[Federal Register Volume 77, Number 15 (Tuesday, January 24, 2012)]
[Notices]
[Pages 3539-3541]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-1288]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66178; File No. SR-Phlx-2011-170]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order
Approving a Proposed Rule Change Requesting Permanent Approval of the
Pilot Program Permitting NASDAQ OMX PSX To Accept Inbound Orders That
Nasdaq Execution Services, LLC Routes in Its Capacity as a Facility of
the NASDAQ Stock Market LLC
January 18, 2012.
I. Introduction
On December 1, 2011, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change
requesting permanent approval of the Exchange's pilot program to permit
the Exchange's NASDAQ OMX PSX system (``PSX'') to accept certain
inbound orders that Nasdaq Execution Services, LLC (``NES'') routes in
its capacity as a facility of the NASDAQ Stock Market LLC (``Nasdaq'').
The proposed rule change was published for comment in the Federal
Register on December 15, 2011.\3\ The Commission received no comment
letters regarding the proposed rule change. This order approves the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 65934 (December 9,
2011), 76 FR 78060 (``Notice'').
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II. Background
Exchange Rule 985(b) prohibits the Exchange or any entity with
which it is affiliated from, directly or indirectly, acquiring or
maintaining an ownership interest in, or engaging in a business venture
with, an Exchange member or an affiliate of an Exchange member in the
absence of an effective filing under Section 19(b) of the Exchange
Act.\4\ NES is a broker-dealer that is a member of the Exchange, and
currently provides to members of Nasdaq optional routing
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services to other market centers.\5\ NES is owned by The NASDAQ OMX
Group, Inc. (``NASDAQ OMX''), which also owns three registered
securities exchanges--Nasdaq, the Exchange, and NASDAQ OMX BX, Inc.\6\
Thus, NES is an affiliate of each of these exchanges. Absent an
effective filing, Exchange Rule 985(b) would prohibit NES from being a
member of the Exchange.
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\4\ 15 U.S.C. 78s(b).
\5\ NES operates as a facility of Nasdaq that provides outbound
routing from Nasdaq to other market centers, subject to certain
conditions. See Nasdaq Exchange Rule 4758(b).
\6\ See Securities Exchange Act Release No. 58179 (July 17,
2008), 73 FR 42874 (July 23, 2008) (SR-Phlx-2008-31) (``Phlx
Approval Order''). See also Securities Exchange Act Release No.
58324 (August 7, 2008), 73 FR 46936 (August 12, 2008) (SR-BSE-2008-
02; SR-BSE-2008-23; SR-BSE-2008-25; SR-BSECC-2008-01).
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On September 9, 2010, the Commission approved the Exchange's
proposed rule change relating to the establishment of PSX as a platform
for trading NMS stocks.\7\ As part of this approval, the Exchange was
approved to receive inbound routes of cash equities orders by NES in
its capacity as an order routing facility of Nasdaq on a pilot
basis.\8\ The Exchange now seeks permanent approval of this inbound
routing pilot.\9\
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\7\ See Securities Exchange Act Release No. 62877 (September 9,
2010), 75 FR 56633 (September 16, 2010) (SR-Phlx-2010-79) (``PSX
Approval Order'').
\8\ See PSX Approval Order. See also Securities Exchange Act
Release No. 65552 (October 13, 2011), 76 FR 64989 (October 19, 2011)
(SR-Phlx-2011-139) (extending the inbound routing pilot through
April 8, 2012).
\9\ See Notice.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\10\ Specifically, the Commission finds that the proposed rule
change is consistent with Section 6(b)(1) of the Act,\11\ which
requires, among other things, that a national securities exchange be so
organized and have the capacity to carry out the purposes of the Act,
and to comply and enforce compliance by its members and persons
associated with its members, with the provisions of the Act, the rules
and regulation thereunder, and the rules of the Exchange. Further, the
Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\12\ which requires, among other things,
that the rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices; to promote just and
equitable principles of trade; to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, and processing
information with respect to, and facilitating transactions in
securities; to remove impediments to and perfect the mechanism of a
free and open market and a national market system; and, in general, to
protect investors and the public interest. Section 6(b)(5) also
requires that the rules of an exchange not be designed to permit unfair
discrimination among customers, issuers, brokers, or dealers.
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\10\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition and
capital formation. 15 U.S.C. 78c(f).
\11\ 15 U.S.C. 78f(b)(1).
\12\ 15 U.S.C. 78f(b)(5).
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Recognizing that the Commission has previously expressed concern
regarding the potential for conflicts of interest in instances where a
member firm is affiliated with an exchange to which it is routing
orders, the Exchange previously implemented limitations and conditions
to NES's affiliation with the Exchange to permit the Exchange to accept
inbound orders that NES routes in its capacity as a facility of Nasdaq,
on a pilot basis.\13\ The Exchange now seeks to make this pilot
permanent. Specifically, the Exchange states it is in compliance with
the following limitations and conditions:\14\
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\13\ See PSX Approval Order, 75 FR at 56637--56638.
\14\ See Notice, 76 FR at 78061.
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First, the Exchange and FINRA have entered into a
regulatory services agreement (``FINRA RSA'') pursuant to which FINRA
reviews NES's compliance with the Exchange's rules through FINRA's
examination program.\15\ Pursuant to the FINRA RSA, however, the
Exchange retains ultimate responsibility for enforcing its rules with
respect to NES.
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\15\ The Exchange also states that NES is subject to independent
oversight by FINRA, its Designated Examining Authority, for
compliance with financial responsibility requirements. See Notice,
76 FR at 78061, n.5.
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Second, FINRA and the Exchange \16\ will monitor NES for
compliance with PSX's trading rules, and collect and maintain certain
related information.\17\
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\16\ Personnel performing real-time oversight of equity trading
on Nasdaq will also perform similar functions with respect to PSX
pursuant to a regulatory services agreement among Nasdaq, the
Exchange, NASDAQ OMX BX, Inc., and NASDAQ OMX (the ``Intercompany
RSA'') under the direction, authority, and oversight of Phlx's Chief
Regulatory Officer (``CRO'') and the Regulatory Oversight Committee
(``ROC'') of its Board of Directors.
\17\ Pursuant to the FINRA RSA, both the Exchange and FINRA will
collect and maintain all alerts, complaints, investigations and
enforcement actions in which NES (in its capacity as a facility of
Nasdaq routing orders to the Exchange) is identified as a
participant that has potentially violated applicable Commission or
Exchange rules. The Exchange and FINRA will retain these records in
an easily accessible manner in order to facilitate any potential
review conducted by the Commission's Office of Compliance
Inspections and Examinations. See Notice, 76 FR at 78061, n.7.
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Third, FINRA will provide a report to the Exchange's Chief
Regulatory Officer (``CRO''), on at least a quarterly basis, that: (i)
quantifies all alerts (of which the Exchange and FINRA become aware)
that identify NES as a participant that has potentially violated
Commission or Exchange rules and (ii) quantifies the number of
investigations that identify NES as a participant that has potentially
violated Exchange or Commission Rules.\18\
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\18\ See id.
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Fourth, the Exchange adopted Rule 985(c)(2), which
requires NASDAQ OMX, as the holding company owning NES and the
Exchange, to establish and maintain procedures and internal controls
reasonably designed to ensure that NES does not develop or implement
changes to its system on the basis of non-public information regarding
planned changes to the Exchange's systems, obtained as a result of its
affiliation with the Exchange, until such information is available
generally to similarly situated Exchange members in connection with the
provision of inbound routing to the Exchange.\19\
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\19\ See Phlx Rule 985(c)(2). See also Notice, 76 FR at 78061.
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Fifth, routing of orders from NES to the Exchange, in
NES's capacity as a facility of Nasdaq, will be authorized for a pilot
period of twelve months, as further extended to April 8, 2012.\20\
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\20\ See Notice, 76 FR at 78061.
The Exchange believes that by meeting the above-listed conditions it
has set up mechanisms that protect the independence of the Exchange's
regulatory responsibility with respect to NES, and has demonstrated
that NES cannot use any information advantage it may have because of
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its affiliation with the Exchange.\21\
\21\ See id.
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In the past, the Commission has expressed concern that the
affiliation of an exchange with one of its members raises potential
conflicts of interest, and the potential for unfair competitive
advantage.\22\ Although the Commission
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continues to be concerned about potential unfair competition and
conflicts of interest between an exchange's self-regulatory obligations
and its commercial interest when the exchange is affiliated with one of
its members, for the reasons discussed below, the Commission believes
that it is consistent with the Act to permit NES, in its capacity as a
facility of Nasdaq, to provide inbound routing to the Exchange on a
permanent basis instead of a pilot basis, subject to the other
conditions described above.
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\22\ See, e.g., Securities Exchange Act Release Nos. 54170 (July
18, 2006), 71 FR 42149 (July 25, 2006) (SR-NASDAQ-2006-006) (order
approving Nasdaq's proposal to adopt Nasdaq Rule 2140, restricting
affiliations between Nasdaq and its members); 53382 (February 27,
2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) (order
approving the combination of the New York Stock Exchange, Inc. and
Archipelago Holdings, Inc.); 58673 (September 29, 2008), 73 FR 57707
(October 8, 2008) (SR-Amex-2008-62) (order approving the combination
of NYSE Euronext and the American Stock Exchange LLC); 59135
(December 22, 2008), 73 FR 79954 (December 30, 2008) (SR-ISE-2009-
85) (order approving the purchase by ISE Holdings of an ownership
interest in DirectEdge Holdings LLC); and 59281 (January 22, 2009),
74 FR 5014 (January 28, 2009) (SR-NYSE-2008-120) (order approving a
joint venture between NYSE and BIDS Holdings L.P.).
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The Exchange has proposed four ongoing conditions applicable to
NES's inbound routing activities in its capacity as a facility of
Nasdaq, which are enumerated above. The Commission believes that these
conditions mitigate its concerns about potential conflicts of interest
and unfair competitive advantage. In particular, the Commission
believes that FINRA's oversight of NES,\23\ combined with FINRA's
monitoring of NES's compliance with the Exchange's rules and quarterly
reporting to Phlx's CRO, will help to protect the independence of the
Exchange's regulatory responsibilities with respect to NES.
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\23\ This oversight will be accomplished through the FINRA RSA
between the Exchange and FINRA, and, as applicable, a 17d-2
Agreement. See PSX Approval Order, 75 FR at 56638, n.80 and
accompanying text.
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\24\ that the proposed rule change (SR-Phlx-2011-170) be, and
hereby is, approved.
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\24\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-1288 Filed 1-23-12; 8:45 am]
BILLING CODE 8011-01-P