[Federal Register Volume 80, Number 11 (Friday, January 16, 2015)]
[Notices]
[Pages 2457-2460]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-00579]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-74036; File No. SR-NYSEMKT-2014-97]
Self-Regulatory Organizations; NYSE MKT LLC; Order Approving
Proposed Rule Change Amending Rules 311--Equities and 313--Equities To
Add Limited Liability Companies as Eligible Member Organizations and
Delineate the Information Limited Liability Companies Must Submit to
the Exchange as Part of the Membership Process; Eliminate the
Requirement That a Member Corporation Be Created or Organized, and
Maintain Its Principal Place of Business, in the United States; and
Make Additional Related Amendments To Update Its Membership Rules
January 12, 2015.
I. Introduction
On November 12, 2014, NYSE MKT LLC (the ``Exchange'' or ``NYSE
MKT'') filed with the Securities and Exchange Commission (the
``Commission'') pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposal
to amend NYSE MKT Rules 311--Equities (``Rule 311'') and 313--Equities
(``Rule 313'') to add limited liability companies (``LLCs'') to the
types of eligible member organizations and delineate the information
LLCs must submit to the Exchange as part of the membership process;
eliminate the requirement that a member corporation be created or
organized, and maintain its principal place of business, in the United
States; and make additional related amendments to update its membership
rules. The proposed rule change was published for comment in the
Federal Register on November 28, 2014.\3\ The Commission received one
comment on the proposal.\4\ 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. 73671 (Nov. 21,
2014), 79 FR 70900 (Nov. 28, 2014) (``Notice'').
\4\ See anonymous comment submitted through the Commission's
Internet comment form on December 19, 2014.
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II. Description of the Proposal
A. Rule 311
NYSE MKT Rule 311 governs the formation and approval of member
organizations. The Exchange proposes to revise Rule 311 to explicitly
provide for LLCs to apply to become member organizations and eliminate
the requirement that a member corporation be created or organized, and
maintain its principal place of business, in the United States.
The Exchange's membership rules currently provide for member
organizations to be corporations or partnerships, but have not
explicitly provided for LLCs.\5\ The Exchange proposes to add LLCs to
the types of potential member organizations and require LLCs to meet
the same requirements currently applicable to partnerships and
corporations set forth in Rule 311(b). As part of the proposed
revision, the Exchange seeks to add a new section (4) to Rule 311(b)
requiring every member of an LLC to be a member, principal executive,
or approved person.\6\ The Exchange also proposes to amend current Rule
311(b)(6) to reflect that proposed LLC member organizations must, like
corporations and partnerships, also comply with any additional
requirements as the rules of the Exchange may prescribe. In addition,
the Exchange proposes to add new Supplementary Material .16 to Rule 311
to specify that LLC applicants for Exchange membership are subject to
Rule 313.24 regarding the submission of copies of proposed or existing
limited
[[Page 2458]]
liability company documents and other agreements.
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\5\ Current Rule 311(f) permits the Exchange to approve
``entities that have characteristics essentially similar to
corporations, partnerships, or both'' as a member organization ``on
such terms and conditions as the Exchange may prescribe.''
\6\ Rule 311(b)(2) and (b)(3) currently impose the same
requirement on the relevant control persons at corporations and
partnerships, respectively.
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The Exchange also proposes to amend Rule 311(f) to eliminate the
geographic limitation on incorporation and domicile of corporation
members. The first sentence of Rule 311(f) currently provides that
every member corporation be a corporation ``created or organized under
the laws of, and shall maintain its principal place of business in, the
United States or any State thereof.'' \7\ The Exchange does not believe
that the Exchange's restriction on whether foreign entities may be a
member organization is consistent with either federal rules or those of
other self-regulatory organizations (``SRO''). The Exchange states that
rules promulgated pursuant to the Act require, under certain
circumstances, a foreign broker-dealer to register with the
Commission.\8\ The Exchange also states that other SROs, including the
Financial Industry Regulatory Authority, Inc. (``FINRA''), do not
require their members to be domiciled in the United States.\9\
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\7\ The first sentence of Rule 311(f) also provides that every
member firm organization shall be a partnership or corporation. This
statement is redundant to Rule 311(b), which the Exchange is
amending to add LLCs. Accordingly, the Exchange proposes to delete
the first sentence of Rule 311(f) in its entirety.
\8\ See 17 CFR 240.15a-6 and Commission Guide to Broker-Dealer
Registration, Division of Trading and Markets, available at http://www.sec.gov/divisions/marketreg/bdguide.htm (foreign broker-dealers
that, from the outside of the United States, induce or attempt to
induce securities transactions by any person in the United States,
or that use the means or instrumentalities of interstate commerce in
the United States for this purpose, must register as broker-dealers
with the Commission).
\9\ See, e.g., NASD Membership and Registration Rules (1000
Series). NASD Rule 1090 imposes specific requirements on members
that do not maintain an office in the United States responsible for
preparing and maintaining financial and other reports required to be
filed with the SEC and the Exchange, which the Exchange proposes to
import into Rule 313. See infra note 10 and accompanying text. See
also BATS Exchange, Inc. Rules 2.3, 2.5 and 2.6.
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The Exchange believes that the current restriction in Rule 311(f)
puts it at a competitive disadvantage because it restricts foreign
broker-dealers that are registered with the Commission and are members
of another SRO from also becoming Exchange member organizations. The
Exchange notes that its rules already require member organizations to
meet prerequisites as specified in Rule 2(b). Specifically, regardless
of corporate form, all member organizations must be registered broker-
dealers that are members of FINRA or another registered securities
exchange. If a registered broker-dealer transacts business with public
customers or conducts business on the Floor of the Exchange, such
member organization must be a member of FINRA.
The Exchange further notes that a member organization will be
subject to regulatory examination and jurisdiction for misconduct
whether or not it is based in the United States. However, for the
avoidance of doubt, as discussed below, the Exchange proposes to add
supplementary material to Rule 313 based on NASD Rule 1090 that imposes
certain requirements on foreign members that do not maintain an office
in the United States.
B. Rule 313
NYSE MKT Rule 313 sets forth certain corporate or partnership
documents that each member organization must submit to enter into and
continue in NYSE membership. The Rule also sets forth certain
restrictions on capital withdrawals and distributions applicable to
member corporations and partnerships. The Exchange proposes to amend
Rule 313 to delineate the types of documents that LLCs must submit
that, as noted, mirror the requirements currently in place for member
corporations and partnerships.
First, the Exchange proposes to add a subsection (d) to Rule 313
requiring all articles of organization and operating documents for LLCs
to be submitted for Exchange approval prior to becoming effective.
Relatedly, the Exchange proposes to add Supplementary Material .24
setting forth that existing LLCs must promptly submit certified copies
(to the extent possible) of articles of organization and operating
agreements to the Exchange.
Second, the Exchange proposes to add Supplementary Material .25
providing restrictions on capital withdrawals by LLC members that are
substantially the same as those applicable to corporations and
partnerships. The Supplementary Material would provide that the capital
contribution of any LLC member may not be withdrawn on less than six
months' written notice of withdrawal given no sooner than six months
after such contribution was first made without the prior written
approval of the Exchange. The Supplementary Material would also specify
that each member firm shall promptly notify the Exchange of the receipt
of any notice of withdrawal of any part of a member's capital
contribution or if any withdrawal is not made because prohibited under
the provisions of Rule 15c3-1 under the Act.
Third, the Exchange proposes to add Supplementary Material .26
providing that LLCs not organized under the laws of New York State must
subject themselves to the following restrictions: No distributions
shall be declared or paid that impair the LLC's capital; and no
distribution of assets shall be made to any member unless the value of
the LLC's assets remaining after such payment or distribution is at
least equal to the aggregate of its debts and liabilities, including
capital. These proposed restrictions are based on existing restrictions
applicable to member corporations and partnerships.
In addition, as noted above, the Exchange proposes to add new
Supplementary Material .27 to Rule 313 specifying the requirements
applicable to Foreign Member Organizations. The proposed new rule text
would adopt, without substantive change, paragraphs (a), (b), and (c)
of NASD Rule 1090 (Foreign Members), which impose specific requirements
on FINRA members that do not maintain an office in the United States
responsible for preparing and maintaining financial and other reports
required to be filed by the SEC and FINRA.\10\ As proposed, foreign
member organizations that do not maintain an office in the United
States responsible for preparing and maintaining financial and other
reports required to be filed with the Commission and the Exchange would
be required to: (1) Prepare all such reports, and maintain a general
ledger chart of account and any description thereof, in English and
U.S. dollars; (2) reimburse the Exchange or its representatives for
expenses incurred in connection with examinations of the member
organization to the extent that such expenses exceed the cost of
examining a member organization located within the continental United
States in the geographic location most distant from the Exchange's
principal office or, in such other amount as the Exchange may deem to
be an equitable allocation of such expenses; and (3) ensure the
availability of an individual fluent in English and knowledgeable in
securities and financial matters to assist
[[Page 2459]]
representatives of the Exchange during examinations.
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\10\ The Exchange is not proposing to adopt a rule similar to
NASD Rule 1090(d), which requires foreign members to ``utilize,
either directly or indirectly, the services of a broker/dealer
registered with the Commission, a bank or a clearing agency
registered with the Commission located in the United States in
clearing all transactions involving members of the Association,
except where both parties to a transaction agree otherwise.'' The
Exchange agrees with FINRA, which similarly recommended skipping
paragraph (d) as part of its contemplated adoption of NASD Rule
1090, that the provision is ``outdated'' and that clearing
arrangements are better addressed by FINRA Rule 4311 (Carrying
Agreements). See FINRA Regulatory Notice 13-29 at 27 (Sept. 2013).
FINRA Rule 4311 governs the requirements applicable to members when
entering into agreements for the carrying of any customer accounts
in which securities transactions can be effected.
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The Exchange also proposes to eliminate certain restrictions, which
the Exchange considers redundant, on member organizations and
prospective member organizations organized as partnerships and
corporations. The Exchange proposes to eliminate the requirement in
Rule 313.11 that the partnership articles of each member firm provide
that capital withdrawals by partners cannot be made without the prior
written approval of the Exchange. Rule 313.11 already requires the
Exchange's prior written approval for any such capital withdrawals, and
member organizations need to monitor for and comply with the
prohibition, including whether particular withdrawals violate net
capital requirements. The Exchange believes that because Exchange rules
already govern this behavior, a partnership seeking approval as a
member organization would not need to amend its partnership articles to
reflect this existing rule requirement.\11\
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\11\ See also infra note 12.
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Further, the Exchange proposes to eliminate the requirement in Rule
313.20 that prospective member corporations submit an opinion of
counsel stating, among other things, that the corporation is duly
organized and existing, that its stock is validly issued and
outstanding, and that the restrictions and provisions required by the
Exchange on the transfer, issuance, conversion and redemption of its
stock have been made legally effective. Corporate members are required
under the Rule to submit relevant corporate documents, including
articles of incorporation, that contain the same information required
in the opinion of counsel. The Exchange represents that requiring a
legal opinion attesting to facts contained in a corporation's public
filings is redundant and, given the expense, potentially a disincentive
to smaller entities applying for Exchange membership.
Similarly, the Exchange proposes to remove the requirement in Rule
313.23 that the opinion of counsel submitted to the Exchange at the
time the corporation applies for approval under Rule 313.20 state the
extent to which the corporation has made the following prohibitions
legally effective: The prohibition on declaring or paying a dividend
that impairs the capital of the corporation and the prohibition on
distributing assets to any stockholder unless the value of the
corporate assets remaining after such payment or distribution is at
least equal to the aggregate of its debts and liabilities, including
capital. Rule 313.23 would continue to prohibit corporation members
from declaring or paying dividends or distributing corporate assets
that impair the corporation's capital, and member corporations would
not be relieved of the obligation to monitor and enforce these
prohibitions. The Exchange believes that requiring these
representations in a separate legal opinion is redundant and serves no
necessary regulatory or other purpose.\12\
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\12\ FINRA Rule 4110 (Capital Compliance) contains similar
prohibitions on capital withdrawals by FINRA members without
requiring that the prohibitions be reflected in a firm's partnership
articles or requiring a legal opinion that the member has made the
prohibitions legally effective. See FINRA Rule 4110(c)(1) (``No
equity capital of a member may be withdrawn for a period of one year
from the date such equity capital is contributed, unless otherwise
permitted by FINRA in writing.'').
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Finally, the Exchange proposes to make certain miscellaneous
amendments to Rule 313. Specifically, the Exchange proposes to replace
outdated references to ``Regulation and Surveillance'' with ``the
Exchange'' in Rules 313.10 and 313.20.\13\ Similarly, the Exchange
proposes to replace outdated references to ``photostatic'' copies in
Rules 313.10 and 313.20 in connection with the submission of documents
to the Exchange and replace them with ``electronically or mechanically
reproduced.''
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\13\ Under Rule 0--Equities, references to the Exchange also
refer to FINRA staff and FINRA departments acting on behalf of the
Exchange pursuant to a Regulatory Services Agreement (``RSA'').
FINRA currently provides member application proceedings services to
the Exchange pursuant to an RSA.
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As noted above, the Commission received only one comment on the
proposed rule change.\14\ The comment expressed the view that the
proposed rule change was a ``good idea'' but did not elaborate.
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\14\ See supra note 4.
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III. Discussion and Commission Findings
After carefully considering the proposal and the one comment
submitted, 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.\15\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\16\ 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 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.
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\15\ In approving the proposed rule change, the Commission has
considered the proposed rule change's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\16\ 15 U.S.C. 78f(b)(5).
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The Commission agrees with the Exchange that adding LLCs to the
list of eligible member organizations would remove impediments to and
perfect the mechanism of a free and open market and a national market
system by expanding the types of organizational forms a member
organization may take. The Exchange also believes that permitting LLCs
to become member organizations subject to the same restrictions and
requirements currently applicable to corporations and partnerships also
protects investors and the public interest by holding LLCs to the same
high standards.
In addition, permitting non-United States-based registered broker-
dealers that are members of FINRA or another registered securities
exchange and that do not have their principal place of business in the
United States to become Exchange member organizations would remove
impediments to and perfect the mechanism of a free and open market by
removing geographic restrictions on Exchange membership that are not
required by FINRA or other exchanges. Broadening the Exchange
membership pool by facilitating the participation of additional
foreign-based U.S. registered broker-dealers would benefit investors
and the public interest by increasing market participation and depth at
the Exchange. Moreover, adoption of specific requirements for foreign
members that do not maintain an office in the United States based on
NASD Rule 1090 would further assure that foreign Exchange members, once
approved, remain subject to regulatory examination and jurisdiction.
In addition, updating the Exchange's rules to remove requirements
that the Exchange believes are redundant--that a member firm's
partnership articles provide that capital withdrawals by partners
cannot be made without the prior written approval of the Exchange, that
prospective member corporations submit an opinion of counsel reciting
facts contained in its public filings, and that certain prohibitions
have been made legally effective--would remove impediments to and
perfect the mechanism of a free and open market and a national market
system by ensuring that potential member organizations, persons subject
to the Exchange's jurisdiction, regulators, and
[[Page 2460]]
the public could more easily navigate the Exchange's rulebook and
better understand what obligations attach and when. Further, updating
the Exchange's rules to remove what the Exchange considers redundant
requirements also would protect investors as well as the public
interest by providing transparency and reducing potential confusion
regarding the Exchange membership process that may result from having
what the Exchange characterizes as obsolete rules and outdated
guidelines in the Exchange's rulebook. For the same reasons, updating
the Exchange's rules to remove requirements that the Exchange considers
outdated would remove impediments to and perfect the mechanism of a
free and open market and a national market system and is equally
designed to protect investors as well as the public interest.
Based on the foregoing, the Commission finds the proposed rule
change is consistent with the Act.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\17\ that the proposed rule change (SR-NYSEMKT-2014-97) be, and
hereby is, approved.
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\17\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-00579 Filed 1-15-15; 8:45 am]
BILLING CODE 8011-01-P