[Federal Register Volume 80, Number 71 (Tuesday, April 14, 2015)]
[Notices]
[Pages 20049-20053]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-08449]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-74677; File No. SR-NYSEMKT-2015-23]
Self-Regulatory Organizations; NYSE MKT, LLC; Notice of Filing of
Proposed Rule Change Adopting a Principles-Based Approach To Prohibit
the Misuse of Material Nonpublic Information by Specialists and e-
Specialists by Deleting Rule 927.3NY and Section (f) of Rule 927.5NY
April 8, 2015.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on March 26, 2015, NYSE MKT LLC (the ``Exchange'' or ``NYSE
MKT'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the self-regulatory
organization. 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\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to adopt a principles-based approach to
prohibit the misuse of material nonpublic information by Specialists
and e-Specialists by deleting Rule 927.3NY and section (f) of Rule
927.5NY. The text of the proposed rule change is available on the
Exchange's Web site at www.nyse.com, at the principal office of the
Exchange, and at the Commission's Public Reference Room.
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 self-regulatory organization
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 those 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 parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to adopt a principles-based approach to
prohibit the misuse of material nonpublic information by Specialists
and e-Specialists by deleting Rule 927.3NY and section (f) of Rule
927.5NY. In so doing, the Exchange would harmonize its rules governing
Specialists, e-Specialists and Market Makers relating to protecting
against the misuse of material, non-public information. The Exchange
believes that Rules 927.3NY and 927.5NY(f) are no longer necessary
because all ATP Holders, including Specialists and e-Specialists, are
subject to the Exchange's general principles-based requirements
governing the protection against the misuse of material, non-public
information, pursuant to Exchange Rules, Part 1--General Rules, Rule 3
(General Prohibitions and Duty to Report), section (j) (``Rule 3(j)''),
which obviates the need for separately-prescribed requirements for a
subset of market participants on the Exchange.
Background
The Exchange has three classes of registered market makers.
Pursuant to Rule 920NY(a), a Market Maker is an ATP holder that is
registered with the Exchange for the purpose of submitting quotes
electronically and making transactions as a dealer-specialist verbally
on the Trading Floor, through the System from the Trading Floor, or
remotely from off the Trading Floor. As the rule further provides, a
Market Maker can be either a Remote Market Maker, a Floor Market Maker,
a Specialist, or an e-Specialist. All Market Makers are subject to the
requirements of Rule 925NY and 925.1NY, which set forth the obligations
of Market Makers, particularly relating to quoting.
[[Page 20050]]
Rule 927NY(c) specifies the obligations of Specialists, which, in
addition to the Market Maker obligations of Rule 925NY, must also honor
guaranteed markets. Rules 927.4NY and 927.5NY specify the obligations
of e-Specialists, which is a form of Specialist that operates remotely
only. The quoting obligations of all Market Makers, including
Specialists/e-Specialists, are set forth in Rule 925.1NY. That rule
sets forth the main difference between Market Makers and Specialists/e-
Specialists, namely that Specialists/e-Specialists have a heightened
quoting obligation as compared to Market Makers.\4\ In addition to a
heightened quoting obligation, pursuant to Rule 964NY, Specialists/e-
Specialists that are participants in the Specialist Pool are eligible
to receive a guaranteed participation of incoming bids and offers.\5\
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\4\ Compare Rule 925.1NY(b) (``Specialists must provide
continuous two-sided quotations throughout the trading day in its
appointed issues [sic] 90% of the time the Exchange is open for
trading in each issue.'') with Rule 925.1NY(c) (``A Market Maker
must provide continuous two-sided quotations throughout the trading
day in its appointed issues for 60% of the time the Exchange is open
for trading in each issue.'')
\5\ See Rule 964NY(b)(2)(C).
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Importantly, whether operating on the Trading Floor or remotely,
all Market Makers, including Specialists/e-Specialists, have access to
the same information in the Consolidated Book that is available to all
other market participants. Moreover, none of the Exchange's Market
Makers, including Specialists/e-Specialists, have agency obligations to
the Exchange's Consolidated Book. As such, the distinctions between
Market Makers and Specialists/e-Specialists are the quoting
requirements set forth in Rule 925.1NY and allocation guarantee for the
Specialist Pool set forth in Rule 964NY.
Notwithstanding that Market Makers, Specialists, and e-Specialists
have access to the same Exchange trading information as all other
market participants on the Exchange, the Exchange has distinct,
prescriptive rules governing how Specialists and e-Specialists may
operate. Rule 927.3NY prohibits ATP Holders affiliated with a
Specialist from purchasing or selling any option to which the
Specialist is appointed, except to reduce or liquidate positions after
appropriate identification and floor official approval of the
transaction. The rule further provides an exemption from the
prohibition for affiliated firms that implement specified Exchange-
approved procedures to restrict the flow of material, non-public
information. Rules 927.3NY(e)-(j) outline the ``Exemption Guidelines''
with which an affiliated firm must comply to obtain an exemption from
the restriction in Rule 927.3NY. These specified ``Exemption
Guidelines'' are meant to ensure that a Specialist will not have access
to material, non-public information possessed by its affiliated ATP
Holder, and that a firm will not misuse its affiliated Specialist's
material, non-public information. The Exchange notes that the current
rule is based on requirements from when specialists on the American
Stock Exchange had agency obligations to the Exchange's book.
Rule 927.5NY(f) requires e-Specialists to maintain information
barriers that are reasonably designed to prevent the misuse of
material, non-public information with any affiliates that may conduct a
brokerage business in option classes allocated to the e-Specialist or
act as specialist or Market Maker in any security underlying options
allocated to the e-Specialist (but does not require prior Exchange
approval and does not set forth proscribed ``Exemption Guidelines'').
Proposed Rule Change
The Exchange believes that the particularized guidelines in Rule
927.3NY and 927.5NY(f) for Specialists and e-Specialists, respectively,
are no longer necessary and proposes to delete them. Rather, the
Exchange believes that Rule 3(j) governing the misuse of material, non-
public information provides for an appropriate, principles-based
approach to prevent the market abuses Rules 927.3NY and 927.5(f) are
designed to address. Specifically, Rule 3(j) requires every Exchange
member to establish, maintain, and enforce written policies and
procedures reasonably designed to prevent the misuse of material, non-
public information by such member or associated persons. For purposes
of this requirement, the misuse of material, non-public information
includes, but is not limited to, the following:
(a) Trading in any securities issued by a corporation, or in any
related securities or related options or other derivative securities,
while in possession of material, non-public information concerning that
issuer;
(b) trading in a security or related options or other derivative
securities, while in possession of material, non-public information
concerning imminent transactions in the security or related securities;
or
(c) disclosing to another person or entity any material, non-public
information involving a corporation whose shares are publicly traded or
an imminent transaction in an underlying security or related securities
for the purpose of facilitating the possible misuse of such material,
non-public information.
Because Specialists and e-Specialists are already subject to the
requirements of Rule 3(j), the Exchange does not believe that it is
necessary to separately require specific limitations on dealings
between Specialists/e-Specialists and their affiliates. Deleting Rule
927.3NY and 927.5NY(f) and requirements for specific procedures would
provide Specialists/e-Specialists and ATP Holders with the flexibility
to adapt their policies and procedures as appropriate to reflect
changes to their business model, business activities, or the securities
market in a manner similar to how Market Makers on the Exchange
currently operate and consistent with Rule 3(j).
As noted above, Exchange Specialists and e-Specialists are
distinguished under Exchange rules from other types of Market Makers
only to the extent that Specialists and e-Specialists have heightened
obligations and allocation guarantees. However, none of these
heightened obligations provides [sic] different or greater access to
nonpublic information than any other market participant on the
Exchange.\6\ Specifically, whether on the Trading Floor or remotely,
neither Specialists nor e-Specialists on the Exchange have access to
trading information provided by the Exchange, either at, or prior to,
the point of execution, that is not made available to all other market
participants on the Exchange in a similar manner. Further, as noted
above, Specialists/e-Specialists on the Exchange do not have any agency
responsibilities for orders in the Consolidated Book. Accordingly,
because Specialists, e-Specialists and Market Makers do not have any
trading advantages at the Exchange due to their market role, the
Exchange believes that they should be subject to the same rules
regarding the protection against the misuse of material non-public
information, which in this case, is existing Rule 3(j).\7\
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\6\ See Rules 927NY(c) and 927.5NY.
\7\ The Exchange notes that by deleting Rule 927.3NY, the
Exchange would no longer require specific information barriers for
Specialists or require pre-approval of any information barriers that
a Specialist would erect for purposes of protecting against the
misuse of material non-public information. However, as is the case
today with Market Makers, information barriers of new entrants,
including new Specialists, would be subject to review as part of a
new firm application. Moreover, the policies and procedures of
Specialists and e-Specialists, including those relating to
information barriers, would be subject to review by FINRA, on behalf
of the Exchange, pursuant to a Regulatory Services Agreement.
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[[Page 20051]]
The Exchange notes that its proposed approach to use a principles-
based approach to protecting against the misuse of material non-public
information for all of its registered market makers is consistent with
recent approved rule changes for NYSE Arca Equities, Inc. (``NYSE
Arca''), BATS Exchange, Inc.'s (``BATS''), and New York Stock Exchange
LLC (``NYSE'') rules governing cash equity market makers on those
respective exchanges.\8\ Except for prescribed rules relating to floor-
based designated market makers on the NYSE, who have access to
specified non-public trading information, each of these exchanges have
moved to a principles-based approach to protecting against the misuse
of material non-public information. In connection with approving those
rule changes, the Commission found that eliminating prescriptive
information barrier requirements should not reduce the effectiveness of
exchange rules requiring its members to establish and maintain systems
to supervise the activities of its members, including written
procedures reasonably designed to ensure compliance with applicable
federal securities law and regulations, and with the rules of the
applicable exchange.\9\
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\8\ See Securities Exchange Act Release Nos. 60604 (Sept. 2,
2009), 76 FR 46272 (Sept. 8, 2009) (SR-NYSEArca-2009-78) (Order
approving elimination of NYSE Arca rule that required market makers
to establish and maintain specifically prescribed information
barriers, including discussion of NYSE Arca and Nasdaq rules)
(``Arca Approval Order''); 61574 (Feb. 23, 2010), 75 FR 9455 (Mar.
2, 2010) (SR-BATS-2010-003) (Order approving amendments to BATS Rule
5.5 to move to a principles-based approach to protecting against the
misuse of material, non-public information, and noting that the
proposed change is consistent with the approaches of NYSE Arca and
Nasdaq) (``BATS Approval Order''); and 72534 (July 3, 2014), 79 FR
39440 (July 10, 2014), SR-NYSE-2014-12) (Order approving amendments
to NYSE Rule 98 governing designated market makers to move to a
principles-based approach to prohibit the misuse of material non-
public information) (``NYSE Approval Order'').
\9\ See, e.g., BATS Approval Order, supra note 8 at 9458.
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Comparable to members of cash equity markets, the Exchange believes
that a principles-based rule applicable to members of options markets
would be equally effective in protecting against the misuse of material
non-public information. Indeed, Exchange Rule 3(j) is currently
applicable to Exchange Market Makers other than Specialists and e-
Specialists and already requires all ATP Holders to have policies and
procedures reasonably designed to protect against the misuse of
material nonpublic information, which is similar to the respective NYSE
Arca Equities, BATS and NYSE rules governing cash equity market makers.
The Exchange believes Rule 3(j) provides appropriate protection against
the misuse of material nonpublic information by Specialists and e-
Specialists on the Exchange and there is no longer a need for
prescriptive information barrier requirements in Rules 927.3NY and
927.5NY(f).
The Exchange notes that even with this proposed rule change,
pursuant to Rule 3(j), a Specialist or e-Specialist would still be
obligated to ensure that its policies and procedures reflect the
current state of its business and continue to be reasonably designed to
achieve compliance with applicable federal securities law and
regulations, and with applicable Exchange rules, including being
reasonably designed to protect against the misuse of material, non-
public information. While information barriers would not specifically
be required under the proposal, Rule 3(j) already requires that an ATP
Holder consider its business model or business activities in
structuring its policies and procedures, which may dictate that an
information barrier or a functional separation be part of the
appropriate set of policies and procedures that would be reasonably
designed to achieve compliance with applicable securities law and
regulations, and with applicable Exchange rules.
The Exchange further notes that under Rule 3(j), an ATP Holder
would be able [sic] structure its firm to provide for its options
Specialists, e-Specialists, or Market Makers, as applicable, to be
structured with its equities and customer-facing businesses, provided
that any such structuring would be done in a manner reasonably designed
to protect against the misuse of material, non-public information. For
example, pursuant to Rule 3(j), a Specialist on the Exchange could be
in the same independent trading unit, as defined in Rule 200(f) of
Regulation SHO,\10\ as an equities market maker and other trading desks
within the firm, including options trading desks, so that the firm
could share post-trade information to better manage its risk across
related securities. The Exchange believes it is appropriate, and
consistent with Rule 3(j) and Section 15(g) of the Act \11\ for a firm
to share options position and related hedging position information
(e.g., equities, futures, and foreign currency) within a firm to better
manage risk on a firm-wide basis. The Exchange notes, however, that if
so structured, a firm would need to have appropriate policies and
procedures, including information barriers as applicable, to protect
against the misuse of material non-public information, and specifically
customer information, consistent with Rule 3(j).
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\10\ 17 CFR part 242.200(f).
\11\ 15 U.S.C. 78o(g).
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The Exchange believes that the proposed reliance on the principles-
based Rule 3(j) would ensure that an ATP Holder that operates a
Specialist or e-Specialist would be required to protect against the
misuse of any material non-public information. As noted above, Rule
3(j) already requires that firms refrain from trading while in
possession of material non-public information concerning imminent
transactions in the security or related product. The Exchange believes
that moving to a principles-based approach rather than prescribing how
and when to wall off a Specialist or e-Specialist from the rest of the
firm would provide ATP Holders operating Specialists or e-Specialists
with appropriate tools to better manage risk across a firm, including
integrating options positions with other positions of the firm or, as
applicable, by the respective independent trading unit. Specifically,
the Exchange believes that it is appropriate for risk management
purposes for a member operating a Specialist or e-Specialist to be able
to consider both options Specialist/e-Specialist traded positions for
purposes of calculating net positions consistent with Rule 200 of
Regulation SHO, calculating intra-day net capital positions, and
managing risk both generally as well as in compliance with Rule 15c3-5
under the Act (the ``Market Access Rule'').\12\ The Exchange notes that
any risk management operations would need to operate consistent with
the requirement to protect against the misuse of material non-public
information.
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\12\ 17 CFR part 240.15c3-5.
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The Exchange further notes that if Specialists or e-Specialists are
integrated with other market making operations, they would be subject
to existing rules that prohibit ATP Holders from disadvantaging their
customers or other market participants by improperly capitalizing on a
member organization's access to the receipt of material, non-public
information. As such, a member organization that integrates its
Specialist/e-Specialist operations together with equity market making
would need to protect customer information consistent with existing
obligations to protect such information. The Exchange has rules
prohibiting members from disadvantaging their customers or other market
participants by improperly capitalizing on the
[[Page 20052]]
members' [sic] access to or receipt of material, non-public
information. For example, Rule 320 requires members to establish,
maintain, enforce, and keep current a system of compliance and
supervisory controls, reasonably designed to achieve compliance with
applicable securities laws and Exchange rules. Additionally, Rule
995NY(c) prevents an ATP Holder or person associated with an ATP
Holder, who has knowledge of an originating order, a solicited order,
or a facilitation order, to enter, based on such knowledge, an order to
buy or sell an option on the underlying securities of any option that
is the subject of the order, an order to buy or sell the security
underlying any option that is the subject of the order, or any order to
buy or sell any related instrument unless certain circumstances are
met.
The Exchange proposes to make a conforming amendment to remove the
section referencing Rule 927.3NY in Rule 927.6NY.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \13\ in general, and furthers the objectives of Section
6(b)(5) of the Act \14\ in particular, in that it is 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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\13\ 15 U.S.C. 78f(b).
\14\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change would remove
impediments to and perfect the mechanism of a free and open market by
adopting a principles-based approach to permit an ATP Holder operating
a Specialist or e-Specialist to maintain and enforce policies and
procedures to, among other things, prohibit the misuse of material non-
public information and eliminating restrictions on how an ATP Holder
structures it Specialist or e-Specialist operations. The Exchange notes
that the proposed rule change is based on an approved rule of the
Exchange to which Specialists and e-Specialists are already subject--
Rule 3(j)--and harmonizes the rules governing Specialists, e-
Specialists, and Market Makers. Moreover, ATP Holders operating
Specialists and e-Specialists would continue to be subject to federal
and Exchange requirements for protecting material non-public order
information.\15\ The Exchange believes that the proposed rule change
would remove impediments to and perfect the mechanism of a free and
open market because it would harmonize the Exchange's approach to
protecting against the misuse of material nonpublic information and no
longer subject Specialists/e-Specialists to prescriptive requirements.
The Exchange does not believes that the existing prescriptive
requirements applicable to Specialists/e-Specialists are narrowly
tailored to their respective roles because neither market participant
has access to Exchange trading information in a manner different from
any other market participant on the Exchange and they do not have
agency responsibilities to the Consolidated Book.
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\15\ See 15 U.S.C. 78o(g) and Rule 3(j).
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The Exchange further believes the proposal is designed to prevent
fraudulent and manipulative acts and practices and to promote just and
equitable principles of trade because existing rules make clear to
Specialists, e-Specialists and ATP Holders the type of conduct that is
prohibited by the Exchange. While the proposal eliminates prescriptive
requirements relating to the misuse of material non-public information,
Specialists, e-Specialists and ATP Holders would remain subject to
existing Exchange rules requiring them to establish and maintain
systems to supervise their activities, and to create, implement, and
maintain written procedures that are reasonably designed to comply with
applicable securities laws and Exchange rules, including the
prohibition on the misuse of material, nonpublic information.
The Exchange notes that the proposed rule change would still
require that ATP Holders operating Specialists and e-Specialists
maintain and enforce policies and procedures reasonably designed to
ensure compliance with applicable federal securities laws and
regulations and with Exchange rules. Even though there would no longer
be pre-approval of Specialist information barriers, any Specialist/e-
Specialist written policies and procedures would continue to be subject
to oversight by the Exchange and therefore the elimination of
prescribed restrictions should not reduce the effectiveness of the
Exchange rules to protect against the misuse of material non-public
information. Rather, ATP Holders will be able to utilize a flexible,
principles-based approach to modify their policies and procedures as
appropriate to reflect changes to their business model, business
activities, or to the securities market itself. Moreover, while
specified information barriers may no longer be required, an ATP
Holder's business model or business activities may dictate that an
information barrier or functional separation be part of the appropriate
set of policies and procedures that would be reasonably designed to
achieve compliance with applicable securities laws and regulations, and
with applicable Exchange rules. The Exchange therefore believes that
the proposed rule change will maintain the existing protection of
investors and the public interest that is currently applicable to
Specialists and e-Specialists, while at the same time removing
impediments to and perfecting a free and open market by moving to a
principles-based approach to protect against the misuse of material
non-public information.
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, the Exchange
believes that the proposal will enhance competition by allowing
Specialists, e-Specialists and Market Makers to comply with applicable
Exchange rules in a manner best suited to their business models,
business activities, and the securities markets, thus reducing
regulatory burdens while still ensuring compliance with applicable
securities laws and regulations and Exchange rules. The Exchange
believes that the proposal will foster a fair and orderly marketplace
without being overly burdensome upon Specialists and e-Specialists.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or up to 90 days (i) as the Commission may designate
if it finds such longer period to be appropriate and publishes its
reasons for so finding or (ii) as to which the self-regulatory
organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
[[Page 20053]]
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEMKT-2015-23 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEMKT-2015-23. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing will also be available
for inspection and copying at the NYSE's principal office and on its
Internet Web site at www.nyse.com. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-NYSEMKT-2015-23 and should be submitted on or before May
5, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-08449 Filed 4-13-15; 8:45 am]
BILLING CODE 8011-01-P