findings, Opinion, and 
Order of the Commission

December 13, 2016.

I. Introduction

    On August 12, 2016, MIAX PEARL, LLC (``MIAX PEARL'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission'') an application for Registration as a National 
Securities Exchange (``Form 1 Application'') under Section 6 of the 
Securities Exchange Act of 1934 (``Exchange Act''), seeking 
registration as a national securities exchange under Section 6 of the 
Exchange Act.\1\ Notice of the Form 1 Application was published for 
comment in the Federal Register on September 14, 2016,\2\ and the 
Commission received no comments.
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    \1\ 15 U.S.C. 78f.
    \2\ See Securities Exchange Act Release No. 78793 (September 8, 
2016), 81 FR 63238 (``Notice'').

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[[Page 92902]]

II. Statutory Standards

    Under Sections 6(b) and 19(a) of the Act,\3\ the Commission shall 
by order grant an application for registration as a national securities 
exchange if the Commission finds, among other things, that the proposed 
exchange is so organized and has the capacity to carry out the purposes 
of the Act and to comply, and to enforce compliance by its members and 
persons associated with its members, with the provisions of the Act, 
the rules and regulations thereunder, and the rules of the exchange.
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    \3\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(a), respectively.
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    As discussed in greater detail below, the Commission finds that 
MIAX PEARL's application for exchange registration meets the 
requirements of the Act and the rules and regulations thereunder. 
Further, the Commission finds that the proposed rules of MIAX PEARL are 
consistent with Section 6 of the Act in that, among other things, they 
assure a fair representation of the Exchange's members in the selection 
of its directors and administration of its affairs and provide that one 
or more directors will be representative of issuers and investors and 
not be associated with a member of the exchange, or with a broker or 
dealer; \4\ and that they are designed to prevent fraudulent and 
manipulative acts and practices, promote just and equitable principles 
of trade, foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities, and remove impediments to 
and perfect the mechanisms of a free and open market and a national 
market system and, in general, protect investors and the public 
interest and are not designed to permit unfair discrimination between 
customers, issuers, or broker-dealers.\5\ Finally, the Commission finds 
that MIAX PEARL's proposed rules do not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act.\6\
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    \4\ See 15 U.S.C. 78f(b)(3).
    \5\ See 15 U.S.C. 78f(b)(5).
    \6\ See 15 U.S.C. 78f(b)(8).
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III. Discussion

A. Governance of MIAX PEARL

1. MIAX PEARL Board of Directors
    The board of directors of MIAX PEARL (``Exchange Board'' or ``MIAX 
PEARL Board'') will be its governing body and will possess all of the 
powers necessary for the management of its business and affairs, 
including governance of MIAX PEARL as a self-regulatory organization 
(``SRO'').\7\
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    \7\ See MIAX PEARL By-Laws, Section 2.1. See also MIAX PEARL LLC 
Agreement, Section 8(b).
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    Under the By-Laws of MIAX PEARL (``MIAX PEARL By-Laws''): \8\
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    \8\ The MIAX PEARL By-Laws are included in the Amended and 
Restated Limited Liability Company Agreement of MIAX PEARL (``MIAX 
PEARL LLC Agreement'').
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     The Exchange Board will be composed of not less than ten 
directors; \9\
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    \9\ See MIAX PEARL By-Laws, Article II, Section 2.2(a).
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     One director will be the Chief Executive Officer of MIAX 
PEARL; \10\
---------------------------------------------------------------------------

    \10\ See MIAX PEARL By-Laws, Article II, Section 2.2(b).
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     The number of Non-Industry Directors,\11\ including at 
least one Independent Director,\12\ will equal or exceed the sum of the 
number of Industry Directors \13\ and Member Representative Directors; 
\14\ and
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    \11\ ``Non-Industry Director'' means a Director who is an 
Independent Director or any other individual who would not be an 
Industry Director. See MIAX PEARL By-Laws, Article I(aa).
    \12\ ``Independent Director'' means a ``Director who has no 
material relationship with [MIAX PEARL] or any affiliate of [MIAX 
PEARL], or any [MIAX PEARL member] or any affiliate of any such 
[MIAX PEARL member]; provided, however, that an individual who 
otherwise qualifies as an Independent Director shall not be 
disqualified from serving in such capacity solely because such 
Director is a Director of [MIAX PEARL] or [Miami Holdings].'' See 
MIAX PEARL By-Laws, Article I(p).
    \13\ An ``Industry Director'' is, among other things, a Director 
that is or has served within the prior three years as an officer, 
director, employee, or owner of a broker or dealer, as well as any 
Director who has, or has had, a consulting or employment 
relationship with MIAX PEARL or any affiliate of MIAX PEARL within 
the prior three years. See MIAX PEARL By-Laws, Article I(r). This 
definition is consistent with what the Commission has approved for 
other exchanges. See Securities Exchange Act Release Nos. 68341 
(December 3, 2012), 77 FR 73065 (December 7, 2012) (File No. 10-207) 
(order granting the registration of MIAX Exchange) (``MIAX Order''); 
58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (File No. 10-
182) (order granting the registration of BATS Exchange, Inc.) 
(``BATS Order''); and 66871 (April 27, 2012), 77 FR 26323 (May 3, 
2012) (File No. 10-206) (order granting the registration of BOX 
Options Exchange LLC) (``BOX Order'').
    \14\ See MIAX PEARL By-Laws, Article II, Section 2.2 (b)(i). 
``Member Representative Director'' means a Director who has been 
appointed by Miami International Holdings, Inc. as an initial 
Director pursuant to Section 2.5 of the MIAX PEARL By-Laws to serve 
until the first annual meeting or who ``has been elected by the 
Miami International Holdings, Inc. after having been nominated by 
the Member Nominating Committee or by an Exchange Member pursuant to 
[the] By-Laws and confirmed as the nominee of Exchange Members after 
majority vote of Exchange Members, if applicable. A Member 
Representative Director may, but is not required to be, an officer, 
director, employee, or agent of an Exchange Member.'' See MIAX PEARL 
By-Laws, Article I(x). See also MIAX PEARL By-Laws Article II, 
Section 2.5.
---------------------------------------------------------------------------

     At least 20% of the directors on the Exchange Board will 
be Member Representative Directors.\15\
---------------------------------------------------------------------------

    \15\ See MIAX PEARL By-Laws, Article II, Section 2.2(b)(ii).
---------------------------------------------------------------------------

    For the interim board (discussed below), and subsequently at the 
first annual meeting and each annual meeting thereafter, Miami 
International Holdings, Inc. (``Miami Holdings''), as the sole LLC 
Member of MIAX PEARL, will elect the MIAX PEARL Board pursuant to the 
MIAX PEARL By-Laws.\16\ In addition, Miami Holdings will appoint the 
initial Nominating Committee \17\ and Member Nominating Committee,\18\ 
consistent with each committee's compositional requirements,\19\ to 
nominate candidates for election to the Exchange Board. Each of the 
Nominating Committee and Member Nominating Committee, after completion 
of its respective duties for nominating directors for election to the 
Board for that year, shall nominate candidates to serve on the 
succeeding year's Nominating Committee or Member Nominating Committee, 
as applicable. Additional candidates for the Member Nominating 
Committee may be nominated and elected by MIAX PEARL members pursuant 
to a petition process.\20\
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    \16\ See MIAX PEARL By-Laws, Article II, Section 2.4. See also 
MIAX PEARL LLC Agreement, Section 9(a).
    \17\ The Nominating Committee will be comprised of at least 
three directors, and the number of Non-Industry members on the 
Nominating Committee must equal or exceed the number of Industry 
members. See MIAX PEARL By-Laws, Article V, Section 5.2. See also 
MIAX PEARL By-Laws, Article IV, Section 4.2(a).
    \18\ The Member Nominating Committee will be comprised of at 
least three directors, and each member of the Member Nominating 
Committee shall be a Member Representative member and shall not be 
required to be a Director of the Exchange. See MIAX PEARL By-Laws, 
Article V, Section 5.3. See also MIAX PEARL By-Laws, Article IV, 
Section 4.2(a). Pursuant to MIAX PEARL By-Laws, Article I(y), a 
``Member Representative member'' is a member of any committee or 
hearing panel appointed by the Exchange Board who has been elected 
or appointed after having been nominated by the Member Nominating 
Committee pursuant to the By-Laws and who is an officer, director, 
employee, or agent of an Exchange Member.
    \19\ See MIAX PEARL By-Laws, Article V, Section 5.1.
    \20\ See id.
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    The Nominating Committee will nominate candidates for each director 
position, and Miami Holdings, as the sole LLC Member, will elect those 
directors. For Member Representative Director positions, the Nominating 
Committee will nominate those candidates submitted to it, and approved, 
by the Member Nominating Committee.\21\ Additional candidates,

[[Page 92903]]

however, may be nominated for the Member Representative Director 
positions by MIAX PEARL members pursuant to a petition process.\22\ If 
no candidates are nominated pursuant to a petition process, then the 
initial nominees submitted by the Member Nominating Committee will be 
nominated as Member Representative Directors by the Nominating 
Committee. If a petition process produces additional candidates, then 
the candidates nominated pursuant to the petition process, together 
with those nominated by the Member Nominating Committee, will be 
presented to MIAX PEARL members for a run-off election to determine the 
final slate of candidates for the vacant Member Representative Director 
positions.\23\ In the event of a contested run-off election, the 
candidates who receive the most votes will be nominated as the final 
slate of Member Representative Director candidates by the Nominating 
Committee.\24\ Miami Holdings, as the sole LLC Member, is obligated to 
elect the final slate of the Member Representative Director candidates 
that are nominated by the Nominating Committee.\25\
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    \21\ The Member Nominating Committee will solicit comments from 
MIAX PEARL members for the purpose of approving and submitting names 
of candidates for election to the position of Member Representative 
Director. See MIAX PEARL By-Laws, Article II, Section 2.4(b).
    \22\ See MIAX PEARL By-Laws, Article II, Section 2.4(c). The 
petition must be signed by executive representatives of 10% or more 
of the MIAX PEARL members. No MIAX PEARL member, together with its 
affiliates, may account for more than 50% of the signatures 
endorsing a particular candidate. See id.
    \23\ See MIAX PEARL By-Laws, Article II, Sections 2.4(e) and 
(f). Each MIAX PEARL Member shall have the right to cast one vote 
for each available Member Representative Director nomination, 
provided that any such vote must be cast for a person on the List of 
Candidates and that no MIAX PEARL member, together with its 
affiliates, may account for more than 20% of the votes cast for a 
candidate. See MIAX PEARL By-Laws, Article II, Section 2.4(f).
    \24\ See MIAX PEARL By-Laws, Article II, Section 2.4(f).
    \25\ See id.
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    The Commission believes that the requirement in the MIAX PEARL By-
Laws that 20% of the directors be Member Representative Directors and 
the means by which they will be chosen by MIAX PEARL members provide 
for the fair representation of members in the selection of directors 
and the administration of MIAX PEARL and therefore is consistent with 
Section 6(b)(3) of the Act.\26\ The Commission notes that this 
requirement helps to ensure that members have a voice in the use of 
self-regulatory authority by MIAX PEARL.\27\
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    \26\ 15 U.S.C. 78f(b)(3).
    \27\ See, e.g., MIAX Order, supra note 13, at 73067; Securities 
Exchange Act Release Nos. 76998 (January 29, 2016), 81 FR 6066, 6068 
(February 4, 2016) (File No. 10-221) (order granting exchange 
registration of ISE Mercury, LLC) (``ISE Mercury Order''); 70050 
(July 26, 2013), 78 FR 46622, 46624 (August 1, 2013) (File No. 10-
209) (order granting the exchange registration of ISE Gemini, LLC) 
(``ISE Gemini Order''); 53128 (January 13, 2006), 71 FR 3550, 3553 
(January 23, 2006) (granting the exchange registration of Nasdaq 
Stock Market, Inc.) (``Nasdaq Order''); and BATS Order, supra note 
13.
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    In addition, with respect to the requirement that the number of 
Non-Industry Directors, including at least one Independent Director, 
will equal or exceed the sum of the number of Industry Directors and 
Member Representative Directors, the Commission believes that the 
proposed composition of the Exchange Board satisfies the requirements 
in Section 6(b)(3) of the Act,\28\ which requires in part that one or 
more directors be representative of issuers and investors and not be 
associated with a member of the exchange, or with a broker or dealer. 
The Commission notes that the inclusion of public, non-industry 
representatives on exchange oversight bodies is an important mechanism 
to support an exchange's ability to protect the public interest.\29\ 
Further, the presence of public, non-industry representatives can help 
to ensure that no single group of market participants has the ability 
to systematically disadvantage other market participants through the 
exchange governance process. The Commission believes that public, non-
industry directors can provide unique, unbiased perspectives, which are 
designed to enhance the ability of the Exchange Board to address issues 
in a non-discriminatory fashion and foster the integrity of the 
Exchange.\30\
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    \28\ 15 U.S.C. 78f(b)(3).
    \29\ See, e.g., Regulation of Exchanges and Alternative Trading 
Systems, Securities Exchange Act Release No. 40760 (December 8, 
1998), 63 FR 70844, 70882 (December 22, 1998) (``Regulation ATS 
Release'').
    \30\ See MIAX Order, supra note 13, at 73067; BATS Order, supra 
note 13, at 49501; and Nasdaq Order, supra note 27, at 3553.
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2. Interim Exchange Board
    Prior to commencing operations, Miami Holdings will appoint an 
interim Exchange board of directors (``Interim Exchange Board''), which 
will include interim Member Representative Directors.\31\ With respect 
to the selection of the interim Member Representative Directors for the 
Interim Exchange Board, prior to the commencement of operations as an 
exchange, Miami Holdings will submit the names of its nominees for the 
interim Member Representative Directors positions to persons that have 
begun the process of becoming members in the new Exchange.\32\ Such 
persons and firms will be allowed 14 days to submit the names of 
alternative candidates.\33\ Voting will occur no sooner than 5 days 
after the interim election notice is delivered to confirm the final 
slate of candidates to become an interim Member Representative 
Director.\34\ All other interim directors, except for the interim 
Member Representative Directors, will be appointed and elected by Miami 
Holdings, and must meet the MIAX PEARL board composition requirements 
as set forth in the MIAX PEARL By-Laws.\35\ Once these interim Member 
Representative Directors are seated on the Interim Exchange Board, then 
the Interim Exchange Board will meet the board composition requirements 
set forth in the governing documents of MIAX PEARL.
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    \31\ See MIAX PEARL By-Laws, Section 2.5.
    \32\ See MIAX PEARL By-Laws, Section 2.5(b). Specifically, Miami 
Holdings will submit the names of its nominees for the interim 
Member Representative Director positions to persons who have 
submitted the initial documents for membership in the Exchange who 
would meet the qualifications for membership. See MIAX PEARL By-
Laws, Section 2.5(b). MIAX PEARL additionally represents that the 
initial members of MIAX PEARL will consist substantially of the 
current group of persons and firms that have begun the membership 
application process with MIAX PEARL. See MIAX PEARL Form 1 
Application, Exhibit J.
    \33\ See MIAX PEARL By-Laws, Section 2.5(b).
    \34\ See MIAX PEARL By-Laws, Section 2.5(d).
    \35\ See MIAX PEARL By-Laws, Section 2.5(a).
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    The Interim Exchange Board will serve until the first initial 
Exchange Board is elected pursuant to the full nomination, petition, 
and voting process set forth in the MIAX PEARL By-Laws.\36\ MIAX PEARL 
will complete such process within 90 days after its application for 
registration as a national securities exchange is granted by the 
Commission.\37\
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    \36\ See MIAX PEARL By-Laws, Sections 2.2(e) and 2.5(a).
    \37\ See MIAX PEARL By-Laws, Sections 2.5(a). The 90-day period 
is consistent with what the Commission recently approved for ISE 
Mercury, LLC. See ISE Mercury Order, supra note 27, at 6068 
(allowing ISE Mercury, LLC to appoint an initial interim board to 
enable it to commence operations as a registered exchange). See also 
MIAX Order, supra note 13, at 73067; and BOX Order, supra note 13, 
at 26325.
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    The Commission believes that the process for electing the Interim 
Exchange Board, as proposed, is consistent with the requirements of the 
Act, including that the rules of the exchange assure fair 
representation of the exchange's members in the selection of its 
directors and administration of its affairs.\38\ As noted above, MIAX 
PEARL represents that the initial members of MIAX PEARL will consist 
substantially of the current group of persons and firms that have begun 
the membership

[[Page 92904]]

application process with MIAX PEARL.\39\ MIAX PEARL will engage these 
persons and firms in the interim board election process by, prior to 
the commencement of operations as an exchange, providing each of them 
with the opportunity to participate in the selection of interim Member 
Representative Directors consistent with the MIAX PEARL By-Laws. 
Further, MIAX PEARL represents that it will complete the full 
nomination, petition, and voting process as set forth in the MIAX PEARL 
By-Laws, which will provide persons that are approved as members after 
the effective date of this Order with the opportunity to participate in 
the selection of the Member Representative Directors, within 90 days of 
when MIAX PEARL's application for registration as a national securities 
exchange is granted.\40\ Therefore, the Commission believes that MIAX 
PEARL's initial interim board process is consistent with the Act, 
including Section 6(b)(3), in that it is designed to provide 
representation among the persons and firms likely to become members 
when MIAX PEARL commences operations and is sufficient to allow MIAX 
PEARL to commence operations for an interim period prior to going 
through the process to elect a new Exchange Board pursuant to the full 
nomination, petition, and voting process set forth in the MIAX PEARL 
By-Laws.
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    \38\ See 15 U.S.C. 78f(b)(3).
    \39\ See supra note 32.
    \40\ MIAX PEARL's proposed timeline for the interim board 
process follows a process identical to what the Commission recently 
approved for ISE Mercury, LLC. See ISE Mercury Order, supra note 27, 
at 6068.
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3. Exchange Committees
    In the MIAX PEARL By-Laws, the Exchange proposed to establish 
several standing committees, which would be divided into two 
categories: Committees of the Board (composed of MIAX PEARL directors) 
and Committees of the Exchange (composed of a mixture of MIAX PEARL 
directors and persons that are not MIAX PEARL directors).\41\ The 
standing Committees of the Board would be the Audit, Compensation, 
Appeals, and Regulatory Oversight Committees.\42\ In addition, the 
Exchange Chairman, with approval of the Exchange Board, may appoint an 
Executive Committee and a Finance Committee, which also would be 
Committees of the Board.\43\
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    \41\ See MIAX PEARL By-Laws, Section 4.1.
    \42\ See MIAX PEARL By-Laws, Section 4.1(a).
    \43\ See MIAX PEARL By-Laws, Section 4.5(e) and (f), 
respectively.
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    The Audit Committee will consist of three or more directors, a 
majority of which will be Non-Industry Directors.\44\ Each of the 
Compensation and Regulatory Oversight Committees will consist of three 
or more directors, all of which will be required to be Non-Industry 
Directors.\45\ The Appeals Committee will consist of one Independent 
Director, one Industry Director, and one Member Representative 
Director.\46\ If established, the Finance Committee will consist of at 
least three persons (who may, but are not required to, be directors) a 
majority of whom will be Non-Industry Directors.\47\ The Executive 
Committee, if established, will consist of at least three directors. 
Because the Executive Committee will have the powers and authority of 
the Exchange Board in the management of the business and affairs of the 
Exchange between meetings of the Exchange Board, its composition must 
reflect that of the Exchange Board. Accordingly, the number of Non-
Industry Directors on the Executive Committee must equal or exceed the 
number of Industry Directors and the percentages of Independent 
Directors and Member Representative Directors must be at least as great 
as the corresponding percentages on the Exchange Board as a whole.\48\
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    \44\ See MIAX PEARL By-Laws, Section 4.5(b). A Non-Industry 
Director shall serve as Chairman of the Committee. See id. See also 
MIAX PEARL By-Laws, Section 4.2(a) (requiring that each committee be 
comprised of at least three people).
    \45\ See MIAX PEARL By-Laws, Section 4.5(a) and 4.5(c).
    \46\ See MIAX PEARL By-Laws, Section 4.5(d).
    \47\ See MIAX PEARL By-Laws, Section 4.5(f). See also MIAX PEARL 
By-Laws, Section 4.2(a) (providing that except as otherwise provided 
in the MIAX PEARL By-Laws, committees may include persons who are 
not members of the Board).
    \48\ See MIAX PEARL By-Laws, Section 4.5(e).
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    With respect to Committees of MIAX PEARL, the Exchange has proposed 
to establish a Nominating Committee \49\ and a Member Nominating 
Committee.\50\ As discussed above, these committees will have 
responsibility for, among other things, nominating candidates for 
election to the Exchange Board. On an annual basis, the members of 
these committees will nominate candidates for the succeeding year's 
respective committees to be elected by Miami Holdings, as the sole LLC 
Member.\51\ In addition, MIAX PEARL has proposed to establish a Quality 
of Markets Committee,\52\ which will provide advice and guidance to the 
Exchange Board on issues related to the fairness, integrity, efficiency 
and competiveness of the information, order handling and execution 
mechanisms of the Exchange from the perspective of individual and 
institutional investors, retail and market making firms, and other 
market participants. The Quality of Markets Committee will include a 
broad representation of participants in the Exchange. Additionally, at 
least 20% of the members of the committee will be Member Representative 
members, and the number of Non-Industry members must equal or exceed 
the total number of Industry and Member Representative members. MIAX 
PEARL also has proposed to establish a Business Conduct Committee, 
which shall be appointed by the Chairman of the Exchange Board.\53\ 
Specifically, the Business Conduct Committee, which will not be a Board 
committee, will have a minimum of three members and will be composed of 
a number of individuals as determined by the Exchange Chairman, none of 
whom shall be Directors of MIAX PEARL. In addition, at least one member 
of the Business Conduct Committee and any panel thereof must be an 
officer, director or employee of a MIAX PEARL member.
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    \49\ See MIAX PEARL By-Laws, Article V, Section 5.2, and supra 
note 17.
    \50\ See MIAX PEARL By-Laws, Article V, Section 5.3, and supra 
note 18.
    \51\ See MIAX PEARL By-Laws, Article V, Section 5.1, and supra 
note 20. Additional candidates for the Member Nominating Committee 
may be nominated and elected by MIAX PEARL members pursuant to a 
petition process. See supra note 22 and accompanying text.
    \52\ See MIAX PEARL By-Laws, Article IV, Section 4.6.
    \53\ See MIAX PEARL By-Laws, Article IV, Section 4.7.
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    The Commission believes that MIAX PEARL's proposed committees, 
which are similar to the committees maintained by other exchanges,\54\ 
are designed to help enable MIAX PEARL to carry out its 
responsibilities under the Act and are consistent with the Act, 
including Section 6(b)(1), which requires, in part, an exchange to be 
so organized and have the capacity to carry out the purposes of the 
Act.\55\
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    \54\ See, e.g., MIAX Order and BATS Order, supra note 13, and 
ISE Mercury Order, ISE Gemini Order, Nasdaq Order, supra note 27.
    \55\ 15 U.S.C. 78f(b)(1).
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B. Regulation of MIAX PEARL

    When MIAX PEARL commences operations as a national securities 
exchange, the Exchange will have all the attendant regulatory 
obligations under the Act. In particular, MIAX PEARL will be 
responsible for the operation and regulation of its trading system and 
the regulation of its members. Certain provisions in the MIAX PEARL and 
Miami Holdings governance documents are designed to facilitate the 
ability of MIAX PEARL and the Commission to fulfill their regulatory 
obligations. The

[[Page 92905]]

discussion below summarizes some of these key provisions.
1. Ownership Structure: Ownership and Voting Limitations
    MIAX PEARL will be structured as a Delaware limited liability 
company, which will be wholly owned by the sole member of the LLC, 
Miami Holdings. The Miami Holdings' proposed Amended and Restated 
Certificate of Incorporation (``Miami Holdings Certificate'') includes 
restrictions on the ability to own and vote shares of capital stock of 
Miami Holdings.\56\ These limitations are designed to prevent any Miami 
Holdings shareholder from exercising undue control over the operation 
of MIAX PEARL and to assure that MIAX PEARL and the Commission are able 
to carry out their regulatory obligations under the Act.
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    \56\ These provisions are consistent with ownership and voting 
limits approved by the Commission for other SROs. See, e.g., ISE 
Mercury Order and ISE Gemini Order, supra note 27; MIAX Order and 
BATS Order, supra note 13. See also Securities Exchange Act Release 
Nos. 62158 (May 24, 2010), 75 FR 30082 (May 28, 2010) (CBOE-2008-88) 
(``CBOE Demutualization Approval Order''); 53963 (June 8, 2006), 71 
FR 34660 (June 15, 2006) (SR-NSX-2006-03) (``NSX Demutualization 
Order''); 51149 (February 8, 2005), 70 FR 7531 (February 14, 2005) 
(SR-CHX-2004-26) (``CHX Demutualization Order''); and 49098 (January 
16, 2004), 69 FR 3974 (January 27, 2004) (SR-Phlx-2003-73) (``Phlx 
Demutualization Order'').
---------------------------------------------------------------------------

    In particular, for so long as Miami Holdings (directly or 
indirectly) controls MIAX PEARL, no person, either alone or together 
with its related persons,\57\ may beneficially own more than 40% of any 
class of capital stock of Miami Holdings.\58\ There would be a more 
conservative restriction for MIAX PEARL members, wherein MIAX PEARL 
members, either alone or together with their related persons, are 
prohibited from beneficially owning more than 20% of shares of any 
class of capital stock of Miami Holdings.\59\ If any stockholder 
violates these ownership limits, Miami Holdings would redeem the shares 
in excess of the applicable ownership limit at their par value.\60\ In 
addition, no person, alone or together with its related persons, may 
vote or cause the voting of more than 20% of the voting power of the 
then issued and outstanding capital stock of Miami Holdings.\61\ If any 
stockholder purports to vote, or cause the voting of, shares that would 
violate this voting limit, Miami Holdings would not honor such vote in 
excess of the voting limit.\62\
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    \57\ See Miami Holdings Certificate, Article NINTH (a)(ii) 
(defining ``related persons'').
    \58\ See Miami Holdings Certificate, Article NINTH (b)(i)(A).
    \59\ See Miami Holdings Certificate, Article NINTH (b)(i)(B).
    \60\ See Miami Holdings Certificate, Article NINTH (e). Any 
shares which have been called for redemption shall not be deemed 
outstanding shares for the purpose of voting or determining the 
total number of shares entitled to vote. Once redeemed by Miami 
Holdings, such shares shall become treasury shares and shall no 
longer be deemed to be outstanding. See id. Furthermore, if any 
redemption results in another stockholder owning shares in violation 
of the ownership limits described above, Miami Holdings shall redeem 
such shares. See id.
    \61\ See Miami Holdings Certificate, Article NINTH (b)(i)(C).
    \62\ See Miami Holdings Certificate, Article NINTH (d). The 
Miami Holdings Certificate also prohibits the payment of any stock 
dividends and conversions that would violate the ownership and 
voting limitations. See Miami Holdings Certificate, Article FOURTH 
A.(b) and (e), and D.7.
---------------------------------------------------------------------------

    Any person that proposes to own shares of capital stock in excess 
of the 40% ownership limitation, or vote or grant proxies or consents 
with respect to shares of capital stock in excess of the 20% voting 
limitation, must deliver written notice to the Miami Holdings board to 
notify the Board of its intention.\63\ The notice must be delivered to 
the Board not less than 45 days before the proposed ownership of such 
shares or proposed exercise of such voting rights or the granting of 
such proxies or consents.\64\ The Miami Holdings board may waive the 
40% ownership limitation and the 20% voting limitation, pursuant to a 
resolution duly adopted by the Board of Directors, if it makes certain 
findings,\65\ except that the Miami Holdings board cannot waive the 
voting and ownership limits above 20% for MIAX PEARL members and their 
related persons.\66\ Any such waiver would not be effective unless and 
until approved by the Commission pursuant to Section 19 of the Act.\67\
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    \63\ See Miami Holdings Certificate, Article NINTH (b)(iv).
    \64\ See id.
    \65\ See Miami Holdings Certificate, Article NINTH (b)(ii)(B). 
The required findings include determinations that (A) such waiver 
will not impair the ability of MIAX PEARL to carry out its functions 
and responsibilities under the Act and the rules and regulations 
promulgated thereunder, (B) such waiver is otherwise in the best 
interests of MIAX PEARL and Miami Holdings, (C) such waiver will not 
impair the ability of the Commission to enforce the Act and (D) the 
transferee in such transfer and its related persons are not subject 
to any applicable ``statutory disqualification'' (within the meaning 
of Section 3(a)(39) of the Act). See Miami Holdings Certificate, 
Article NINTH (b)(ii)(B) and (b)(iii). The Commission has previously 
approved the rules of other exchanges that provide for the ability 
of the exchange to waive the ownership and voting limitations 
discussed above for non-members of the exchange. See, e.g., ISE 
Mercury Order and ISE Gemini Order, supra note 27; MIAX Order, supra 
note 13; and Securities Exchange Act Release No. 61698 (March 12, 
2010), 75 FR 13151 (March 18, 2010) (order approving DirectEdge 
exchanges) (``DirectEdge Exchanges Order'').
    \66\ See Miami Holdings Certificate, Article NINTH (b)(ii)(B). 
These provisions are generally consistent with waiver of ownership 
and voting limits approved by the Commission for other SROs. See, 
e.g., ISE Mercury Order, supra note 27; MIAX Order, supra note 13; 
BATS Order, supra note 13; NSX Demutualization Order, supra note 56; 
CHX Demutualization Order, supra note 56; and Securities Exchange 
Act Release No. 49718 (May 17, 2004), 69 FR 29611 (May 24, 2004) 
(SR-PCX-2004-08).
    \67\ See Miami Holdings Certificate, Article NINTH (b)(ii)(B).
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    The Miami Holdings Certificate also contains provisions that are 
designed to further safeguard the ownership and voting limitation 
described above, or are otherwise related to direct and indirect 
changes in control. Specifically, any person that, either alone or 
together with its related persons owns, directly or indirectly, of 
record or beneficially, 5% or more of the capital stock of Miami 
Holdings will be required to immediately notify Miami Holdings in 
writing upon acquiring knowledge of such ownership.\68\ Thereafter, 
such persons will be required to update Miami Holdings of any increase 
or decrease of 1% or more in their previously reported ownership 
percentage.\69\
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    \68\ See Miami Holdings Certificate, Article NINTH(c)(i). The 
notice will require the person's full legal name; the person's title 
or status; the person's approximate ownership interest in Miami 
Holdings; and whether the person has power, directly or indirectly, 
to direct the management or policies of Miami Holdings. See id.
    \69\ See Miami Holdings Certificate, Article NINTH(c)(ii). 
Changes of less than 1% must also be reported to Miami Holdings if 
they result in such person crossing a 20% or 40% ownership 
threshold. See id. In addition, the MIAX PEARL rules also impose 
limits on affiliation between MIAX PEARL and a member of MIAX PEARL. 
See MIAX PEARL Rule 201(g) (``Without prior Commission approval, the 
Exchange or any entity with which it is affiliated shall not 
directly or indirectly through one or more intermediaries acquire or 
maintain an ownership interest in an Exchange Member. In addition, 
without prior Commission approval, no Member shall be or become 
affiliated with (1) the Exchange; or (2) any affiliate of the 
Exchange. Nothing herein shall prohibit a Member from acquiring or 
holding an equity interest in (i) Miami International Holdings, Inc. 
that is permitted by the Certificate of Incorporation of Miami 
International Holdings, Inc. or (ii) Miami International Securities 
Exchange, LLC that is permitted by the Amended and Restated Limited 
Liability Company Agreement of Miami International Securities 
Exchange, LLC.'').
---------------------------------------------------------------------------

    The MIAX PEARL LLC Agreement does not include change of control 
provisions that are similar to those in the Miami Holdings Certificate; 
however the MIAX PEARL LLC Agreement explicitly provides that Miami 
Holdings is the sole LLC Member of MIAX PEARL.\70\ Thus, if Miami 
Holdings ever proposes to no longer be the sole LLC Member of MIAX 
PEARL (and therefore no longer its sole owner), MIAX PEARL would be 
required to amend the MIAX PEARL LLC Agreement and the MIAX

[[Page 92906]]

PEARL By-Laws. Any changes to the MIAX PEARL LLC Agreement or the MIAX 
PEARL By-Laws, including any change in the provisions that identify 
Miami Holdings as the sole owner of MIAX PEARL, must be filed with, or 
filed with and approved by, the Commission pursuant to Section 19 of 
the Act, as the case may be.\71\ Further, pursuant to the MIAX PEARL 
By-Laws, Miami Holdings may not transfer or assign, in whole or in 
part, its ownership interest in MIAX PEARL, unless such transfer is 
filed with and approved by the Commission pursuant to Section 19 of the 
Act.\72\
---------------------------------------------------------------------------

    \70\ See MIAX PEARL LLC Agreement and MIAX PEARL By-Laws, 
Article I(v) (both of which define ``LLC Member'' to mean Miami 
Holdings, as the sole member of MIAX PEARL).
    \71\ See 15 U.S.C. 78s. See also MIAX PEARL LLC Agreement, 
Section 28(b).
    \72\ See MIAX PEARL By-Laws, Article III, Section 3.4.
---------------------------------------------------------------------------

    As described above, the provisions applicable to direct and 
indirect changes in control of Miami Holdings and MIAX PEARL, as well 
as the voting limitation imposed on owners of Miami Holdings who also 
are MIAX PEARL members, are designed to help prevent any owner of Miami 
Holdings from exercising undue influence or control over the operation 
of MIAX PEARL. In addition, these limitations are designed to address 
the conflicts of interests that might result from a member of a 
national securities exchange owning interests in the exchange. A 
member's interest in an exchange, including an entity that controls an 
exchange, could become so large as to cast doubts on whether the 
exchange may fairly and objectively exercise its self-regulatory 
responsibilities with respect to such member.\73\ A member that is a 
controlling shareholder of an exchange could seek to exercise that 
controlling influence by directing the exchange to refrain from, or the 
exchange may hesitate to, diligently monitor and conduct surveillance 
of the member's conduct or diligently enforce the exchange's rules and 
the federal securities laws with respect to conduct by the member that 
violates such provisions. As such, the Commission believes that these 
voting and ownership limitations are designed to minimize the potential 
that a person or entity can improperly interfere with or restrict the 
ability of MIAX PEARL to effectively carry out its regulatory oversight 
responsibilities under the Act.
---------------------------------------------------------------------------

    \73\ See, e.g., ISE Mercury Order, supra note 27; MIAX Order, 
supra note 13; BATS Order, supra note 13; and DirectEdge Exchanges 
Order, supra note 65.
---------------------------------------------------------------------------

    The Commission believes that MIAX PEARL's and Miami Holding's 
proposed governance provisions are consistent with the Act, including 
Section 6(b)(1), which requires, in part, an exchange to be so 
organized and have the capacity to carry out the purposes of the 
Act.\74\ In particular, these requirements are designed to minimize the 
potential that a person could improperly interfere with or restrict the 
ability of the Commission or MIAX PEARL to effectively carry out their 
regulatory oversight responsibilities under the Act.
---------------------------------------------------------------------------

    \74\ 15 U.S.C. 78f(b)(1). See also ISE Mercury Order, supra note 
27; MIAX Order, supra note 13; and BOX Order, supra note 13.
---------------------------------------------------------------------------

2. Regulatory Independence and Oversight
    Although Miami Holdings will not itself carry out regulatory 
functions, its activities with respect to the operation of MIAX PEARL 
must be consistent with, and must not interfere with, MIAX PEARL's 
self-regulatory obligations. In this regard, MIAX PEARL and Miami 
Holdings propose to adopt certain provisions in their respective 
governing documents that are designed to help maintain the independence 
of the regulatory functions of MIAX PEARL. These proposed provisions 
are substantially similar to those included in the governing documents 
of other exchanges that recently have been granted registration.\75\ 
Specifically:
---------------------------------------------------------------------------

    \75\ See, e.g., DirectEdge Exchanges Order, supra note 65, and 
BATS Order, supra note 13. See also Securities Exchange Act Release 
No. 61152 (December 10, 2009), 74 FR 66699 (December 16, 2009) (``C2 
Order'').
---------------------------------------------------------------------------

     The directors, officers, employees, and agents of Miami 
Holdings must give due regard to the preservation of the independence 
of the self-regulatory function of MIAX PEARL and must not take actions 
that would interfere with the effectuation of decisions by the MIAX 
PEARL Board relating to its regulatory functions or that would 
interfere with MIAX PEARL's ability to carry out its responsibilities 
under the Act.\76\
---------------------------------------------------------------------------

    \76\ See Amended and Restated By-Laws of Miami Holdings (``Miami 
Holdings By-Laws''), Article VII, Section 1.
     Similarly, Article II, Section 2.1(d) of the MIAX PEARL By-Laws 
requires the MIAX PEARL Board to, when managing the business and 
affairs of MIAX PEARL and evaluating any proposal, consider the 
requirements of Section 6(b) of the Act. Section 2.1(e) also 
requires the MIAX PEARL Board, when evaluating any proposal to take 
into account (among other things and to the extent relevant), the 
potential impact on the integrity, continuity and stability of the 
national securities exchange operated by MIAX PEARL and the other 
operations of MIAX PEARL, on the ability to prevent fraudulent and 
manipulative acts and practices and on investors and the public, and 
whether such would promote just and equitable principles of trade, 
foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect 
to and facilitating transactions in securities or assist in the 
removal of impediments to or perfection of the mechanisms for a free 
and open market and a national market system. See, e.g., Fourth 
Amended and Restated By-Laws of BATS, Article III, Section 1.
---------------------------------------------------------------------------

     Miami Holdings must comply with federal securities laws 
and the rules and regulations promulgated thereunder, and agrees to 
cooperate with the Commission and MIAX PEARL pursuant to, and to the 
extent of, their respective regulatory authority. In addition, Miami 
Holdings' officers, directors, employees, and agents must comply with 
federal securities laws and the rules and regulations promulgated 
thereunder and agree to cooperate with the Commission and MIAX PEARL in 
respect of the Commission's oversight responsibilities regarding MIAX 
PEARL and the self-regulatory functions and responsibilities of MIAX 
PEARL.\77\
---------------------------------------------------------------------------

    \77\ See Miami Holdings By-Laws, Article VII, Section 4.
---------------------------------------------------------------------------

     Miami Holdings, and its officers, directors, employees, 
and agents are deemed to irrevocably submit to the jurisdiction of the 
U.S. federal courts, the Commission, and MIAX PEARL, for purposes of 
any action, suit, or proceeding pursuant to U.S. federal securities 
laws, and the rules and regulations thereunder, arising out of, or 
relating to, MIAX PEARL activities.\78\
---------------------------------------------------------------------------

    \78\ See Miami Holdings By-Laws, Article VII, Section 5.
---------------------------------------------------------------------------

     All books and records of MIAX PEARL reflecting 
confidential information pertaining to the self-regulatory function of 
MIAX PEARL (including but not limited to disciplinary matters, trading 
data, trading practices, and audit information) shall be retained in 
confidence by MIAX PEARL and its personnel and will not be used by MIAX 
PEARL for any non-regulatory purpose and shall not be made available to 
persons (including, without limitation, any MIAX PEARL member) other 
than to personnel of the Commission, and those personnel of MIAX PEARL, 
members of committees of MIAX PEARL, members of the MIAX PEARL Board, 
or hearing officers and other agents of MIAX PEARL, to the extent 
necessary or appropriate to properly discharge the self-regulatory 
function of MIAX PEARL.\79\
---------------------------------------------------------------------------

    \79\ See MIAX PEARL By-Laws Article X, Section 10.4. The 
Commission notes that the Miami Holdings By-Laws also provide that 
all books and records of MIAX PEARL reflecting confidential 
information pertaining to the self-regulatory function of MIAX PEARL 
will be subject to confidentiality restrictions. See Miami Holdings 
By-Laws Article VII, Section 2. The requirement to keep such 
information confidential shall not limit the Commission's ability to 
access and examine such information or limit the ability of 
officers, directors, employees, or agent of Miami Holdings to 
disclose such information to the Commission. See id.
---------------------------------------------------------------------------

     The books and records of MIAX PEARL and Miami Holdings 
must be

[[Page 92907]]

maintained in the United States \80\ and, to the extent they are 
related to the operation or administration of MIAX PEARL, Miami 
Holdings books and records will be subject at all times to inspection 
and copying by the Commission.\81\
---------------------------------------------------------------------------

    \80\ See MIAX PEARL By-Laws, Article X, Section 10.4; and Miami 
Holdings By-Laws, Article VII, Section 3.
    \81\ See Miami Holdings By-Laws, Article VII, Section 3.
---------------------------------------------------------------------------

     Furthermore, to the extent they relate to the activities 
of MIAX PEARL, the books, records, premises, officers, directors, 
employees, and agents of Miami Holdings will be deemed to be the books, 
records, premises, officers, directors, employees, and agents of MIAX 
PEARL, for purposes of, and subject to oversight pursuant to, the 
Act.\82\
---------------------------------------------------------------------------

    \82\ See Miami Holdings By-Laws, Article VII, Section 3.
---------------------------------------------------------------------------

     Miami Holdings will take necessary steps to cause its 
officers, directors, employees, and agents, prior to accepting a 
position as an officer, director, employee or agent (as applicable) to 
consent in writing to the applicability of provisions regarding books 
and records, confidentiality, jurisdiction, and regulatory obligations, 
with respect to their activities related to MIAX PEARL.\83\
---------------------------------------------------------------------------

    \83\ See Miami Holdings By-Laws, Article VII, Section 6.
---------------------------------------------------------------------------

     Miami Holdings Certificate and By-Laws require that, so 
long as Miami Holdings controls MIAX PEARL, any changes to those 
documents be submitted to the MIAX PEARL Board, and, if such change is 
required to be filed with the Commission pursuant to Section 19(b) of 
the Act and the rules and regulations thereunder, such change shall not 
be effective until filed with, or filed with and approved by, the 
Commission.\84\
---------------------------------------------------------------------------

    \84\ See Miami Holdings Certificate, Article VIII; and Miami 
Holdings By-Laws, Article XII, Section 1.
---------------------------------------------------------------------------

    The Commission believes that the provisions discussed in this 
section, which are designed to help maintain the independence of MIAX 
PEARL's regulatory function and help facilitate the ability of MIAX 
PEARL to carry out its regulatory responsibilities and operate in a 
manner consistent with the Act, are appropriate and consistent with the 
requirements of the Act, particularly with Section 6(b)(1), which 
requires, in part, an exchange to be so organized and have the capacity 
to carry out the purposes of the Act.\85\ Whether MIAX PEARL operates 
in compliance with the Act, however, depends on how it and Miami 
Holdings in practice implement the governance and other provisions that 
are the subject of this Order.
---------------------------------------------------------------------------

    \85\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    Further, Section 19(h)(1) of the Act \86\ provides the Commission 
with the authority ``to suspend for a period not exceeding twelve 
months or revoke the registration of [an SRO], or to censure or impose 
limitations upon the activities, functions, and operations of [an SRO], 
if [the Commission] finds, on the record after notice and opportunity 
for hearing, that [the SRO] has violated or is unable to comply with 
any provision of the Act, the rules or regulations thereunder, or its 
own rules or without reasonable justification or excuse has failed to 
enforce compliance'' with any such provision by its members (including 
associated persons thereof).\87\ If Commission staff were to find, or 
become aware of, through staff review and inspection or otherwise, 
facts indicating any violations of the Act, including without 
limitation Sections 6(b)(1) and 19(g)(1), these matters could provide 
the basis for a disciplinary proceeding under Section 19(h)(1) of the 
Act.
---------------------------------------------------------------------------

    \86\ See 15 U.S.C. 78s(h)(1).
    \87\ See id.
---------------------------------------------------------------------------

    The Commission also notes that, even in the absence of the 
governance provisions described above, under Section 20(a) of the Act, 
any person with a controlling interest in MIAX PEARL would be jointly 
and severally liable with and to the same extent that MIAX PEARL is 
liable under any provision of the Act, unless the controlling person 
acted in good faith and did not directly or indirectly induce the act 
or acts constituting the violation or cause of action.\88\ In addition, 
Section 20(e) of the Act creates aiding and abetting liability for any 
person who knowingly provides substantial assistance to another person 
in violation of any provision of the Act or rule thereunder.\89\ 
Further, Section 21C of the Act authorizes the Commission to enter a 
cease-and-desist order against any person who has been ``a cause of'' a 
violation of any provision of the Act through an act or omission that 
the person knew or should have known would contribute to the 
violation.\90\ These provisions are applicable to all entities' 
dealings with MIAX PEARL, including Miami Holdings.
---------------------------------------------------------------------------

    \88\ 15 U.S.C. 78t(a).
    \89\ 15 U.S.C. 78t(e).
    \90\ 15 U.S.C. 78u-3.
---------------------------------------------------------------------------

3. Regulation of MIAX PEARL
    As a prerequisite to the Commission's granting of an exchange's 
application for registration, an exchange must be so organized and have 
the capacity to carry out the purposes of the Act.\91\ Specifically, an 
exchange must be able to enforce compliance by its members, and persons 
associated with its members, with the Act and the rules and regulations 
thereunder and the rules of the exchange.\92\ The discussion below 
summarizes how MIAX PEARL proposes to structure and conduct its 
regulatory operations.
---------------------------------------------------------------------------

    \91\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
    \92\ See id. See also Section 19(g) of the Act, 15 U.S.C. 
78s(g).
---------------------------------------------------------------------------

a. Regulatory Oversight Committee
    The regulatory operations of MIAX PEARL will be monitored by the 
Regulatory Oversight Committee of the Exchange Board. The Regulatory 
Oversight Committee will consist of at least three directors, all of 
whom will be Non-Industry Directors. The Regulatory Oversight Committee 
will be responsible for overseeing the adequacy and effectiveness of 
MIAX PEARL's regulatory and SRO responsibilities, assessing MIAX 
PEARL's regulatory performance, and assisting the Exchange Board (and 
committees of the Exchange Board) in reviewing MIAX PEARL's regulatory 
plan and the overall effectiveness of MIAX PEARL's regulatory 
functions.\93\
---------------------------------------------------------------------------

    \93\ See MIAX PEARL By-Laws, Article IV, Section 4.5(c). The 
Regulatory Oversight Committee is responsible for reviewing MIAX 
PEARL's regulatory budget, and also will meet regularly with the 
Chief Regulatory Officer. See id.
---------------------------------------------------------------------------

    Further, a Chief Regulatory Officer (``CRO'') of MIAX PEARL will 
have general day-to-day supervision over MIAX PEARL's regulatory 
operations.\94\ The Regulatory Oversight Committee also will be 
responsible for recommending compensation and personnel actions 
involving the CRO and senior regulatory personnel to the Compensation 
Committee of MIAX PEARL for action.\95\ The CRO will report to the 
Regulatory Oversight Committee.\96\
---------------------------------------------------------------------------

    \94\ See MIAX PEARL By-Laws, Article VI, Section 6.10.
    \95\ See MIAX PEARL By-Laws, Article IV, Section 4.5(c).
    \96\ See MIAX PEARL By-Laws, Article VI, Section 6.10.
---------------------------------------------------------------------------

b. Regulatory Funding
    To help assure the Commission that it has and will continue to have 
adequate funding to be able to meet its responsibilities under the Act, 
MIAX PEARL represents in its Form 1 Application that, prior to 
beginning operations as a national securities exchange, Miami Holdings 
will provide sufficient funding to MIAX PEARL for the exchange to carry 
out its

[[Page 92908]]

responsibilities under the Act.\97\ Specifically, MIAX PEARL represents 
that Miami Holdings has allocated sufficient operational assets to 
enable its operation and that prior to launching operations, Miami 
Holdings will make a capital contribution of not less than $5,000,000 
into MIAX PEARL's capital account, in addition to any previously-
provided in-kind contributions, such as legal, regulatory, and 
infrastructure-related services.\98\ MIAX PEARL represents that such 
cash and in-kind contributions by Miami Holdings will be adequate to 
begin operation of the Exchange, including the regulation of the 
Exchange.
---------------------------------------------------------------------------

    \97\ See MIAX PEARL Form 1 Application, Exhibit I.
    \98\ See id.
---------------------------------------------------------------------------

    MIAX PEARL also represents in its Form 1 application that there is 
a written agreement between MIAX PEARL and Miami Holdings that requires 
Miami Holdings to provide adequate funding for MIAX PEARL's ongoing 
operations, including the regulation of MIAX PEARL. This agreement 
provides that MIAX PEARL will receive all fees, including regulatory 
fees and trading fees, payable by MIAX PEARL's members, as well as any 
funds received from any applicable market data fees and OPRA tape 
revenue. The agreement further provides that Miami Holdings will 
reimburse MIAX PEARL for its costs and expenses to the extent MIAX 
PEARL's assets are insufficient to meets its costs and expenses.\99\
---------------------------------------------------------------------------

    \99\ See id.
---------------------------------------------------------------------------

    Further, any revenues received by MIAX PEARL from fees derived from 
its regulatory function or regulatory penalties will not be used for 
non-regulatory purposes.\100\ Any excess funds, as determined by MIAX 
PEARL, may be remitted to Miami Holdings, however ``Regulatory Funds'' 
will not be remitted to Miami Holdings.\101\
---------------------------------------------------------------------------

    \100\ See MIAX PEARL By-Laws, Article IX, Section 9.4.
    \101\ See MIAX PEARL Form 1 Application, Exhibit I. See also 
MIAX PEARL LLC Agreement, Section 16; and MIAX PEARL By-Laws, 
Article IX, Section 9.4. MIAX PEARL By-Laws, Article 1(gg) defines 
``Regulatory Funds'' as ``fees, fines, or penalties derived from the 
regulatory operations of [MIAX PEARL]'', but such term does not 
include ``revenues derived from listing fees, market data revenues, 
transaction revenues, or any other aspect of the commercial 
operations of [MIAX PEARL], even if such revenues are used to pay 
costs associated with the regulatory operations of [MIAX PEARL].'' 
This definition is consistent with the rules of other SROs. See, 
e.g., By-Laws of MIAX Exchange, Article I(ll); By-Laws of NASDAQ 
PHLX LLC, Article I(ii); and By-Laws of NASDAQ BX, Inc., Article 
I(ii).
---------------------------------------------------------------------------

c. Rule 17d-2 Agreements; Regulatory Contract With FINRA
    Unless the SRO is relieved of this responsibility pursuant to 
Section 17(d) or Section 19(g)(2) of the Act,\102\ Section 19(g)(1) of 
the Act, among other things, requires every SRO registered as a 
national securities exchange, absent reasonable justification or 
excuse, to enforce compliance by its members and persons associated 
with its members with the Act, the rules and regulations thereunder, 
and the SRO's own rules.\103\ Section 17(d) of the Act and Rule 17d-2 
thereunder permit SROs to propose joint plans to allocate regulatory 
responsibilities among themselves for their common rules with respect 
to their common members.\104\ These agreements, which must be filed 
with and declared effective by the Commission, generally cover areas 
where each SRO's rules substantively overlap, including such regulatory 
functions as personnel registration and sales practices. Without this 
relief, the statutory obligation of each individual SRO could result in 
a pattern of multiple examinations of broker-dealers that maintain 
memberships in more than one SRO.\105\ Such regulatory duplication 
would add unnecessary expense for common members and their SROs. A 17d-
2 plan that is declared effective by the Commission relieves the 
specified SRO of those regulatory responsibilities allocated by the 
plan to another SRO.\106\ Many SROs have entered into Rule 17d-2 
agreements.\107\
---------------------------------------------------------------------------

    \102\ 15 U.S.C. 78q(d) and 15 U.S.C. 78s(g)(2), respectively.
    \103\ 15 U.S.C. 78s(g)(1).
    \104\ See Section 17(d)(1) of the Act and Rule 17d-2 thereunder, 
15 U.S.C. 78q(d)(1) and 17 CFR 240.17d-2. Section 17(d)(1) of the 
Act allows the Commission to relieve an SRO of certain 
responsibilities with respect to members of the SRO who are also 
members of another SRO. Specifically, Section 17(d)(1) allows the 
Commission to relieve an SRO of its responsibilities to: (i) Receive 
regulatory reports from such members; (ii) examine such members for 
compliance with the Act and the rules and regulations thereunder, 
and the rules of the SRO; or (iii) carry out other specified 
regulatory responsibilities with respect to such members.
    \105\ Section 17(d) was intended, in part, to eliminate 
unnecessary multiple examinations and regulatory duplication with 
respect to Common Members. See Securities Exchange Act Release No. 
12935 (October 28, 1976), 41 FR 49091 (November 8, 1976).
    \106\ See id.
    \107\ See, e.g., Securities Exchange Act Release Nos. 77321 
(March 8, 2016), 81 FR 13434 (March 14, 2016) (File No. 4-697) 
(Financial Industry Regulatory Authority, Inc. (``FINRA'')/ISE 
Mercury, LLC), 73641 (November 19, 2014), 79 FR 70230 (November 25, 
2014) (File No. 4-678) (FINRA/MIAX Exchange); 70053 (July 26, 2013), 
78 FR 46656 (August 1, 2013) (File No. 4-663) (FINRA/ISE Gemini, 
LLC); 59218 (January 8, 2009), 74 FR 2143 (January 14, 2009) (File 
No. 4-575) (FINRA/Boston Stock Exchange, Inc.); 58818 (October 20, 
2008), 73 FR 63752 (October 27, 2008) (File No. 4-569) (FINRA/BATS 
Exchange, Inc.); 55755 (May 14, 2007), 72 FR 28087 (May 18, 2007) 
(File No. 4-536) (National Association of Securities Dealers, Inc. 
(``NASD'') (n/k/a FINRA) and Chicago Board of Options Exchange, Inc. 
concerning the CBOE Stock Exchange, LLC); 55367 (February 27, 2007), 
72 FR 9983 (March 6, 2007) (File No. 4-529) (NASD/International 
Securities Exchange, LLC); and 54136 (July 12, 2006), 71 FR 40759 
(July 18, 2006) (File No. 4-517) (NASD/The Nasdaq Stock Market LLC).
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    A 17d-2 plan that is declared effective by the Commission relieves 
the specified SRO of those regulatory responsibilities allocated by the 
plan to another SRO.\108\ MIAX PEARL has represented to the Commission 
that it intends to become a party to the existing multiparty options 
Rule 17d-2 plans concerning sales practice regulation and market 
surveillance.\109\ MIAX PEARL has also represented that it will enter 
into a bi-lateral 17d-2 agreement to allocate regulatory responsibility 
to FINRA for common rules of dual members between MIAX PEARL and FINRA. 
Under these agreements, the examining SROs will examine firms that are 
common members of MIAX PEARL and the particular examining SRO for 
compliance with certain provisions of the Act, certain rules and 
regulations adopted thereunder, and certain MIAX PEARL Rules.
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    \108\ See supra notes 104-105.
    \109\ See MIAX PEARL Form 1 Application, Exhibit L. See also 
Securities Exchange Act Release No. 68363 (December 5, 2012), 77 FR 
73711 (December 11, 2012) (File No. S7-966) (notice of filing and 
order approving and declaring effective an amendment to the 
multiparty 17d-2 plan concerning options-related sales practice 
matters); and 68362 (December 5, 2012), 77 FR 73719 (December 11, 
2012) (File No. 4-551) (notice of filing and order approving and 
declaring effective an amendment to the multiparty 17d-2 plan 
concerning options-related market surveillance).
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    In addition, MIAX PEARL has represented that it will enter into a 
Regulatory Services Agreement (``RSA'') with FINRA, under which FINRA 
will perform certain regulatory functions on behalf of MIAX PEARL.\110\ 
Pursuant to the RSA, FINRA, in its capacity as service provider to MIAX 
PEARL, will perform various services on MIAX PEARL's behalf, including 
assisting MIAX PEARL with member registration and related 
administrative support services; certain cross-market surveillance 
services; certain options trading examinations; at MIAX PEARL's 
request, investigating potential violations of enumerated MIAX PEARL 
market rules, as well as federal securities laws, and rules and 
regulations thereunder, related to MIAX PEARL market activity; 
performing examinations of options, including routine and for cause 
examinations of

[[Page 92909]]

MIAX PEARL members under certain MIAX PEARL rules and federal 
securities laws; bringing formal disciplinary actions, including 
hearing officer services; and providing arbitration, mediation, and 
other dispute resolution services to MIAX PEARL member firms.\111\ 
Notwithstanding the RSA, MIAX PEARL, as an SRO, has the ultimate legal 
responsibility for the regulation of its members and market.
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    \110\ See MIAX PEARL Form 1 Application, Exhibit L.
    \111\ See id.
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    The Commission believes that it is consistent with the Act for MIAX 
PEARL to contract with other SROs to perform certain examination, 
enforcement, and disciplinary functions.\112\ This regulatory structure 
would be consistent with that of other SROs.\113\ These functions are 
fundamental elements of a regulatory program, and constitute core self-
regulatory functions. The Commission believes that FINRA, as an SRO 
that provides contractual services to other SROs, should have the 
capacity to perform these functions for MIAX PEARL.\114\ However, MIAX 
PEARL, unless relieved by the Commission of its responsibility,\115\ 
bears the ultimate responsibility for self-regulatory responsibilities 
and primary liability for self-regulatory failures, not the SRO 
retained to perform regulatory functions on MIAX PEARL's behalf. In 
performing these regulatory functions, however, the SRO retained to 
perform regulatory functions may nonetheless bear liability for causing 
or aiding and abetting the failure of MIAX PEARL to perform its 
regulatory functions.\116\ Accordingly, although FINRA will not act on 
its own behalf in carrying out these regulatory services for MIAX 
PEARL, as the SRO retained to perform certain regulatory functions, 
FINRA may have secondary liability if, for example, the Commission 
finds that the contracted functions are being performed so inadequately 
as to cause a violation of the federal securities laws by MIAX PEARL.
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    \112\ See, e.g., Regulation ATS Release, supra note 29. See also 
Securities Exchange Act Release Nos. 50122 (July 29, 2004), 69 FR 
47962 (August 6, 2004) (SR-Amex-2004-32) (order approving rule that 
allowed Amex to contract with another SRO for regulatory services) 
(``Amex Regulatory Services Approval Order''); 57478 (March 12, 
2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004) (``NOM 
Approval Order''); Nasdaq Order, supra note 27; and BATS Order, 
supra note 13.
    \113\ For example, MIAX Exchange, ISE Mercury, EDGA Exchange, 
Inc., EDGX Exchange Inc., and BATS have entered into 17d-2 Plans and 
RSAs with FINRA.
    \114\ See, e.g., Amex Regulatory Services Approval Order, supra 
note 112; NOM Approval Order, supra note 112; and Nasdaq Order, 
supra note 27. The Commission notes that the RSA is not before the 
Commission and, therefore, the Commission is not acting on them.
    \115\ See supra note 104.
    \116\ For example, if failings by the SRO retained to perform 
regulatory functions have the effect of leaving an exchange in 
violation of any aspect of the exchange's self-regulatory 
obligations, the exchange will bear direct liability for the 
violation, while the SRO retained to perform regulatory functions 
may bear liability for causing or aiding and abetting the violation. 
See, e.g., Nasdaq Order, supra note 27; BATS Order, supra note 13; 
and Release No. 42455 (February 24, 2000), 65 FR 11388 (March 2, 
2000) (File No. 10-127) (approval of registration of International 
Securities Exchange Act, LLC (``ISE'') as a national securities 
exchange).
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C. Trading System

1. Access to MIAX PEARL
    Access to MIAX PEARL will be granted to individuals or 
organizations who are approved to become Members.\117\ Approved Members 
will be issued Trading Permits that grant the Member the ability to 
transact on MIAX PEARL through its electronic systems.\118\ Trading 
Permits will not convey upon Members any ownership interest in MIAX 
PEARL, and they will not be transferable except in cases where a Member 
experiences a change in control or corporate reorganization.\119\ 
Membership will be open to any broker-dealer that: (1) Is registered 
under Section 15 of the Act; \120\ and (2) has and maintains membership 
in another registered options exchange (other than the MIAX Exchange) 
or FINRA.\121\ As explained below, a holder of a MIAX Exchange trading 
permit will not be required to submit a full application for membership 
on MIAX PEARL.\122\ There will be no limit to the number of Trading 
Permits that MIAX PEARL can issue, although MIAX PEARL could determine 
in the future a limit or decrease in the number of Trading Permits 
issued.\123\ Members of MIAX PEARL may be Market Makers,\124\ or they 
may be EEMs.\125\
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    \117\ A ``Member'' is defined as an individual or organization 
that is registered with the Exchange pursuant to Chapter II of the 
MIAX PEARL Rules for purposes of trading on the Exchange as an 
``Electronic Exchange Member'' (``EEM'') or ``Market Maker.'' 
Members are deemed ``members'' under the Exchange Act. See MIAX 
PEARL Rule 100.
    \118\ See MIAX PEARL Rule 200(a). MIAX PEARL represents that it 
has designed its systems to allow its Members to individually 
determine the best method for accessing the Exchange, whether by 
using customized front-end software using protocols determined by 
the Exchange or through third-party vendors who route orders to MIAX 
PEARL through a front-end or service bureau configuration. See MIAX 
PEARL Form 1 Application, Exhibit E.
    \119\ See MIAX PEARL Rule 200(e).
    \120\ See MIAX PEARL Rule 200(b).
    \121\ See MIAX PEARL Rule 200(d). If such other options exchange 
has not been designated by the Commission to examine Members for 
compliance with financial responsibility rules, then the broker-
dealer must have and maintain a membership in FINRA. Id.
    \122\ See MIAX PEARL Rule 200(c) and infra notes 127-128 and 
accompanying text.
    \123\ See MIAX PEARL Rule 200(a). MIAX PEARL would announce in 
advance any limitation or decrease it plans to impose pursuant to 
Rule 200(a). See id. In the event that MIAX PEARL imposes a 
limitation or decrease, MIAX PEARL, in doing so, may not eliminate 
the ability of an existing member to trade on the Exchange unless 
MIAX PEARL is permitted to do so pursuant to a rule filing submitted 
to the Commission under Section 19(b) of the Act. See id. In 
addition, MIAX PEARL's exercise of authority under proposed Rule 200 
would be subject to the provisions of Section 6(c)(4) of the Act. 
See id. See also Chicago Board Options Exchange, Incorporated 
(``CBOE'') Rule 3.1(a)(vi) and MIAX Exchange Rule 200(a) (concerning 
limiting or reducing the number of trading permits). Further, MIAX 
PEARL's exercise of authority under proposed Rule 200 would be 
subject to the provisions of Section 6(b)(2) of the Act, which 
requires the rules of an exchange to provide that any registered 
broker or dealer or any natural person associated with a registered 
broker or dealer may become a member of such exchange and any person 
may become associated with a member thereof. See 15 U.S.C. 
78f(b)(2).
    \124\ See MIAX PEARL Rule 600. Market Maker registration is 
discussed in greater detail below, infra Section III.C.3.
    \125\ See supra note 117.
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    A holder of a MIAX Exchange trading permit in good standing will be 
eligible to receive one MIAX PEARL Trading Permit.\126\ MIAX Exchange 
member applicants will not be required to submit a full application for 
membership on MIAX PEARL, but rather will only need to complete 
selected MIAX PEARL forms concerning their election to trade on MIAX 
PEARL, consent to MIAX PEARL's jurisdiction, and other operational 
matters.\127\ This waive-in application process is similar to 
arrangements in place at other exchanges.\128\
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    \126\ See MIAX PEARL Rule 200(c)(1).
    \127\ See id.
    \128\ See, e.g., C2 Options Exchange, Inc. Rule 3.1(c)(1) 
(containing similar expedited waive-in membership process for 
members of CBOE) and ISE Mercury, LLC Rule 302(a) (containing 
similar expedited waive-in membership process for members of the ISE 
and ISE Gemini, LLC).
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    Non-MIAX Exchange members seeking to become members of MIAX PEARL 
would submit a full application in accordance with procedures 
established by the Exchange.\129\ Entities that become members, and 
their associated persons, will be required to meet and maintain certain 
qualification and registration criteria similar to what is required by 
other options exchanges.\130\ In addition, MIAX PEARL proposes further 
requirements on members that seek to do business with

[[Page 92910]]

the public.\131\ Applicants who are denied membership may appeal MIAX 
PEARL's decision pursuant to MIAX PEARL's rules governing Hearings, 
Review, and Arbitration.\132\ Every Member will be subject to MIAX 
PEARL's regulatory jurisdiction, including MIAX PEARL's disciplinary 
jurisdiction.\133\
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    \129\ See MIAX PEARL Rule 200(c)(2).
    \130\ See MIAX PEARL Rules Chapter II. Such criteria include, 
but are not limited to, capital maintenance requirements. See, e.g., 
MIAX Exchange Rule 200 Series and C2 Options Exchange, Inc. Rules 
3.1 and 3.2 (containing similar criteria).
    \131\ See MIAX PEARL Rules Chapter XIII (incorporating by 
reference Chapter XIII of the MIAX Exchange Rules). Chapter XIII of 
the MIAX Exchange Rules also are similar to the rules of other 
exchanges. See, e.g., ISE Rules Chapter 6.
    \132\ See MIAX PEARL Rules Chapter XI (incorporating by 
reference Chapter XI of the MIAX Exchange Rules).
    \133\ See MIAX PEARL Rule 200(g). For MIAX PEARL's rules 
concerning discipline, see Chapter X of the MIAX PEARL Rules.
---------------------------------------------------------------------------

    The Commission finds that MIAX PEARL's proposed membership rules 
are consistent with the Act, including Section 6(b)(2) of the Act, 
which requires the rules of an exchange to provide that any registered 
broker or dealer or natural person associated with a broker or dealer 
may become a member of such exchange or associated with a member 
thereof.\134\ MIAX PEARL's proposed rules with respect to exchange 
membership are substantively similar to the rules of other exchanges.
---------------------------------------------------------------------------

    \134\ 15 U.S.C. 78f(b)(2).
---------------------------------------------------------------------------

    The Commission notes that pursuant to Section 6(c) of the Act,\135\ 
an exchange must deny membership to any person, other than a natural 
person, that is not a registered broker or dealer, any natural person 
that is not, or is not associated with, a registered broker or dealer, 
and registered broker-dealers that do not satisfy certain standards, 
such as financial responsibility or operational capacity. As a 
registered exchange, MIAX PEARL must independently determine if an 
applicant satisfies the standards set forth in the Act, regardless of 
whether an applicant is a member of another SRO.\136\
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    \135\ 15 U.S.C. 78f(c).
    \136\ See, e.g., ISE Mercury Order, supra note 27, at 6076; ISE 
Gemini Order, supra note 27, at 46633; MIAX Order, supra note 13, at 
73074; BOX Order, supra note 14, at 26337; BATS Order, supra note 
13, at 49502; and Nasdaq Order, supra note 27, at 3555.
---------------------------------------------------------------------------

    In addition, Members may enter into arrangements with other 
parties, including non-Members and other Members, to provide 
``Sponsored Access'' to trading on MIAX PEARL.\137\ Members who provide 
such Sponsored Access will be responsible for all trading conducted 
pursuant to the access agreement, and to the same extent as if the 
Member were trading directly.\138\ Accordingly, Members that provide 
Sponsored Access must maintain and implement policies and procedures to 
supervise and monitor sponsored trading activity.\139\ Additionally, 
non-Members who seek to trade on MIAX PEARL through Sponsored Access 
agreements will need to agree to comply with all applicable federal 
securities laws and rules and Exchange rules.\140\ MIAX PEARL's rules 
governing Sponsored Access arrangements are similar to the rules of 
other exchanges.\141\
---------------------------------------------------------------------------

    \137\ See MIAX PEARL Rule 210.
    \138\ See MIAX PEARL Rule 210(b).
    \139\ See MIAX PEARL Rule 210(b)-(c).
    \140\ See MIAX PEARL Rule 210(b). See also, e.g., 17 CFR 
240.15c3-5.
    \141\ See, e.g., MIAX Exchange Rule 210 and NASDAQ Stock Market 
LLC Rule 4615.
---------------------------------------------------------------------------

2. Linkage
    MIAX PEARL intends to become a participant in the Plan Relating to 
Options Order Protection and Locked/Crossed Markets or any successor 
plan (``Linkage Plan'').\142\ If admitted as a participant to the 
Linkage Plan, other plan participants would be able to send orders to 
MIAX PEARL in accordance with the terms of the plan as applied to the 
Exchange. The MIAX PEARL Rules include relevant definitions, establish 
the conditions pursuant to which members may enter orders in accordance 
with the Linkage Plan, impose obligations on the Exchange regarding how 
it must process incoming orders, establish a general standard that 
members and MIAX PEARL should avoid trade-throughs, establish potential 
regulatory liability for members that engage in a pattern or practice 
of trading through other exchanges, and establish obligations with 
respect to locked and crossed markets.
---------------------------------------------------------------------------

    \142\ See MIAX PEARL Form 1 Application, Exhibit E. See also 
Securities Exchange Act Release No. 60405 (July 30, 2009), 74 FR 
39362 (August 6, 2009) (File No. 4-546) (order approving the 
national market system Plan Relating to Options Order Protection and 
Locked/Crossed Markets Submitted by the Chicago Board Options 
Exchange, Incorporated, ISE, The NASDAQ Stock Market LLC, NASDAQ OMX 
BX, Inc., NASDAQ OMX PHLX, Inc., NYSE Amex LLC, and NYSE Arca, 
Inc.).
---------------------------------------------------------------------------

    The Commission believes that MIAX PEARL has proposed rules that are 
designed to comply with the requirements of the Linkage Plan.\143\ 
Further, as provided below, before MIAX PEARL can commence operations 
as a national securities exchange, it must become a participant in the 
Linkage Plan.
---------------------------------------------------------------------------

    \143\ See Chapter XIV of the MIAX PEARL Rules (incorporating by 
reference Chapter XIV of the MIAX Exchange Rules).
---------------------------------------------------------------------------

3. Market Makers
a. Registration of Market Makers
    MIAX PEARL Members may register as Market Makers for the purpose of 
making markets in options contracts traded on the Exchange.\144\ Market 
Makers are entitled to receive certain benefits and privileges in 
exchange for fulfilling certain affirmative and negative market-making 
obligations. To begin the process of registering as a Market Maker, a 
Member will be required to file a written application with MIAX 
PEARL.\145\ MIAX PEARL will consider an applicant's market making 
ability and other factors it deems appropriate in determining whether 
to approve an applicant's registration.\146\ All Market Makers will be 
designated as specialists on MIAX PEARL for all purposes under the Act 
and rules thereunder.\147\ The Exchange will not place any limit on the 
number of entities that may become Market Makers.\148\ The good 
standing of a Market Maker may be suspended, terminated or otherwise 
withdrawn if the conditions for approval cease to be maintained or the 
Market Maker violates any of its agreements with MIAX PEARL or any 
provisions of the MIAX PEARL Rules.\149\ A Member that has qualified as 
a Market Maker may register to make markets in individual series of 
options.\150\
---------------------------------------------------------------------------

    \144\ See MIAX PEARL Rule 600.
    \145\ See MIAX PEARL Rule 600(a).
    \146\ See id. The provision permitting MIAX PEARL to consider 
``such other factors as [it] deems appropriate'' must be applied in 
a manner that is consistent with the Act, including provisions that 
prohibit an exchange from acting in an unfairly discriminatory 
manner. See 15 U.S.C. 78f(b)(5); see also C2 Order, supra note 75.
    \147\ See MIAX PEARL Rule 600.
    \148\ See MIAX PEARL Rule 600(c).
    \149\ See MIAX PEARL Rule 603(b).
    \150\ See MIAX PEARL Rule 602(a).
---------------------------------------------------------------------------

    The Commission finds that the MIAX PEARL qualification requirements 
are consistent with the Act. MIAX PEARL's rules provide an objective 
process by which a Member could become a Market Maker on MIAX PEARL. 
The Commission notes that MIAX PEARL's proposed Market Maker 
qualification requirements are similar to those of other options 
exchanges.\151\
---------------------------------------------------------------------------

    \151\ See, e.g., Bats BZX Exchange, Inc. (``Bats BZX'') Rules 
22.2, 22.3 and 22.4, and NASDAQ Options Market Rules, Chapter VII, 
Sections 2, 3, and 4.
---------------------------------------------------------------------------

b. Market Maker Obligations
    Pursuant to MIAX PEARL rules, there will be one class of Market 
Makers. All Market Makers will be subject to a number of general 
obligations. In particular, the transactions of a Market Maker must 
constitute a course of dealings reasonably calculated to contribute to 
the maintenance of a fair and orderly market.\152\ Among other things, 
a Market Maker must: (1)

[[Page 92911]]

Maintain a two-sided market during trading hours, in a manner that 
enhances the depth, liquidity, and competitiveness of the market; (2) 
engage in dealings for its own account when there is a lack of price 
continuity, a temporary disparity between the supply of (or demand for) 
a particular option contract, or a temporary distortion of the price 
relationships between option contracts of the same series; (3) compete 
with other market makers; (4) make markets that will be honored for the 
number of contracts entered; (5) update quotations in response to 
changed market conditions; and (6) maintain active markets.\153\ Market 
Makers must provide continuous two-sided quotes throughout the trading 
day 90% of the time in 75% of the series in which the Market Maker is 
registered.\154\ Further, a Market Maker may be called upon by MIAX 
PEARL to submit a single bid or offer or maintain continuous bid and 
offers in one or more series to which it is registered whenever, in the 
judgment of the Exchange, it is necessary to do so in the interest of 
fair and orderly markets.\155\ In addition, Market Makers must maintain 
minimum net capital in accordance with the federal securities 
laws.\156\ In options classes other than to which it is registered, the 
total number of contracts executed during a quarter by a Market Maker 
in series in which it is not registered may not exceed 25% of the total 
number of all contracts executed by such Market Maker.\157\ If MIAX 
PEARL finds any failure by a Market Maker to properly perform as a 
Market Maker, such Market Maker may be subject to suspension or 
termination of registration.\158\
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    \152\ See MIAX PEARL Rule 604(a).
    \153\ See MIAX PEARL Rule 604(a).
    \154\ See MIAX PEARL Rule 605(d)(1) and (d)(3). Immediate-or-
Cancel Orders from Market Makers will not be counted for the 
continuous quoting obligations of Market Makers. See MIAX PEARL Rule 
605, Interpretations and Policies .01.
    \155\ See MIAX PEARL Rule 605(d)(2).
    \156\ See MIAX PEARL Rule 608.
    \157\ See MIAX PEARL Rule 605(e). See also Bats BZX Rule 22.6(e) 
and NASDAQ Options Market Rules, Chapter VII, Section 6(e).
    \158\ See MIAX PEARL Rule 600(b).
---------------------------------------------------------------------------

    Market Makers will receive certain benefits in return for 
satisfying their responsibilities.\159\ For example, a broker-dealer or 
other lender may extend ``good faith'' credit to a member of a national 
securities exchange or registered broker-dealer to finance its 
activities as a market maker or specialist.\160\ In addition, market 
makers are excepted from the prohibition in Section 11(a) of the 
Act.\161\ The Commission believes that a market maker must be subject 
to sufficient and commensurate affirmative obligations, including the 
obligation to hold itself out as willing to buy and sell options for 
its own account on a regular or continuous basis, to justify favorable 
treatment.\162\ The Commission further believes that the rules of all 
U.S. options markets need not provide the same standards for market 
maker participation, so long as they impose affirmative obligations 
that are consistent with the Act.\163\ Market Makers on MIAX PEARL will 
not receive special trading allocations or similar rights vis-[agrave]-
vis other Members.\164\ The Commission believes that MIAX PEARL's 
Market Maker participation requirements impose sufficient affirmative 
obligations on MIAX PEARL's Market Makers and, accordingly, that MIAX 
PEARL's requirements are consistent with the Act. The Commission 
believes that while Market Makers may become an important source of 
liquidity on MIAX PEARL, they will likely not be the only source as 
MIAX PEARL is designed to match buying and selling interest of all MIAX 
PEARL participants. Therefore, the Commission believes that MIAX 
PEARL's proposed structure is consistent with the Exchange Act.
---------------------------------------------------------------------------

    \159\ See, e.g., NOM Approval Order, supra note 112, at 14526 
and Securities Exchange Act Release No. 61419 (January 26, 2010), 75 
FR 5157, 5159 (February 1, 2010) (``BATS Options Approval Order'') 
(discussing the benefits and obligations of market makers).
    \160\ See 12 CFR 221.5 and 12 CFR 220.7; see also 17 CFR 
240.15c3-1(a)(6) (capital requirements for market makers).
    \161\ 15 U.S.C. 78k(a). See also, infra Section III.C.5.
    \162\ See NOM Approval Order, supra note 112, at 14526 and BATS 
Options Approval Order, supra note 159, at 5159.
    \163\ See id.
    \164\ See MIAX PEARL Rule 514; see also MIAX PEARL Form 1 
Application, Exhibit E at 2.
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4. Order Display, Execution, and Priority
    MIAX PEARL will operate a fully automated electronic options 
marketplace. Liquidity will be derived from orders to buy and orders to 
sell, including orders from Market Makers,\165\ submitted to MIAX PEARL 
electronically by its members from remote locations. There will be no 
physical trading floor. Options traded on the Exchange will be subject 
to Minimum Price Variations (``MPV'') that will begin at $0.05 for 
option contracts trading at less than $3.00 per option, and $.10 for 
option contracts trading at $3.00 per option or higher.\166\ In 
addition, MIAX PEARL will participate in the penny pilot program 
pursuant to which it will permit certain options with premiums under $3 
(as well as heavily traded options on certain indices) to be quoted and 
traded in increments as low as $.01.\167\
---------------------------------------------------------------------------

    \165\ The definition of ``quote'' or ``quotation'' means a bid 
or offer entered by a Market Maker as a firm order that updates the 
Market Maker's previous bid or offer, if any. An order entered by 
the Market Maker in the options series to which such Market maker is 
registered shall, as applicable, constitute a quote or quotation on 
MIAX PEARL. See MIAX PEARL Rule 100.
    \166\ See MIAX PEARL Rule 510(a).
    \167\ See MIAX PEARL Rule 510, Interpretations and Policies .01. 
MIAX PEARL has established a scheduled expiration date of December 
31, 2016. However, MIAX PEARL may not be operational before December 
31, 2016, thus the Exchange may need to file a proposed rule change 
under Section 19(b) of the Exchange Act to update this proposed 
rule.
---------------------------------------------------------------------------

    Orders submitted to MIAX PEARL will be displayed unless the order 
is an immediately marketable order or is a contingent order, such as an 
immediate or cancel order. Additionally, orders may have a non-
displayed price that is different than the displayed price, as further 
described below. Displayed orders and quotes will be displayed on an 
anonymous basis at a specified price. Non-displayed prices associated 
with orders will not be displayed to any participant.
    Members may submit the following types of orders: Market; 
Marketable Limit; Cancel-Replacement; Immediate-or-Cancel; Intermarket 
Sweep; Do Not Route; Day Limit; Good `Til Cancelled; and Post-
Only.\168\ All of these order types are based on similar order types 
available on other options exchanges.\169\ The Commission believes that 
these order types are substantially similar to order types approved by 
the Commission on other exchanges and thus raise no new regulatory 
issues.
---------------------------------------------------------------------------

    \168\ See MIAX PEARL Rule 516 for a description of each of the 
order types. MIAX PEARL notes that some of these order types will be 
valid only during certain portions of the trading day (e.g., after 
the opening). MIAX PEARL further notes that not all order types will 
be available for use on each of the MEO interface and the FIX 
interface, and that the Exchange will issue a Regulatory Circular 
listing which order types, among the order types listed above, are 
available for delivery via the MEO interface and which are available 
for delivery via the FIX interface.
    \169\ See, e.g., Bats BZX Rule 21.1(d)(8) (Post Only Order); 
NASDAQ Options Market Rules, Chapter VI, Section 1(e)(8) 
(Intermarket Sweep Order) and (1)(e)(1) (Cancel-replacement Order); 
NASDAQ PHLX LLC Rule 1080(m)(iv)(A) (Do Not Route Order and 
Immediate or Cancel Order); NYSE MKT LLC Rule 900.3NY(m) (Day Order) 
and (n) (Good-Til-Cancelled Order).
---------------------------------------------------------------------------

    After the opening, trades will execute on MIAX PEARL when a buy 
order and a sell order match one another on the MIAX PEARL order book 
(``MIAX PEARL Book'' or ``Book''). The MIAX PEARL system will 
continuously and automatically match orders pursuant to price-time 
priority.\170\ The highest bid

[[Page 92912]]

and lowest offer shall have priority on the Exchange. Within each price 
level, if there are two or more orders at the best price, trading 
interest will be executed in time priority.\171\ MIAX PEARL proposes to 
make available order processing and matching features, which are based 
on those features available on MIAX Exchange.\172\ MIAX PEARL's system 
will automatically execute incoming orders that are executable against 
orders in its system, provided that such incoming orders will not be 
executed at prices inferior to the NBBO.\173\ MIAX PEARL Rule 515 sets 
forth how the MIAX PEARL system will handle incoming orders that cannot 
be executed in part or in full. In particular, MIAX PEARL Rule 515 
specifies a ``price protection process,'' a Managed Interest Process, 
and a Post Only Process, each discussed more fully below.
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    \170\ See MIAX PEARL Rule 514(b).
    \171\ See id.
    \172\ See infra discussion of MIAX PEARL's proposed price 
protection process and managed interest process, which are based on 
substantially similar order processing and matching features on MIAX 
Exchange.
    \173\ See MIAX PEARL Rule 515(a) and (b).
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    The MIAX PEARL system offers a ``price protection'' process for all 
orders.\174\ Price protection prevents an order from being executed 
beyond the price designated in the order's price protection 
instructions (``the price protection limit''). The price protection 
limit is expressed in units of MPV away from the national best bid and 
offer (``NBBO'') at the time of the order's receipt, or the MIAX PEARL 
Best Bid and Offer (``PBBO'') if the best bid or offer on away markets 
(``ABBO'') is crossing the PBBO.\175\ When triggered, price protection 
will cancel an order or the remaining contracts of an order. The MIAX 
PEARL system will not execute such orders at prices inferior to the 
current NBBO.\176\
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    \174\ See MIAX PEARL Rule 515(c).
    \175\ See MIAX PEARL Rule 515(c). The Exchange will publish a 
Regulatory Circular setting a minimum and maximum number of MPVs 
away from the NBBO (or PBBO if the ABBO is crossing the PBBO) that a 
market participant may designate for its price protection limit. The 
Exchange will also set, and announce by Regulatory Circular, a 
default price protection limit within 1 to 5 MPVs away from the NBBO 
(or PBBO if the ABBO is crossing the PBBO).
    \176\ See MIAX PEARL Rule 515(c).
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    The MIAX PEARL price protection process is substantially similar to 
that adopted by MIAX Exchange.\177\ The Commission believes that this 
price protection functionality can benefit all market participants.
---------------------------------------------------------------------------

    \177\ See MIAX Exchange Rule 515(c)(1). The MIAX Exchange price 
protection process applies only to non-market maker orders, whereas 
the MIAX PEARL price protection process applies to all market 
participants, including market makers. The Commission believes that 
this is consistent with the price protection rules of other 
exchanges. See, e.g., NYSE Arca, Inc. Rules 6.60 (Price Protection--
Orders) and 6.61 (Price Protection--Quotes).
---------------------------------------------------------------------------

    The Exchange's rules also provide for a ``Managed Interest 
Process'' that would apply to non-routable orders \178\ that would 
either lock or cross the current opposite side NBBO where the PBBO is 
inferior to the NBBO.\179\ The MIAX PEARL system will not execute such 
orders at prices inferior to the current NBBO.\180\ The managed order 
would be displayed at one MPV away from the current opposite side NBBO 
and placed on the MIAX PEARL Book at a price equal to the opposite side 
NBBO.\181\ Should the NBBO price change to an inferior price level, the 
order's displayed price will continue to re-price so that it is 
displayed one MPV away from the new NBBO, and the order's Book price 
will continuously reprice to lock the new NBBO.\182\ Such re-pricing 
will continue until the managed order is fully executed, reaches its 
limit price, reaches its price protection limit, or is cancelled.\183\
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    \178\ Non-routable orders would include, for example, orders 
marked ``Do Not Route'' or Post-Only orders being handled under the 
Managed Interest Process.
    \179\ See MIAX PEARL Rule 515(d)(2).
    \180\ See MIAX PEARL Rule 515(d)(2).
    \181\ See MIAX PEARL Rule 515(d)(2)(ii). See also MIAX Exchange 
Rule 515(c)(1)(ii) (providing for the same Managed Interest Process 
on MIAX Exchange).
    \182\ See id.
    \183\ See id.
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    During the Managed Interest Process, if the Exchange receives a new 
order or quote on the opposite side of the market from the managed 
order that could be executed, the MIAX PEARL system will immediately 
execute the remaining contracts to the extent possible at the 
initiating order's current booked bid or offer price, provided that it 
does not trade through the current NBBO.\184\
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    \184\ See MIAX PEARL Rule 515(d)(2)(iii)(A). See also MIAX 
Exchange Rule 515(c)(1)(ii).
---------------------------------------------------------------------------

    The Commission believes that the MIAX PEARL's Managed Interest 
Process is consistent with the managed interest process that the 
Commission approved for MIAX Exchange.\185\ With regard to the 
treatment of Post-Only Orders under MIAX PEARL's Managed Interest 
Process, the Commission believes that the rules are consistent with 
rules that have been adopted by other exchanges governing the execution 
of Post-Only Orders.\186\
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    \185\ See MIAX Exchange Rule 515(c)(1)(ii).
    \186\ See, e.g., Bats BZX Rule 21.1(h) and Securities Exchange 
Act Release No. 77818 (May 12, 2016), 81 FR 31283 (May 18, 2016) 
(SR-BatsBZX-2016-16).
---------------------------------------------------------------------------

    MIAX PEARL will have a process for the handling of certain Post-
Only Orders (``POP Process'').\187\ The POP Process will apply to Post-
Only Orders where the limit price of the Post-Only Order locks or 
crosses the current opposite side PBBO where the PBBO is the NBBO 
(i.e., locks or crosses an order on the MIAX PEARL Book).\188\ The MIAX 
PEARL system will display and book such Post-Only Orders one MPV away 
from the current opposite side PBBO.\189\ Should the PBBO price change 
to an inferior price level, the Post-Only Order's Book price and 
displayed price would continuously re-price to one MPV away from new 
PBBO until Post-Only Order is fully executed, reaches its limit price, 
reaches its price protection limit, or is cancelled.\190\
---------------------------------------------------------------------------

    \187\ See MIAX PEARL Rule 515(g).
    \188\ Post-Only Orders that lock or cross the current opposite 
side NBBO and the PBBO is inferior to the NBBO would be handled 
through the Managed Interest Process under Rule 515(d)(2) as 
described above.
    \189\ See MIAX PEARL Rule 515(g)(ii).
    \190\ Id.
---------------------------------------------------------------------------

    Under the POP Process, if the Exchange receives a new order or 
quote on the opposite side of the market from the Post-Only Order that 
could be executed, the MIAX PEARL system will immediately execute the 
remaining contracts to the extent possible at the Post-Only Order's 
current booked bid or offer price, provided that it does not trade 
through the current NBBO.\191\ If the Exchange receives a new Post-Only 
Order on the opposite side of the market from a Post-Only Order being 
managed under the POP Process, and the new Post-Only Order locks or 
crosses the book price of the resting Post-Only Order, the Exchange 
will book and display the new Post-Only Order one MPV away from the 
current opposite side PBBO.\192\
---------------------------------------------------------------------------

    \191\ See MIAX PEARL Rule 515(g)(iii)(A).
    \192\ See MIAX PEARL Rule 515(g)(iii)(B).
---------------------------------------------------------------------------

    The POP Process under MIAX PEARL's rules is substantially similar 
to the Managed Interest Process described above for MIAX PEARL and that 
the Commission approved for the MIAX Exchange.\193\ The primary 
difference is that, under the POP Process, Post-Only Orders are booked 
and displayed at the same price--one MPV away from the current opposite 
side PBBO. This aspect of the POP Process is consistent with the 
treatment of Post-Only Orders on other exchanges.\194\
---------------------------------------------------------------------------

    \193\ See MIAX PEARL Rule 515(d)(2) and MIAX Exchange Rule 
515(c)(1)(ii).
    \194\ See, e.g., Bats BZX Rule 21.1(i) (Price Adjust) (providing 
that an order that, at the time of entry, would lock or cross a 
protected quotation of another options exchange or Bats BZX will be 
ranked and displayed by the Bats BZX system at one MPV below the 
current NBO (for bids) or to one MPV above the current NBB (for 
offers)); NASDAQ Options Market Rules, Chapter VI, Section 1(e)(11) 
(providing that if a Post-Only Order would lock or cross an order on 
the NASDAQ Options Market system, the order will be re-priced to 
$.01 below the current low offer (for bids) or above the current 
best bid (for offers) and displayed at one MPV below the current low 
offer (for bids) or above the current best bid (for offers)).

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

[[Page 92913]]

    The Commission believes that MIAX PEARL's proposed display, 
execution, and priority rules discussed above in this section are 
consistent with the Act. In particular, the Commission finds that the 
proposed rules are consistent with Section 6(b)(5) of the Act,\195\ 
which, among other things, requires that the rules of a national 
securities exchange be designed to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest, and to not permit unfair discrimination between 
customers, issuers, or dealers. The Commission also finds that the 
proposed rules are consistent with Section 6(b)(8) of the Act,\196\ 
which requires that the rules of an exchange not impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. The trading rules of MIAX PEARL are substantially 
similar to the current trading rules of MIAX Exchange and other 
exchanges, as noted above, which were filed with and approved by the 
Commission (or otherwise became effective) pursuant to Section 19(b) of 
the Act.\197\ Therefore, the Commission believes that these rules raise 
no new regulatory issues and are consistent with the Act.
---------------------------------------------------------------------------

    \195\ 15 U.S.C. 78f(b)(5).
    \196\ 15 U.S.C. 78f(b)(8).
    \197\ Many of MIAX Exchange's rules were approved at the time 
that MIAX Exchange's registration as a national securities exchanged 
was granted. See MIAX Order, supra note 13.
---------------------------------------------------------------------------

5. Section 11(a) of the Act
    Section 11(a)(1) of the Act \198\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises investment discretion 
(collectively, ``covered accounts''), unless an exception applies. The 
Exchange has represented that it has analyzed its rules proposed 
hereunder, and believes that they are consistent with Section 11(a) of 
the Act and rules thereunder.\199\ For the reasons set forth below, 
based on MIAX PEARL's representations, the Commission believes that 
MIAX PEARL's order execution algorithm will allow members to meet the 
requirements of Rule 11a2-2(T) for executions on MIAX PEARL.
---------------------------------------------------------------------------

    \198\ 15 U.S.C. 78k(a)(1).
    \199\ See Letter from Barbara J. Comly, EVP, General Counsel and 
Corporate Secretary, Miami Holdings, to Brent J. Fields, Secretary, 
Commission, and John C. Roeser, Associate Director, Office of Market 
Supervision, Division of Trading and Markets, Commission, dated 
November 4, 2016 (``MIAX PEARL 11(a) Request Letter'').
---------------------------------------------------------------------------

    Rule 11a2-2(T) under the Act,\200\ known as the ``effect versus 
execute'' rule, provides exchange members with an exemption from the 
Section 11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange 
member, subject to certain conditions, to effect transactions for 
covered accounts by arranging for an unaffiliated member to execute the 
transactions on the exchange. To comply with Rule 11a2-2(T)'s 
conditions, a member: (i) May not be associated with the executing 
member; (ii) must transmit the order from off the exchange floor; (iii) 
may not participate in the execution of the transaction once it has 
been transmitted to the member performing the execution; \201\ and (iv) 
with respect to an account over which the member or an associated 
person has investment discretion, neither the member nor its associated 
person may retain any compensation in connection with effecting the 
transaction except as provided in the Rule.
---------------------------------------------------------------------------

    \200\ 17 CFR 240.11a2-2(T).
    \201\ This prohibition also applies to associated persons. See 
15 U.S.C. 78f(b)(8). The member may, however, participate in 
clearing and settling the transaction. See Securities Exchange Act 
Release No. 14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) 
(regarding the NYSE's Designated Order Turnaround System) (``1978 
Release'').
---------------------------------------------------------------------------

    In a letter to the Commission,\202\ MIAX PEARL requested that the 
Commission concur with its conclusion that MIAX PEARL members that 
enter orders into the MIAX PEARL trading system satisfy the 
requirements of Rule 11a2-2(T). For the reasons set forth below, the 
Commission believes that MIAX PEARL members entering orders into the 
MIAX PEARL trading system will satisfy the conditions of Rule 11a2-
2(T).
---------------------------------------------------------------------------

    \202\ See MIAX PEARL 11(a) Request Letter, supra note 199.
---------------------------------------------------------------------------

    First, Rule 11a2-2(T) requires that orders for covered accounts be 
transmitted from off the exchange floor. MIAX PEARL will not have a 
physical trading floor, and like other automated systems, the MIAX 
PEARL trading system will receive orders from members electronically 
through remote terminals or computer-to-computer interfaces. In the 
context of other automated trading systems, the Commission has found 
that the off-floor transmission requirement is met if a covered account 
order is transmitted from a remote location directly to an exchange's 
floor by electronic means.\203\ Since the MIAX PEARL trading system 
receives all orders electronically through remote terminals or 
computer-to-computer interfaces, the Commission believes that the MIAX 
PEARL trading system satisfies the off-floor transmission requirement.
---------------------------------------------------------------------------

    \203\ See, e.g., Securities Exchange Act Release Nos. 59154 
(December 23, 2008), 73 FR 80468 (December 31, 2008) (SR-BSE-2008-
48) (order approving proposed rules of BX); 49068, (January 13, 
2004), 69 FR 2775 (January 20, 2004) (establishing, among other 
things, BOX as an options trading facility of BSE); 44983 (October 
25, 2001), 66 FR 55225 (November 1, 2001) (approving the PCX's use 
of the Archipelago Exchange as its equity trading facility); 29237 
(May 24, 1991), 56 FR 24853 (May 31, 1991) (regarding NYSE's Off-
Hours Trading Facility). See 1978 Release, supra note 201. See also 
Securities Exchange Act Release No. 15533 (January 29, 1979), 44 FR 
6084 (January 31, 1979) (regarding the American Stock Exchange 
(``Amex'') Post Execution Reporting System, the Amex Switching 
System, the Intermarket Trading System, the Multiple Dealer Trading 
Facility of the Cincinnati Stock Exchange, the PCX Communications 
and Execution System, and the Philadelphia Stock Exchange Automated 
Communications and Execution System) (``1979 Release'').
---------------------------------------------------------------------------

    Second, Rule 11a2-2(T) requires that the member not participate in 
the execution of its order once it has been transmitted to the member 
performing the execution. MIAX PEARL has represented that the MIAX 
PEARL trading system will at no time following the submission of an 
order allow a member or an associated person of such member to acquire 
control or influence over the result or timing of an order's 
execution.\204\ According to MIAX PEARL, the execution of a member's 
order is determined solely by what orders, bids, or offers are present 
in the MIAX PEARL trading system at the time the member submits the 
order and the order priority based on MIAX PEARL rules.\205\ 
Accordingly, the Commission believes that a MIAX PEARL member will not 
participate in the execution of its order submitted into the trading 
system.
---------------------------------------------------------------------------

    \204\ See MIAX PEARL 11(a) Request Letter, supra note 199. 
Members may change or cancel an order or quote at any time before 
the order is executed on the Exchange. See MIAX PEARL Form 1 
Application, Exhibit E. The Commission has stated that the non-
participation requirement is satisfied under such circumstances, so 
long as such modifications or cancellations are also transmitted 
from off the floor. See 1978 Release, supra note 201 (stating that 
the ``non-participation requirement does not prevent initiating 
members from canceling of modifying orders (or the instructions 
pursuant to which the initiating member wishes orders to be 
executed) after the orders have been transmitted to the executing 
member, provided that any such instructions are also transmitted 
from off the floor'').
    \205\ See MIAX PEARL 11(a) Request Letter, supra note 199.
---------------------------------------------------------------------------

    Rule 11a2-2(T)'s third condition is that the order be executed by 
an

[[Page 92914]]

exchange member who is unaffiliated with the member initiating the 
order. The Commission has stated that the requirement is satisfied when 
automated exchange facilities, such as the MIAX PEARL trading system, 
are used, as long as the design of these systems ensures that members 
do not possess any special or unique trading advantages over non-
members in handling their orders after transmitting them to the 
Exchange.\206\ MIAX PEARL has represented that the design of its 
trading system ensures that no member has any special or unique trading 
advantage over non-members in the handling of its orders after 
transmitting its orders to MIAX PEARL.\207\ Based on MIAX PEARL's 
representation, the Commission believes that the MIAX PEARL trading 
system satisfies this requirement.
---------------------------------------------------------------------------

    \206\ In considering the operation of automated execution 
systems operated by an exchange, the Commission noted that while 
there is no independent executing exchange member, the execution of 
an order is automatic once it has been transmitted into each system. 
Because the design of these systems ensures that members do not 
possess any special or unique trading advantages in handling their 
orders after transmitting them to the exchange, the Commission has 
stated that executions obtained through these systems satisfy the 
independent execution requirement of Rule 11a2-2(T). See 1979 
Release, supra note 203.
    \207\ See MIAX PEARL 11(a) Request Letter, supra note 199.
---------------------------------------------------------------------------

    Fourth, in the case of a transaction effected for an account with 
respect to which the initiating member or an associated person thereof 
exercises investment discretion, neither the initiating member nor any 
associated person thereof may retain any compensation in connection 
with effecting the transaction, unless the person authorized to 
transact business for the account has expressly provided otherwise by 
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T).\208\ MIAX PEARL members trading for covered accounts over which 
they exercise investment discretion must comply with this condition in 
order to rely on the rule's exemption.\209\
---------------------------------------------------------------------------

    \208\ 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written 
contract to retain compensation, in connection with effecting 
transactions for covered accounts over which such member or 
associated person thereof exercises investment discretion, to 
furnish at least annually to the person authorized to transact 
business for the account a statement setting forth the total amount 
of compensation retained by the member in connection with effecting 
transactions for the account during the period covered by the 
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, supra 
note 201 (stating ``[t]he contractual and disclosure requirements 
are designed to assure that accounts electing to permit transaction-
related compensation do so only after deciding that such 
arrangements are suitable to their interests'').
    \209\ See MIAX PEARL 11(a) Request Letter, supra note 199.
---------------------------------------------------------------------------

D. Discipline and Oversight of Members

    As noted above, one prerequisite for the Commission's grant of an 
exchange's application for registration is that a proposed exchange 
must be so organized and have the capacity to be able to carry out the 
purposes of the Act.\210\ Specifically, an exchange must be able to 
enforce compliance by its members and persons associated with its 
members with the Act and the rules and regulations thereunder and the 
rules of the exchange.\211\
---------------------------------------------------------------------------

    \210\ See 15 U.S.C. 78f(b)(1).
    \211\ See id.
---------------------------------------------------------------------------

    MIAX PEARL's rules codify MIAX PEARL's disciplinary jurisdiction 
over its members, thereby facilitating its ability to enforce its 
members' compliance with its rules and the federal securities 
laws.\212\ MIAX PEARL's rules permit it to sanction members for 
violations of its rules and violations of any provision of the Exchange 
Act or the rules and regulations promulgated thereunder, by, among 
other things, expelling or suspending members; limiting members' 
activities, functions, or operations; fining or censuring members; 
suspending or barring a person from being associated with a member; or 
any other fitting sanction in accordance with MIAX rules.\213\
---------------------------------------------------------------------------

    \212\ See MIAX PEARL Rule 1000.
    \213\ See id. See also MIAX Rule 1000, CBOE Rule 17.1(a), and 
ISE Rule 1600(a) (containing similar provisions).
---------------------------------------------------------------------------

    MIAX PEARL's disciplinary and oversight functions will be 
administered in accordance with Chapter X of the MIAX PEARL rules, 
which governs disciplinary actions. Unless delegated to another SRO 
pursuant to the terms of any effective 17d-2 plan,\214\ MIAX PEARL 
regulatory staff (including regulatory staff of another SRO that may be 
acting on MIAX PEARL's behalf pursuant to a regulatory services 
agreement) will, among other things, investigate potential securities 
laws violations and initiate charges pursuant to MIAX PEARL rules.\215\
---------------------------------------------------------------------------

    \214\ See supra Section III.B.3.c (concerning the 17d-2 plans to 
which MIAX PEARL has committed to join).
    \215\ See MIAX PEARL Rules 1002 and 1004. As noted above, MIAX 
PEARL has entered into an RSA with FINRA under which FINRA will 
perform certain regulatory functions on behalf of MIAX PEARL. See 
MIAX PEARL Rule 1015.
---------------------------------------------------------------------------

    Upon a finding of probable cause of a violation within the 
disciplinary jurisdiction of MIAX PEARL and where further proceedings 
are warranted,\216\ MIAX PEARL will conduct a hearing on disciplinary 
matters before a professional hearing officer \217\ and two members of 
the Business Conduct Committee \218\ (the ``Panel'').\219\ The MIAX 
PEARL member (or their associated person) or the MIAX PEARL regulatory 
staff may petition for review of the decision of the Panel by the MIAX 
PEARL Board.\220\ Any review would be conducted by the MIAX PEARL Board 
or a committee thereof composed of at least three Directors of the MIAX 
PEARL Board \221\ (whose decision must be ratified by the MIAX PEARL 
Board) and such decision will be final.\222\ In addition, the MIAX 
PEARL Board on its own motion may order review of a disciplinary 
decision.\223\
---------------------------------------------------------------------------

    \216\ See MIAX PEARL Rule 1004.
    \217\ See MIAX PEARL Rule 1015, Interpretation and Policy .01.
    \218\ See MIAX PEARL By-Laws, Article IV, Section 4.7.
    \219\ See MIAX PEARL Rule 1006.
    \220\ See MIAX PEARL Rule 1010.
    \221\ Specifically, the Chairman of the MIAX PEARL Board, with 
the approval of the Board, shall appoint an Appeals Committee to 
preside over all appeals related to disciplinary and adverse action 
determinations. See note 46 and accompanying text (detailing the 
composition of the Appeals Committee). If the Independent Director 
serving on the Appeals Committee recuses himself or herself from an 
appeal, due to conflict of interest or otherwise, the Independent 
Director may be replaced by a Non-Industry Director for purposes of 
the applicable appeal if there is no other Independent Director able 
to serve as the replacement. See MIAX PEARL By-Laws, Article IV, 
Section 4.5(d). See also MIAX Exchange Amended and Restated By-Laws, 
Article IV, Section 4.5(d).
    \222\ See MIAX PEARL Rule 1010.
    \223\ See id.
---------------------------------------------------------------------------

    Appeals from any determination that impacts access to MIAX PEARL, 
such as termination or suspension of membership, will be instituted 
under, and governed by, the provisions in the Chapter XI of the MIAX 
PEARL Rules which incorporates by reference Chapter XI of the MIAX 
Exchange Rules. MIAX PEARL's Chapter XI applies to persons economically 
aggrieved by any of the following actions of MIAX PEARL including, but 
not limited to: (a) Denial of an application to become a Member; (b) 
barring a person from becoming associated with a Member; (c) limiting 
or prohibiting services provided by MIAX PEARL or services of any 
exchange member.\224\
---------------------------------------------------------------------------

    \224\ See MIAX PEARL Rule 1100 (which incorporates by reference 
MIAX Exchange Rule 1100). As noted above, MIAX PEARL has entered 
into a RSA with FINRA under which FINRA will perform certain 
regulatory functions on behalf of MIAX PEARL. MIAX PEARL may perform 
some or all of the functions specified in the Chapter XI of the MIAX 
PEARL Rules, which incorporates by reference Chapter XI of the MIAX 
Exchange Rules. See supra note 110. See also MIAX PEARL Rule 1106 
(which incorporates by reference MIAX Exchange Rule 1106).

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[[Page 92915]]

    Any person aggrieved by an action of MIAX PEARL within the scope of 
Chapter XI may file a written application to be heard within thirty 
days \225\ after such action has been taken.\226\ Applications for 
hearing and review will be referred to the Business Conduct Committee, 
which will appoint a hearing panel of no less than three members of 
such Committee.\227\ The decision of the hearing panel made pursuant to 
Chapter XI of the MIAX PEARL rules is subject to review by the MIAX 
PEARL Board, either on its own motion within 30 days after issuance of 
the decision, or upon written request submitted by the applicant or the 
President of MIAX PEARL within 15 days after issuance of the 
decision.\228\ The review would be conducted by the MIAX PEARL Board or 
a committee of the MIAX PEARL Board composed of at least three 
directors.\229\
---------------------------------------------------------------------------

    \225\ An applicant may file for an extension of time as allowed 
by the Chairman of the Business Conduct Committee within thirty days 
of MIAX PEARL's action. An application for an extension will be 
ruled upon by the Chairman of the Business Conduct Committee, and 
his ruling will be given in writing. Rulings on applications for 
extensions of time are not subject to appeal. See MIAX PEARL Rule 
1101 (which incorporates by reference MIAX Exchange Rule 1101).
    \226\ The application must include: (1) The action for which 
review is sought; (2) the specific reasons for the applicant's 
exception to such action; (3) the relief sought; and (4) whether the 
applicant intends to submit any documents, statements, arguments or 
other material in support of the application, with a description of 
any such materials. See MIAX PEARL Rule 1101(a) (which incorporates 
by reference MIAX Exchange Rule 1101(a)).
    \227\ See MIAX PEARL Rule 1102 (which incorporates by reference 
MIAX Exchange Rule 1102). The decision of the hearing panel will be 
made in writing and sent to the parties to the proceedings. See MIAX 
PEARL Rule 1103(d) (which incorporates by reference MIAX Exchange 
Rule 1103(d)).
    \228\ See MIAX PEARL Rule 1104(a) (which incorporates by 
reference MIAX Exchange Rule 1104(a)). The MIAX PEARL Board, or a 
committee of the MIAX PEARL Board, will have sole discretion to 
grant or deny either request. See id.
    \229\ See MIAX PEARL Rule 1104(b) (which incorporates by 
reference MIAX Exchange Rule 1104(b)). The MIAX PEARL Board or its 
designated committee may affirm, reverse, or modify in whole or in 
part, the decision of the hearing panel. The decision of the MIAX 
PEARL Board or its designated committee would be final, and must be 
in writing and would be sent to the parties to the proceeding. See 
MIAX PEARL Rule 1104(c) (which incorporates by reference MIAX 
Exchange Rule 1104(c)).
---------------------------------------------------------------------------

    The Commission finds that MIAX PEARL's proposed disciplinary and 
oversight rules and structure, as well as its proposed process for 
persons economically aggrieved by certain MIAX PEARL actions, are 
consistent with the requirements of Sections 6(b)(6) and 6(b)(7) of the 
Act \230\ in that they provide fair procedures for the disciplining of 
members and persons associated with members. The Commission further 
finds that the proposed MIAX PEARL rules are designed to provide MIAX 
PEARL with the ability to comply, and with the authority to enforce 
compliance by its members and persons associated with its members, with 
the provisions of the Act, the rules and regulations thereunder, and 
the rules of MIAX PEARL.\231\ The Commission notes that MIAX PEARL's 
proposed disciplinary and oversight rules and structures are similar to 
the rules of other exchanges.\232\
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    \230\ 15 U.S.C. 78f(b)(6) and (b)(7), respectively.
    \231\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
    \232\ See, e.g., ISE Mercury Order, supra note 27, ISE Gemini 
Order, supra note 27 and MIAX Order, supra note 13.
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E. Listing Requirements

    MIAX PEARL does not intend to initially list or trade common stock 
or non-option securities of operating companies but rather intends to 
initially only trade option contracts that meet the options listing 
standards of the Exchange.\233\
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    \233\ See MIAX PEARL Form 1 Application, Exhibit H. MIAX PEARL's 
listing rules, including the criteria for the underlying securities 
of the options to be traded, are substantially similar to the 
listing rules of MIAX Exchange. See MIAX PEARL Rules Chapter IV 
(Option Contracts Traded on the Exchange); MIAX Exchange Rules 
Chapter IV. See also ISE Gemini LLC Rule 500 Series and BOX Options 
Exchange LLC Rule 5000 Series.
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    The Commission finds that MIAX PEARL's proposed initial and 
continued listing rules are consistent with the Act, including Section 
6(b)(5),\234\ in that they are designed to protect investors and the 
public interest, prevent fraudulent and manipulative acts and 
practices, and promote just and equitable principles of trade. Before 
beginning operation, MIAX PEARL will need to become a participant in 
the Plan for the Purpose of Developing and Implementing Procedures 
Designed to Facilitate the Listing and Trading of Standardized Options 
Submitted Pursuant to Section 11A(a)(3)(B) of the Securities Exchange 
Act of 1934 (``OLPP'').\235\ In addition, before beginning operation, 
MIAX PEARL will need to become a participant in the Options Clearing 
Corporation.
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    \234\ 15 U.S.C. 78f(b)(5).
    \235\ 15 U.S.C. 78k-1(a)(3)(B).
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IV. Exemption From Section 19(b) of the Act With Regard to MIAX 
Exchange, CBOE, New York Stock Exchange (``NYSE'') and FINRA Rules 
Incorporated by Reference

    MIAX PEARL proposes to incorporate by reference certain MIAX 
Exchange, CBOE, NYSE and FINRA rules.\236\ Thus, for certain MIAX PEARL 
rules, MIAX PEARL members will comply with a MIAX PEARL rule by 
complying with the referenced MIAX Exchange, CBOE, NYSE and FINRA 
rules.
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    \236\ Specifically, MIAX PEARL proposes to incorporate by 
reference the following MIAX Exchange Rules: Chapter III (Business 
Conduct), Chapter VII (Exercises and Deliveries), Chapter VIII 
(Records, Reports and Audits), Chapter IX (Summary Suspension), 
Chapter XI (Hearings, Review and Arbitration), Chapter XIII (Doing 
Business With the Public), Chapter XIV (Order Protection, Locked and 
Crossed Markets), Chapter XV (Margins), Chapter XVI (Net Capital 
Requirements). The following rules are cross-referenced in the MIAX 
Exchange rules: MIAX Exchange Rule 1107 (Arbitration) incorporates 
by reference the Rule 12000 Series and Rule 13000 Series of the 
FINRA Manual and FINRA Rule 2268; MIAX Exchange Rule 1321 (Transfer 
of Accounts) cross-references FINRA Rule 11870; MIAX Exchange Rule 
1502 (Margin Requirements) cross-references the CBOE and NYSE rules 
concerning initial and maintenance margin requirements that may be 
in effect from time to time.
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    In connection with the proposal to incorporate MIAX Exchange, CBOE, 
NYSE and FINRA rules by reference, MIAX PEARL requests, pursuant to 
Rule 240.0-12 under the Act,\237\ an exemption under Section 36 of the 
Act from the rule filing requirements of Section 19(b) of the Act for 
changes to the MIAX PEARL rules that are effected solely by virtue of a 
change to a cross-referenced MIAX Exchange, CBOE, NYSE or FINRA 
rule.\238\ MIAX PEARL proposes to incorporate by reference categories 
of rules, rather than individual rules within a category, that are not 
trading rules. In addition, MIAX PEARL agrees to provide written notice 
to its members whenever MIAX Exchange, CBOE, NYSE or FINRA proposes a 
change to a cross-referenced rule \239\ and whenever any such proposed 
changes are approved by the Commission or otherwise become 
effective.\240\
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    \237\ 17 CFR 240.0-12.
    \238\ See Letter from Barbara J. Comly, EVP, General Counsel and 
Corporate Secretary, Miami Holdings, to Brent J. Fields, Secretary, 
Commission, dated November 4, 2016.
    \239\ See id.
    \240\ MIAX PEARL will provide such notice through a posting on 
the same Web site location where MIAX PEARL posts its own rule 
filings pursuant to Rule 19b-4 under the Act, within the required 
time frame. The Web site posting will include a link to the location 
on the MIAX Exchange, CBOE, NYSE or FINRA Web site where MIAX 
Exchange, CBOE, NYSE or FINRA's proposed rule change is posted. See 
id.
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    Using the authority under Section 36 of the Act, the Commission 
previously exempted certain SROs from the requirement to file proposed 
rule changes under Section 19(b) of the Act.\241\ The Commission is 
hereby

[[Page 92916]]

granting MIAX PEARL's request for exemption, pursuant to Section 36 of 
the Act, from the rule filing requirements of Section 19(b) of the Act 
with respect to the rules that MIAX PEARL proposes to incorporate by 
reference. The exemption is conditioned upon MIAX PEARL providing 
written notice to MIAX PEARL members whenever MIAX Exchange, CBOE, NYSE 
or FINRA proposes to change an incorporated by reference rule and when 
the Commission approves any such changes. The Commission believes that 
the exemption is appropriate in the public interest and consistent with 
the protection of investors because it will promote more efficient use 
of Commission's and SROs' resources by avoiding duplicative rule 
filings based on simultaneous changes to identical rule text sought to 
be implemented by more than one SRO.
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    \241\ See, e.g., Mercury Order, supra note 27, BATS Order, supra 
note 13, C2 Order, supra note 75, Nasdaq Order, supra note 27, and 
NOM Approval Order, supra note 112.
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V. Conclusion

    It is ordered that the application of MIAX PEARL for registration 
as a national securities exchange be, and it hereby is, granted.
    It is furthered ordered that operation of MIAX PEARL is conditioned 
on the satisfaction of the requirements below:
    A. Participation in National Market System Plans Relating to 
Options Trading. MIAX PEARL must join: (1) The Plan for the Reporting 
of Consolidated Options Last Sale Reports and Quotation Information 
(Options Price Reporting Authority); (2) the OLPP; (3) the Linkage 
Plan; (4) the Plan of the Options Regulatory Surveillance Authority; 
and (5) the Plan Governing the Consolidated Audit Trail;
    B. Participation in Multiparty Rule 17d-2 Plans. MIAX PEARL must 
become a party to the multiparty Rule 17d-2 agreements concerning 
options sales practice regulation and market surveillance, and covered 
Regulation NMS rules;
    C. Participation in the Options Clearing Corporation. MIAX PEARL 
must become an Options Clearing Corporation participant exchange; and
    D. Participation in the Intermarket Surveillance Group. MIAX PEARL 
must join the Intermarket Surveillance Group.
    It is further ordered, pursuant to Section 36 of the Act,\242\ that 
MIAX PEARL shall be exempted from the rule filing requirements of 
Section 19(b) of the Act with respect to the MIAX Exchange, CBOE, NYSE 
and FINRA rules that MIAX PEARL proposes to incorporate by reference, 
subject to the conditions specified in this order that MIAX PEARL 
provide written notice to MIAX PEARL members whenever MIAX Exchange, 
CBOE, NYSE or FINRA proposes to change an incorporated by reference 
rule and when the Commission approves any such changes.
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    \242\ 15 U.S.C. 78mm.

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2016-30538 Filed 12-19-16; 8:45 am]
 BILLING CODE 8011-01-P

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