[Federal Register Volume 78, Number 58 (Tuesday, March 26, 2013)]
[Notices]
[Pages 18410-18413]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-06884]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69196]
Order Granting a Limited Exemption From Rule 102 of Regulation M
Concerning the NASDAQ Stock Market LLC Market Quality Program Pilot
Pursuant to Regulation M Rule 102(e)
March 20, 2013.
The Securities and Exchange Commission (``Commission'') approved a
proposed rule change of the NASDAQ Stock Market LLC (``Exchange'' or
``NASDAQ'') to add new NASDAQ Rule 5950 (``New Rule 5950'') to
establish the Market Quality Program (``MQP'' or ``Program'').\1\ In
connection with the Program, an MQP Company \2\ may list an eligible
MQP Security \3\ on NASDAQ and in addition to the standard (non-MQP)
NASDAQ listing fee, a sponsor may pay a fee (``MQP Fee'') \4\ that will
be used for the purpose of incentivizing one or more market makers to
enhance the market quality of an MQP Security on a voluntary pilot
basis. The Commission believes that payment of the MQP Fee, which is
incurred by the MQP Company but paid by the sponsor associated with the
MQP Company, for the purpose of incentivizing market makers to make a
quality market in otherwise less liquid MQP Securities would constitute
an indirect attempt by the issuer to induce a bid for or a purchase of
a covered security during a restricted period.\5\ As a result, absent
exemptive relief, participation in the MQP by an MQP Company would
violate Rule 102 of Regulation M.\6\ This order grants a limited
exemption from Rule 102 of Regulation M solely to permit MQP Companies
to participate in the MQP during the pilot, subject to certain
conditions described below.
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\1\ Securities Exchange Act Release No. 69195, (Mar. 20, 2013)
(``Approval Order''). The Approval Order contains a detailed
description of the MQP. On December 7, 2012, NASDAQ filed with the
Commission, pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934, as amended (``Act'' or ``Exchange Act'') and Rule 19b-4
thereunder, a proposed rule change to establish the MQP. The
proposed rule change, as modified by Amendment No. 1 thereto, was
published for comment in the Federal Register on December 31, 2012.
Securities Exchange Act Release No. 68515 (Dec. 21, 2012), 77 FR
77141 (Dec. 31, 2012) (``Notice''). On February 7, 2013, NASDAQ
submitted Amendment No. 2 to the proposed rule change. On February
8, 2013 NASDAQ withdrew Amendment No. 2 due to a technical error in
that amendment and submitted Amendment No. 3 to the proposed rule
change. As noted in the Approval Order, Amendment No. 3 provided
clarification to the proposed rule change and did not require notice
and comment. On February 14, 2013, the Commission designated a
longer period within which to take action on the proposed rule
change. Securities Exchange Act Release No. 68925 (Feb. 14, 2013),
78 FR 12116 (Feb. 21, 2013). The Approval Order grants approval of
the proposed rule change, as modified by Amendment Nos. 1 and 3.
Previously, NASDAQ filed, but later withdrew, an initial
proposed rule change to establish the MQP. On March 23, 2012, NASDAQ
filed with the Commission, pursuant to Section 19(b)(1) of the
Exchange Act and Rule 19b-4 thereunder, a proposed rule change to
establish the MQP. On March 29, 2012, the Exchange submitted
Amendment No. 1 to the proposed rule change. The proposed rule
change, as modified by Amendment No. 1 thereto, was published for
comment in the Federal Register on April 12, 2012. Securities
Exchange Act Release No. 66765 (Apr. 6, 2012), 77 FR 22042 (Apr. 12,
2012). On May 18, 2012, the Commission extended the time period in
which to either approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings to determine whether
to disapprove the proposed rule change to July 11, 2012. Securities
Exchange Act Release No. 67022 (May 18, 2012), 77 FR 31050 (May 24,
2012). On July 11, 2012, the Commission instituted proceedings to
determine whether to approve or disapprove the proposed rule change,
as modified by Amendment No. 1. Securities Exchange Act Release No.
67411 (Jul. 11, 2012), 77 FR 42052 (Jul. 17, 2012). On October 2,
2012, the Commission issued a notice of designation of a longer
period for Commission action on proceedings to determine whether to
disapprove the proposed rule change. Securities Exchange Act Release
No. 67961, 77 FR 61452 (Oct. 9, 2012). On November 6, 2012, NASDAQ
submitted Amendment No. 2 to the proposed rule change. On December
6, 2012, NASDAQ withdrew the proposed rule change, as modified by
Amendment Nos. 1 and 2 thereto. Securities Exchange Act Release No.
68378, 77 FR 74042 (Dec. 12, 2012) (Securities Exchange Act Release
Nos. 66765, 67022, 67411, 67961, and 68378 collectively, the
``Initial Proposal'').
\2\ The term ``MQP Company'' means the trust or company housing
the exchange traded fund (``ETF'') or, if the ETF is not a series of
a trust or company, then the ETF itself. New Rule 5950(e)(5).
\3\ The term ``MQP Security'' means an ETF security issued by an
MQP Company that meets all of the requirements to be listed on
NASDAQ pursuant to Rule 5705. New Rule 5950(e)(1).
\4\ The MQP Fee, as described more fully in New Rule 5950(b)(2),
consists of an annual basic MQP Fee, and may include an additional
annual supplemental fee.
\5\ See Securities Exchange Act Release No. 67411 (Jul. 11,
2012), 77 FR 42052 (Jul. 17, 2012) (stating ``The Commission
believes that issuer payments made under the SRO Proposals would
constitute an indirect attempt by the issuer of a covered security
to induce a purchase or bid in a covered security during a
restricted period in violation of Rue 102 * * * [u]nder the NASDAQ
Proposal, the issuer payments would `be used for the purpose of
incentivizing one or more Market Makers in the MQP Security,' which
could induce bids or purchases for the issuer's security during a
restricted period'').
\6\ 17 CFR 242.102.
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NASDAQ represents that the MQP is designed to ``promote market
quality'' in certain ETFs listed on NASDAQ.\7\ NASDAQ represents that,
pursuant to the MQP, the MQP Fee will be used for the purpose of
incentivizing one or more market makers in the MQP Security (``MQP
Market Maker'') \8\ to make a quality market in the MQP Security.\9\ An
MQP Company participating in the MQP shall incur an annual basic MQP
Fee of $50,000 per MQP Security.\10\ An MQP Company may also
voluntarily incur an annual supplemental MQP Fee per MQP Security.\11\
The MQP Fee is in addition to the standard (non-MQP) NASDAQ listing fee
applicable to the MQP Security.\12\ NASDAQ will prospectively bill each
MQP Company for the MQP Fee.\13\ The MQP Fee will be credited to the
NASDAQ General Fund.\14\ MQP Credits for each MQP Security will be
calculated monthly and credited out of the NASDAQ General Fund
quarterly on a pro rata basis to one or more eligible MQP Market
Makers.\15\ The voluntary MQP established by New Rule 5950 will be
effective on a pilot basis.\16\
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\7\ New Rule 5950 Preamble.
\8\ ``The term `Market Maker' has the meaning given in Rule
5005(a)(24).'' New Rule 5950(e)(3).
\9\ New Rule 5950 Preamble.
\10\ New Rule 5950(b)(2)(A).
\11\ New Rule 5950(b)(2)(B).
\12\ New Rule 5950(b)(2)(C).
\13\ New Rule 5950(b)(2)(D).
\14\ New Rule 5950(b)(2)(E).
\15\ New Rule 5950(c)(2).
\16\ New Rule 5950(f).
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[[Page 18411]]
Under New Rule 5950, NASDAQ will be required to provide
notification on its Web site regarding: (i) acceptance of an MQP
Company, on behalf of an MQP Security, and an MQP Market Maker into the
Program; \17\ (ii) the total number of MQP Securities that any one MQP
Company may have in the Program; \18\ (iii) the names of MQP Securities
and MQP Market Maker(s) in each MQP Security, and the dates that an MQP
Company, on behalf of an MQP Security, commences participation in and
withdraws or is terminated from the Program; \19\ (iv) a statement
about the MQP that sets forth a general description of the Program as
implemented on a pilot basis and a fair and balanced summation of the
potentially positive aspects of the Program (e.g., enhancement of
liquidity and market quality in MQP Securities) as well as the
potentially negative aspects and risks of the Program (e.g., possible
lack of liquidity and negative price impact on MQP Securities that
withdraw or are terminated from the Program), and indicates how
interested parties can get additional information about products in the
Program; \20\ (v) when NASDAQ receives notification that an MQP
Company, on behalf of an MQP Security, or a Market Maker intends to
withdraw from the Program, and the date of actual withdrawal or
termination from the Program; \21\ and (vi) any limit on the number of
MQP Market Makers permitted to register in an MQP Security.\22\
Furthermore, MQP Companies must, on a product-specific Web site for
each product, indicate that the product is in the MQP and provide a
link to the Exchange's MQP Web page during such time that the MQP
Company lists an MQP Security.\23\
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\17\ New Rule 5950(a)(1)(C)(i).
\18\ New Rule 5950(a)(1)(C)(ii).
\19\ New Rule 5950(a)(1)(C)(iii).
\20\ New Rule 5950(a)(1)(C)(iv).
\21\ New Rule 5950(a)(2)(D).
\22\ New Rule 5950(c)(3).
\23\ New Rule 5950(b)(1)(D).
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In response to the Notice, the Commission received three comment
letters in support of the MQP.\24\ One commenter stated that the MQP
program ``could create value for an issuer,'' ``jump-start trading,''
and make future liquidity ``less uncertain.'' \25\ One commenter
believes ``the MQP could benefit promising tech companies that today
may lack liquid, quality markets.'' \26\ Another commenter stated that
``payments from issuers to market makers are used in a number of
countries outside of the United States with great success.'' \27\ This
commenter reiterated answers to questions concerning disclosure posed
in connection with the Initial Proposal. In some areas, the commenter
stated that ``more information is probably better than less,'' but in
other areas cautioned about the ``potential for information overload.''
\28\ Further, the commenter stated that a ticker symbol identifier
could be used in connection with an MQP Company's participation in the
Program to signal to investors that lower volatility is generated by
the Program.\29\ Another commenter agreed that ``MQP brokers' trades
and quotes should be flagged.'' \30\
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\24\ Letter from Albert J. Menkveld, Associate Professor of
Finance, VU University Amsterdam and the Duisenberg School of
Finance, dated February 18, 2013 (``Menkveld Letter''), Letter from
Rey Ramsey, President and CEO, TechNet, dated January 22, 2013
(``TechNet Letter'') and Letter from Daniel G. Weaver, Ph.D.,
Professor of Finance, Rutgers Business School, dated January 30,
2013 (``Weaver Letter''). Both commenters submitted letters in
support of the Initial Proposal as well. Letter from Rey Ramsey,
President and CEO, TechNet, dated June 20, 2012 and Letter from
Daniel G. Weaver, Ph.D., Professor of Finance, Rutgers Business
School, dated April 26, 2012.
\25\ Menkveld Letter.
\26\ TechNet Letter.
\27\ Weaver Letter.
\28\ Id.
\29\ Id.
\30\ Menkveld Letter.
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In addition, commenters generally in favor of the Initial Proposal
supported the Program's stated goal to increase liquidity and promote
efficient, robust markets for exchange-traded products.\31\ However, in
connection with the Initial Proposal, certain commenters expressed
concerns about the MQP, including the departure from rules precluding
market makers from directly or indirectly accepting payment from an
issuer of a security for acting as a market maker.\32\ In particular,
commenters discussed the potential distortive impact on the natural
market forces of supply and demand.\33\ Commenters also discussed what
they viewed as the failure of Program requirements to adequately
mitigate potential negative impacts of the MQP, including concerns
about hampering investors' ability to evaluate quotations in MQP
Securities.\34\
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\31\ See, e.g., Letter from Joseph Cavatoni, Managing Director,
and Joanne Medero, Managing Director, BlackRock, Inc., dated July
11, 2012.
\32\ See, e.g., Letter from Gus Sauter, Managing Director and
Chief Investment Officer, Vanguard, dated May 3, 2012 (citing to a
discussion in NASD Notice to Members 75-16 regarding the reasons for
prohibiting issuer payments for market making: ``The additional
factor of payments by an issuer to a market maker would probably be
viewed as a conflict of interest since it would undoubtedly
influence, to some degree, a firm's decision to make a market and
thereafter, perhaps, the prices it would quote. Hence, what might
appear to be independent trading activity may well be illusory.'').
In addition, another commenter noted ``that the MQP would represent
a departure from the current rules precluding market makers from
directly or indirectly accepting payment from an issuer of a
security for acting as a market marker'' yet supported the concept
of market maker incentive programs on a pilot basis. Letter from Ari
Burstein, Investment Company Institute (``ICI''), dated May 3, 2012.
In a subsequent letter, however, the same commenter noted that
certain of its members opposed the MQP and stated that it ``could
create a `pay-to-play' environment.'' Letter from Ari Burstein, ICI,
dated August 16, 2012. Pursuant to the Approval Order, the Exchange
will adopt new IM-2460-1 to exclude the MQP from NASDAQ Rule 2460
(Payment for Market Making). The Approval Order notes that NASDAQ
Rule 2460 is almost identical to, and is based on, FINRA Rule 5250
(Payments for Market Making) and that a number of aspects of the MQP
mitigate the concerns that FINRA Rule 5250 and NASDAQ Rule 2460 were
designed to address.
\33\ See, e.g., Letter from F. William McNabb, Chairman and
Chief Executive Officer, Vanguard, dated August 16, 2012.
\34\ See, e.g., Letter from Gus Sauter, Managing Director and
Chief Investment Officer, Vanguard, dated May 3, 2012.
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One commenter stated that ``[i]ssuer payments to market makers have
the potential to distort market forces, resulting in spreads and prices
that do not reflect actual supply and demand.'' \35\ Another commenter
suggested that ``[i]ncentivized trading obfuscates true supply and
demand by creating volume where no natural buyers and sellers exist.''
\36\ One commenter questioned whether any safeguards could alleviate
their concerns regarding issuer payments to market makers.\37\ Another
commenter questioned whether information that would be posted to
NASDAQ's Web site would adequately address investor protection and
market integrity concerns because investors may not search the NASDAQ
Web site for important information about a particular product.\38\
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\35\ Letter from F. William McNabb, Chairman and Chief Executive
Officer, Vanguard, dated August 16, 2012.
\36\ Letter from Timothy Quast, Managing Director, Modern IR,
dated April 26, 2012.
\37\ Letter from Ari Burstein, ICI, dated August 16, 2012
(stating ``ICI members who oppose the Programs believe any fixes to
the proposed parameters will be insufficient to address their
overall concerns with market maker incentive programs'').
\38\ Letter from Gus Sauter, Managing Director and Chief
Investment Officer, Vanguard, dated May 3, 2012 (asking ``[f]or
example, given what we know about investor behavior, is it likely
that investors would consult Nasdaq's Web site for information about
which ETFs and market makers are participating in the Program. * * *
[i]f not, then most investors would not be able to distinguish
quotations that reflect true market forces from quotations that have
been influenced by issuer payments''). As discussed below, while New
Rule 5950 requires certain disclosures on the NASDAQ Web site, the
Commission believes that additional disclosures are required to
address these concerns as they relate to relief from Rule 102 of
Regulation M.
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[[Page 18412]]
Rule 102 of Regulation M
Rule 102 of Regulation M prohibits issuers, selling security
holders, or any affiliated purchaser of such persons, directly or
indirectly, from bidding for, purchasing, or attempting to induce any
person to bid for or purchase a covered security \39\ during the
applicable restricted period in connection with a distribution of
securities effected by or on behalf of an issuer or selling security
holder, except as specifically permitted in the rule.\40\ As mentioned
above, the Commission believes that the payment of the MQP Fee would
constitute an indirect attempt to induce a bid for or purchase of a
covered security during the applicable restricted period.\41\ As a
result, absent exemptive relief, participation in the MQP by an MQP
Company would violate Rule 102.
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\39\ Covered security is defined as any security that is the
subject of a distribution, or any reference security. 17 CFR
242.100(b).
\40\ 17 CFR 242.102(a).
\41\ See note 5, supra.
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On the basis of the conditions set out below and the requirements
set forth in New Rule 5950, which in general are designed to help
inform investors about the potential impact of the MQP, the Commission
finds that it is appropriate in the public interest, and is consistent
with the protection of investors, to grant a limited exemption from
Rule 102 of Regulation M solely to permit the payment of the MQP Fee as
set forth in New Rule 5950 during the pilot.\42\ This limited exemption
is conditioned on a requirement that the MQP Security is an ETF and the
secondary market price for shares of the ETF must not vary
substantially from the net asset value of such ETF shares during the
duration of the ETF's participation in the MQP. This condition is
designed to limit the MQP to ETFs that have a pricing mechanism that is
expected to keep the price of the ETF shares tracking the net asset
value of the ETF shares, which should make the shares less susceptible
to price manipulation.
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\42\ Rule 102(e) allows the Commission to grant an exemption
from the provision of Rule 102, either unconditionally or on
specified terms and conditions, to any transaction or class of
transactions, or to any security or class of securities.
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This limited exemption is further conditioned on disclosure
requirements, as set forth below, which are designed to alert potential
investors that the trading market for the otherwise less liquid
securities in the MQP may be affected by the Program. By making it
easier for investors to be able to distinguish which quotations may
have been influenced by the MQP Fee from those that have not, and by
requiring the MQP Companies to provide information on the potential
effect of Program participation on the price of their MQP Securities,
the required enhanced disclosure requirements are designed to inform
potential investors about the potential distortive impact of the MQP
Fee on the natural market forces of supply and demand. General
disclosure provided on the Exchange's Web site and a simple
notification on a product-specific Web site, as required under new
NASDAQ Rule 5950, may not be sufficient to obtain this result. The
required enhanced disclosures are expected to promote greater investor
protection by helping to ensure that investors (who may not know to
search the NASDAQ's Web site) will have easier access to important
information about a particular ETF.\43\ We also note that, to the
extent that information about participation in the MQP is material,
disclosure of this kind may already be required by the federal
securities laws and rules.
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\43\ The required Web site and press release disclosures should
be less burdensome than requiring a ticker symbol identifier or
flagging MQP broker quotes and trades, as suggested by two
commenters.
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Conclusion
It is therefore ordered, that MQP Companies are hereby exempted
from Rule 102 of Regulation M solely to permit the payment of the MQP
Fee as set forth in New Rule 5950 in connection with an MQP Security
during the pilot, subject to the conditions contained in this order and
compliance with the requirements of New Rule 5950.
This exemption is subject to the following conditions:
1. The MQP Security is an ETF and the secondary market price for
shares of the ETF must not vary substantially from the net asset value
of such ETF shares during the duration of the MQP Security's
participation in the MQP;
2. An MQP Company must provide prompt notice to the public by
broadly disseminating a press release prior to entry (or upon re-entry)
into the MQP. This press release must disclose:
a. The payment of an MQP Fee is intended to generate more quotes
and trading than might otherwise exist absent this payment, and that
the MQP Security leaving the Program may adversely impact a purchaser's
subsequent sale of the security; and
b. A hyperlink to the Web page described in condition (4) below;
3. An MQP Company must provide prompt notice to the public by
broadly disseminating a press release prior to an MQP Security leaving
the Program for any reason, including termination of the Program. This
press release must disclose:
a. The date that the MQP Security is leaving the MQP and that
leaving the MQP may have a negative impact on the price and liquidity
of the MQP Security which could adversely impact a purchaser's
subsequent sale of the MQP Security; and
b. A hyperlink to the Web page described in condition (4) below;
4. An MQP Company must provide prompt, prominent and continuous
disclosure on its Web site in the location generally used to
communicate information to investors about a particular MQP Security,
and for an MQP Security that has a separate Web site, the MQP
Security's Web site of:
a. The MQP Security and ticker, date of entry into the Program, and
the amount of the MQP Fee (basic and supplemental, if any);
b. Risk factors investors should consider when making an investment
decision, including that participation in the Program may have
potential impacts on the price and liquidity of the MQP Security; and
c. Termination date of the pilot, anticipated date (if any) of the
MQP Security leaving the Program for any reason and the date of actual
exit date (if applicable), and that the MQP Security leaving the
Program could adversely impact a purchaser's subsequent sale of the MQP
Security; and
5. The Web site disclosure in condition 4 must be promptly updated
if a material change occurs with respect to any information contained
in the disclosure.
This exemptive relief expires when the pilot terminates, and is
subject to modification or revocation at any time the Commission
determines that such action is necessary or appropriate in furtherance
of the purposes of the Exchange Act. This exemptive relief is limited
solely to the payment of the MQP Fee as set forth in New Rule 5950 for
an MQP Security that is an ETF participating in the Program, and does
not extend to any other activities, any other security of the MQP
Company, or any other issuers.\44\ In addition, persons relying on this
exemption are directed to the anti-fraud and anti-manipulation
provisions of the Exchange Act, particularly Sections 9(a) and 10(b),
and Rule 10b-5 thereunder. Responsibility for compliance with these and
any other applicable provisions of the federal securities laws must
rest with the persons relying on this exemption. This
[[Page 18413]]
order does not represent Commission views with respect to any other
question that the proposed activities may raise, including, but not
limited to the adequacy of the disclosure required by federal
securities laws and rules, and the applicability of other federal or
state laws and rules to, the proposed activities.
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\44\ Other activities, such as ETF redemptions, are not covered
by this exemptive relief.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\45\
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\45\ 17 CFR 200.30-3(a)(6).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-06884 Filed 3-25-13; 8:45 am]
BILLING CODE 8011-01-P