[Federal Register Volume 78, Number 20 (Wednesday, January 30, 2013)]
[Notices]
[Pages 6379-6382]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-01932]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68721; File No. SR-NASDAQ-2013-008]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend Rule 5710
January 24, 2013.
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 January 10, 2013, The NASDAQ Stock Market LLC (``NASDAQ'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to amend Rule 5710 so that the Exchange may
list Linked Securities \3\ that provide for three times accelerated
payment at maturity. The Exchange requests that the Commission waive
the 30-day operative delay period contained in Exchange Act Rule 19b-
4(f)(6)(iii).\4\ The text of the proposed rule change is available at
http://nasdaq.cchwallstreet.com/, at the Exchange's principal office,
and at the Commission's Public Reference Room.
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\3\ For a discussion of Linked Securities, see Rule 5710.
\4\ 17 CFR 240.19b-4(f)(6)(iii).
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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
The purpose of this proposed rule change is to amend Rule 5710(d)
so that the Exchange may list Linked Securities that provide for three
times accelerated payment at maturity.\5\ In changing one word in Rule
5710, the Exchange is conforming its rule to the established listing
rules of other exchanges.
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\5\ The proposal is applicable only to non-option products.
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This proposed amendment to Rule 5710(d) is based, word-for-word, on
NYSE Arca (``Arca'') Equities Rule 5.2(j)(6)(A)(d) and NYSE Section
703.22(B)(6) of the Listed Company Manual. NASDAQ, Arca, and NYSE all
have rule provisions stating that pursuant to Rule 19b-4(e) under the
Act \6\ a loss or negative payment at maturity of a Linked Security \7\
may be accelerated by a multiple of the performance of an underlying
asset (known as the ``acceleration provision''). However, in Rule 5710
NASDAQ sets the multiple for the acceleration provision at ``twice'';
\8\ whereas Arca and NYSE both set the acceleration
[[Page 6380]]
provision multiple at ``three times''.\9\ Other than changing one
word--from ``twice'' to ``three times''--in the Exchange's acceleration
provision in Rule 5710(d), no other change is proposed or made by this
filing.\10\
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\6\ 17 CFR 240.19b-4(e).
\7\ Where NASDAQ refers to ``Linked Securities'' in its Rule
5710, NYSE and Arca refer to these products as ``Index-Linked
Securities.'' On all exchanges, Linked Securities are based on the
performance of various Reference Assets. For a more detailed
discussion of Reference Assets, see Rule 5710.
\8\ See Rule 5710(d). See also Securities Exchange Act Release
Nos. 59663 (March 31, 2009), 74 FR 15552 (April 6, 2009) (SR-NASDAQ-
2009-018) (notice of filing and immediate effectiveness relating to
revisions and restructuring of the NASDAQ listing rules, and
transference of Rule 5710(d) from Rule 4420(m)); and 57269 (February
5, 2008), 73 FR 8092 (February 12, 2008) (SR-NASDAQ-2008-08) (order
approving listing standards in Rule 4420(m) to allow twice (2x) the
performance of the underlying index, indexes, or Reference Asset).
\9\ See Arca Equities Rule 5.2(j)(6) and NYSE Section
703.22(B)(6) of the Listed Company Manual. See also Securities
Exchange Act Release Nos. 59332 (January 30, 2009), 74 FR 6338
(February 6, 2009) (SR-NYSEArca-2008-136) (order approving listing
standards in NYSE Arca Equities Rule 5.2(j)(6) to allow three times
(3x) the performance of the underlying Reference Asset); and 61230
(December 23, 2009), 74 FR 69163 (December 30, 2009) (SR-NYSE-2009-
124) (order approving three times (3x) the performance in NYSE
Section 703.22 of the Listed Company Manual, similarly to Arca
Equities Rule 5.2(j)(6)).
\10\ In recently approving rule changes to allow listings on
NASDAQ that are allowed on Arca by rule, the Commission noted that
it ``has previously approved substantively identical listing
standards for the listing and trading of the Subject Securities on
NYSE Arca.'' See Securities Exchange Act Release No. 66648 (March
23, 2012), 77 FR 19428 (March 30, 2012) (SR-NASDAQ-2012-013).
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The current requirements for listing Linked Securities, which
include Multifactor Index-Linked Securities, Equity Index-Linked
Securities, Commodity-Linked Securities, Fixed Income Index-Linked
Securities and Futures-Linked Securities, are set forth in Rule 5710.
This rule states that NASDAQ will consider Linked Securities for
listing and trading pursuant to Rule 19b-4(e) under the Act, provided
the following requirements are met: \11\
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\11\ However, Rule 5710 provides that if Linked Securities do
not otherwise meet the Rule 19b-4(e) standards set forth in the
rule, NASDAQ may submit a rule filing pursuant to Section 19 of the
Act to permit the listing and trading of Linked Securities.
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(a) Both the issue and the issuer of such security meet the
criteria for other securities set forth in Rule 5730(a), except that if
the security is traded in $1,000 denominations or is redeemable at the
option of holders thereof on at least a weekly basis, then no minimum
number of holders and no minimum public distribution of trading units
shall be required;
(b) The issue has a term of not less than one (1) year and not
greater than thirty (30) years;
(c) The issue must be the non-convertible debt of the Company;
(d) The payment at maturity may or may not provide for a multiple
of the direct or inverse performance of an underlying index, indexes or
Reference Asset; however, in no event will a loss (negative payment) at
maturity be accelerated by a multiple that exceeds twice the
performance of an underlying index, indexes or Reference Asset;
(e) The Company will be expected to have a minimum tangible net
worth in excess of $250,000,000 and to exceed by at least 20% the
earnings requirements set forth in Rule 5405(b)(1)(A); \12\
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\12\ Subsection (e) states also, in relevant part, regarding
minimum tangible net worth: ``In the alternative, the Company will
be expected: (i) To have a minimum tangible net worth of
$150,000,000 and to exceed by at least 20% the earnings requirement
set forth in Rule 5405(b)(1)(A), and (ii) not to have issued
securities where the original issue price of all the Company's other
index-linked note offerings (combined with index-linked note
offerings of the Company's affiliates) listed on a national
securities exchange exceeds 25% of the Company's net worth. Rule
5710(e).'' [sic]
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(f) The Company is in compliance with Rule 10A-3 under the Act;
(g) Certain Maintenance and Dissemination standards must be
satisfied.\13\
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\13\ Subsection (g) states, regarding Maintenance and
Dissemination: ``(i) If the index is maintained by a broker-dealer,
the broker-dealer shall erect a ``firewall'' around the personnel
who have access to information concerning changes and adjustments to
the index and the index shall be calculated by a third party who is
not a broker-dealer. (ii) Unless the Commission order applicable
under paragraph (k) hereof provides otherwise, the current value of
the index or the Reference Asset (as applicable) will be widely
disseminated at least every 15 seconds during Nasdaq's regular
market session, except as provided in the next clause (iii). (iii)
The values of the following indexes need not be calculated and
widely disseminated at least every 15 seconds if, after the close of
trading, the indicative value of the Equity Index-Linked Security
based on one or more of such indexes is calculated and disseminated
to provide an updated value: CBOE S&P 500 BuyWrite Index(sm), CBOE
DJIA Buy Write Index(sm), CBOE Nasdaq-100 BuyWrite Index(sm). (iv)
If the value of a Linked Security is based on more than one index,
then the dissemination requirement of this paragraph (g) applies to
the composite value of such indexes. (v) In the case of a Commodity-
Linked Security that is periodically redeemable, the indicative
value of the subject Commodity-Linked Security must be calculated
and widely disseminated by one or more major market data vendors on
at least a 15-second basis during Nasdaq's regular market session.''
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Of the seven specific and extensive requirements in Rule 5710 for
listing Linked Securities pursuant to Rule 19b-4(e), the Exchange
proposes to change only the multiple by which a Linked Security payment
can be accelerated from twice to three times. Each of the other listing
requirements remains unchanged.
The principal reason for the proposed amendment is demand for
accelerated Linked Securities. There is continuing customer demand for
having the ability to list and trade these Linked Securities products
on the Exchange, particularly as the strategies and components of these
products continue to evolve and offer access to a broader range of
asset classes.
Prior to the commencement of trading of three times accelerated
Linked Securities, NASDAQ will inform its members in an Information
Circular of the special characteristics and risks associated with
trading such leveraged securities. In particular, the Information
Circular will discuss that leveraged Linked Securities seek returns on
a periodic basis (e.g. daily or monthly), and do not seek to achieve
their stated investment objective over a period of time greater than
one period because compounding prevents these securities from perfectly
achieving such results. Accordingly, results for leveraged Linked
Securities over periods of time greater than one period (e.g. daily or
monthly) typically will not reflect exactly the leveraged multiple of
the period return of the applicable Reference Asset benchmark, and may
differ from the multiple.\14\ NASDAQ will also inform its members of
NASDAQ Rule 2310, Recommendations to Customers (Suitability), and the
requirement that, if members recommend transactions in these leveraged
securities, they must have a reasonable basis to believe that (1) the
recommendation is suitable for a customer given reasonable inquiry
concerning the customer's investment objectives, financial situation,
needs, and any other information known by such Member, and (2) the
customer can evaluate the special characteristics, and is able to bear
the financial risks, of an investment in the securities. In addition,
FINRA has implemented increased sales practice and customer margin
requirements for FINRA members applicable to inverse, leveraged, and
inverse leveraged securities and options on such securities, as
described in FINRA Regulatory Notices 09-31 (June 2009), 09-53 (August
2009) and 09-65 (November 2009) (``FINRA Regulatory Notices''). Members
that carry customer accounts will be required to follow the FINRA
guidance set forth in the FINRA Regulatory Notices. The Information
Circular will reference the FINRA Regulatory Notices.
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\14\ The Exchange notes that leveraged exchange trade products
are not new to the market; these products trade on NASDAQ, NASDAQ
Options Market, and various other equity, options, and futures
exchanges. Moreover, as noted 3x leveraged exchange products have
been trading on Arca for years. As such, while the concept of
leverage is not novel to the markets, the Information Circular will
be distributed to provide additional information to market
participants.
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The Exchange believes that its surveillance procedures are adequate
to address any concerns about the trading of the securities on NASDAQ.
Trading of the securities on NASDAQ will be subject to FINRA's
surveillance procedures for derivative products.\15\ NASDAQ may obtain
information via the Intermarket Surveillance Group
[[Page 6381]]
(``ISG'') from other exchanges who are members or affiliates of the
ISG.\16\
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\15\ FINRA surveils trading on NASDAQ pursuant to a regulatory
services agreement. NASDAQ is responsible for FINRA's performance
under this regulatory services agreement.
\16\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
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The Exchange believes that by conforming Rule 5710 to the rules of
other exchanges (e.g. Arca and NYSE) and allowing listing opportunities
on the Exchange that are already allowed by rule on other exchanges,
the proposal would offer another venue for listing and trading the
Linked Securities products and thereby promote competition. For the
noted reasons, the Exchange proposes to change the acceleration
provision in its Rule 5710 to exactly match, as described above, what
is available on other exchanges.\17\
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\17\ No other changes are made or intended by this filing and
existing listing and trading rules continue to be applicable to
leveraged Linked Securities.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \18\ in general, and furthers the objectives of Section
6(b)(5) of the Act \19\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest. For the reasons noted in the filing, the Exchange proposes to
change the acceleration provision in its Rule 5710 from a two times to
a three times multiple of the performance of the underlying asset. This
exactly matches what is available on other exchanges. The Exchange
believes that by conforming Rule 5710 to the rules of other exchanges
(e.g. Arca and NYSE) and allowing listing opportunities on the Exchange
that are already allowed by rule on other exchanges, the proposal would
offer another venue for listing and trading the Linked Securities
products and thereby promote broader competition among exchanges.
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\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. To the contrary, where the
current variance in the rules of the exchanges limits competition, the
proposal will allow listing additional Linked Securities on the
Exchange, thereby promoting increased competition across markets and
liquidity on the Exchange.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing proposed rule change may take effect upon filing with
the Commission pursuant to Section 19(b)(3)(A) \20\ of the Act and Rule
19b-4(f)(6)(iii) thereunder \21\ because the foregoing proposed rule
change does not: (i) Significantly affect the protection of investors
or the public interest; (ii) impose any significant burden on
competition; and (iii) become operative for 30 days from the date on
which it was filed, or such shorter time as the Commission may
designate.
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\20\ 15 U.S.C. 78s(b)(3)(A).
\21\ 17 CFR 240.19b-4(f)(6)(iii).
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The Exchange has requested the Commission to waive the 30-day
operative delay period to allow the proposed rule change to become
operative upon filing.\22\ The Commission believes it is consistent
with the public interest to waive the 30-day operative delay. The
proposed rule change is substantially similar in all material respects
to Section 703.22(B)(6) of the NYSE Listed Company Manual and Arca
Equities Rule 5.2(j)(6)(A)(d), and each policy issue raised by the
proposed rule change (i) has been considered by the Commission in
approving the other exchanges' rules and (ii) is resolved in a manner
generally consistent with the approved rules. As such, the Commission
believes that the proposal presents no novel regulatory issues. Waiver
of the operative delay will allow the Exchange to list certain
securities that can already be listed and traded on other exchanges
without undue delay. Therefore, the Commission grants such waiver and
designates the proposal operative upon filing.\23\
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\22\ As required under Rule 19b-4(f)(6)(iii), the Exchange
provided the Commission with written notice of its intent to file
the proposed rule change along with a brief description and the text
of the proposed rule change, at least five business days prior to
the date of filing of the proposed rule change, or such shorter time
as designated by the Commission.
\23\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of such proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml ); or
Send an email to [email protected]. Please include
File No. SR-NASDAQ-2013-008 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File No. SR-NASDAQ-2013-008. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Web site (http://www.sec.gov/rules/sro.shtml ). Copies
of the submission, all subsequent amendments, all written statements
with respect to the proposed rule change that are filed with the
Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for Web site viewing and printing in
the Commission's Public Reference Room, 100 F Street NE., Washington,
DC 20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of NASDAQ. All comments received
will be posted without change; the Commission does not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File No. SR-NASDAQ-2013-008 and should be submitted on
or before February 20, 2013.
[[Page 6382]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01932 Filed 1-29-13; 8:45 am]
BILLING CODE 8011-01-P