[Federal Register Volume 73, Number 224 (Wednesday, November 19, 2008)]
[Notices]
[Pages 69685-69696]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-27422]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-58927; File No. SR-BSE-2008-48]
Self-Regulatory Organizations; Boston Stock Exchange,
Incorporated; Notice of Filing of Proposed Rule Change To Establish New
Rules for Membership, Member Conduct, and the Listing and Trading of
Cash Equity Securities
November 10, 2008.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
[[Page 69686]]
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 3, 2008, the Boston Stock Exchange (the ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule 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 Substance
of the Proposed Rule Change
The Exchange proposes: (i) To adopt new rules governing membership,
the regulatory obligations of members, listing, and equity trading,
(ii) to amend its certificate of incorporation and by-laws to reflect
the proposed change in the name of the Exchange to NASDAQ OMX BX, Inc.,
(iii) to amend and restate the Operating Agreement of BSX Group LLC
(the ``Operating Agreement''), which will operate the Exchange's cash
equities trading business, and which will be renamed NASDAQ OMX BX
Equities LLC (``BX Equities LLC'' or the ``Company''), and (iv) to
adopt a Delegation Agreement between the Exchange and BX Equities LLC.
The text of the proposed rule change is available from the principal
office of the Exchange and from the Commission, and is also available
at http://www.nasdaqtrader.com/Trader.aspx?id=BSEPendingRules.
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
On August 29, 2008, the Exchange was acquired by The NASDAQ OMX
Group, Inc. (``NASDAQ OMX''). At the time of this acquisition, the
Exchange was not operating a venue for trading cash equities. The
Exchange is now proposing to adopt a new rulebook with rules governing
membership, the regulatory obligations of members, listing, and equity
trading. The new rules, which will be referred to as the ``Equity
Rules,'' will be based to a substantial extent on the rules of The
NASDAQ Stock Market LLC (the ``NASDAQ Exchange''). As is the case with
the NASDAQ Exchange, administration and enforcement of many of the
rules will be supported by the Financial Industry Regulatory Authority,
Inc. (``FINRA'') through a regulatory services agreement (the ``FINRA
Regulatory Contract''). Other rules, such as listing rules, will be
administered by personnel who will be dually employed by the Exchange
and the NASDAQ Exchange, or solely by the Exchange.
The Exchange's existing rules are divided between the rules
currently denominated as the ``Rules of the Board of Governors'' and
the ``Rules of the Boston Options Exchange Group LLC'' (the ``BOX
Rules''). The BOX Rules, and certain of the Rules of the Board of
Governors that are cross-referenced in the BOX Rules, currently govern
trading on the Exchange's Boston Options Exchange facility (``BOX'').
The cross-referenced Rules of the Board of Governors will be referred
to herein as the ``Grandfathered Rules,'' and the BOX Rules, together
with the Grandfathered Rules, will be referred to as the ``Options
Rules.'' The Options Rules, together with the Equity Rules, will be
referred to as the ``Rules of the Exchange.'' The Exchange is currently
preparing a separate proposed rule change to update the Grandfathered
Rules in light of their more limited applicability and to reflect
changes in the Exchange's operations and corporate form.
At present, a broker-dealer that is authorized for trading on BOX
(an ``Options Participant'') is not required to become a member of the
Exchange, but is nevertheless subject to Options Rules as if it were a
member.\3\ Under the new proposed Rules of the Exchange, this principal
(sic) will continue to apply. Thus, the Equity Rules will apply to
members, which will be authorized to engage in equity trading on the
Exchange, and the Options Rules will apply to Options Participants,
which will be authorized to engage in options trading. If a member opts
to become an Options Participant (or vice versa), it will be subject to
both sets of rules. Members must comply with the application
requirements of the Option Rules in order to become Options
Participants, and conversely, Options Participants must comply with the
membership application procedures of the Equity Rules in order to
become members and engage in equity trading.\4\
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\3\ See Chapter 1, Section 2 of the BOX Rules.
\4\ See Equity Rules 1013 and 1014; Chapter II of the BOX Rules.
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Equity Rules
0100 Series
The 0100 Series Equity Rules contain general provisions, including
definitions of general applicability. The rules are substantively
identical to the corresponding rules of the NASDAQ Exchange, with the
following exceptions:
Equity Rule 0120 includes definitions for ``Rules of the
Exchange'', ``Equity Rules'', ``Options Rules'', ``Grandfathered
Rules'', ``Options Participant'', and ``BOX'' consistent with the
definitions described above. The rule also defines ``BOXR'' to mean
``Boston Options Exchange Regulation, LLC'', a subsidiary of the
Exchange that will continue to regulate BOX under the existing Plan of
Delegation of Functions and Authority by the Boston Stock Exchange,
Inc., to Boston Options Exchange Regulation, LLC (the ``Delegation
Plan''), and defines ``BOX LLC'' to mean Boston Options Exchange
Regulation, LLC, the entity that operates BOX.
As described in greater detail below, the Exchange will
operate its cash equities trading business, to be named the NASDAQ OMX
BX Equities Market, through BX Equities LLC, and will adopt a
Delegation Agreement between the Exchange and BX Equities LLC.
Accordingly, Equity Rule 0120 contains definitions of ``NASDAQ OMX BX
Equities Market'', ``NASDAQ OMX BX Equities LLC'', and ``Delegation
Agreement''.
Equity Rule 0115 provides that the Equity Rules apply to
all members and their associated persons, while the Options Rules apply
to all Options Participants. The Equity Rules shall apply to Options
Participants only if they are also members of the Exchange.
Equity Rule 0160 references the Delegation Plan and the
Delegation Agreement and states that the staff, books, records and
premises of BOXR and BX Equities LLC are the staff, books, records and
premises of the Exchange subject to oversight pursuant to the Act, and
all officers, directors, employees and agents of BOXR are the officers,
[[Page 69687]]
directors, employees and agents of the Exchange for purposes of the
Act.\5\
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\5\ As described below, BX Equities LLC will have no directors,
so the reference to directors is omitted with respect to that
entity.
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1000 Series
The 1000 Series Equity Rules contain rules governing membership.
The rules are substantively identical to the corresponding rules of the
NASDAQ Exchange, with the following exceptions:
Equity Rule 1002(f) provides that a registered broker-
dealer that was a member organization in good standing of the Exchange
on the date immediately prior to the acquisition of the Exchange by
NASDAQ OMX (a ``Continuing Member'') is eligible for continued
membership in the Exchange if it continues to satisfy the membership
requirements adopted in the Equity Rule 1000 Series. Specifically, the
Continuing Member must sign a revised membership agreement and maintain
registrations of its associated persons as required under the Equity
Rules. Associated persons already registered with the Exchange will
likewise be eligible for continued registration if they satisfy the
requirements under the Equity Rules. Unlike members in the Exchange
prior to the NASDAQ OMX acquisition, members under the Equity Rules do
not possess an ownership interest in the Exchange.
In order to ensure that Continuing Members are not
subjected to registration requirements that did not previously exist
under the Rules of the Exchange, Equity Rules 1022 and 1032 adopt only
those categories of principal registration and representative
registration that previously existed and that will be relevant to the
future operations of the Exchange. As a result, the Exchange will not
be adopting the categories of Limited Principal--Introducing Broker/
Dealer Financial and Operations; Limited Principal--Investment Company
and Variable Contracts Products; Limited Representative--Investment
Company and Variable Contracts Products; Limited Representative--
Corporate Securities; Limited Representative--Equity Trader; Assistant
Representative--Order Processing; United Kingdom--Limited General
Securities Registered Representative; and Canada--Limited General
Securities Registered Representative. Similarly, under the Equity
Rules, the Exchange is not adopting the categories of Member Exchange
and Floor Employee, which were previously recognized by the Exchange,
as these categories will no longer be relevant to Exchange operations.
Because of the similarity between the proposed Equity
Rules and both NASDAQ Exchange Rules and FINRA Rules, Equity Rule
1013(a)(5)(C) provides that an approved member of FINRA or the NASDAQ
Exchange may apply to become an Exchange member and register with the
Exchange all associated persons whose registrations are approved with
FINRA or the NASDAQ Exchange (as applicable) in categories of
registration recognized by the Exchange through an expedited process by
submitting a Short Form Membership Application and Agreement. NASDAQ
Exchange Rule 1013 provides for a comparable process for FINRA members
becoming NASDAQ Exchange members.
2000 and 3000 Series
The Equity Rule 2000 Series establishes business conduct rules
applicable to members, and the Equity Rule 3000 Series establishes the
responsibilities of associated persons and employees of members. In
each case, they are substantively identical to the comparable rules of
the NASDAQ Exchange. The Exchange is, however, amplifying the
regulatory requirements applicable to index warrants, currency index
warrants, and currency warrants contained in the Equity Rule 2480
Series, and expects the NASDAQ Exchange to adopt a conforming rule
change.
4000 Series
The Equity Rule 4000 Series contains marketplace rules governing
listing and trading of cash equities on the Exchange.
Listing Rules
The proposed listing standards for the Exchange are based on the
standards of the NASDAQ Exchange. The NASDAQ Exchange, however, has
three listing tiers--the Nasdaq Capital Market, the Nasdaq Global
Market, and the Nasdaq Global Select Market--with progressively higher
listing standards applicable at each tier. In contrast, the Exchange
will have only one listing tier, with listing standards for primary and
secondary classes of common stock, preferred stock, convertible debt,
rights and warrants, shares or certificates of beneficial interest of
trusts, foreign securities, American Depositary Receipts (``ADRs''),
and limited partnership interests that are substantively identical to
those of the Nasdaq Capital Market, the tier with the most permissive
listing standards.\6\ The standards for initial and continued listing
of these securities are set forth in the Equity Rule 4300 Series. In
addition, the Exchange will adopt, in Equity Rules 4420 and 4450,
initial and continued listing standards for Selected Equity-linked Debt
Securities (``SEEDS''), units, index warrants, portfolio depository
receipts, index fund shares, trust issued receipts, linked securities,
managed fund shares, and ``other securities'' that are substantively
identical to those of the NASDAQ Global Market, because the Nasdaq
Capital Market does not have standards applicable to any of these
securities other than units.\7\ Provisions of NASDAQ Rules 4420 and
4450 that establish higher initial and continued listing standards for
common stock, preferred stock, convertible debt, rights and warrants,
shares or certificates of beneficial interest of trusts, foreign
securities, ADRs, and limited partnership interests seeking inclusion
on the NASDAQ Global Market are omitted and replaced with a reference
back to the Equity Rule 4300 Series, where the standards for such
securities are found. In addition, the listing standards for SEEDS and
``other securities'' differ slightly from the comparable NASDAQ
Exchange standards, in that they require issuers of securities listed
thereunder to be eligible for listing on the NASDAQ Exchange or NYSE or
to be affiliates of companies that are so eligible, rather than being
required to be actually so listed. This difference recognizes the fact
that an issuer seeking to list a SEED or ``other security'' on the
Exchange would not necessarily also have a security listed on the
NASDAQ Exchange or NYSE, but it would nevertheless be required to
demonstrate ability to meet such other listing standards before listing
the SEED or ``other security.'' Finally, NASDAQ Rules 4426 and 4427,
which establish standards for NASDAQ's Global Select
[[Page 69688]]
Market tier, are omitted in their entirety.\8\
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\6\ The Exchange notes, however, that securities listed on the
Nasdaq Capital Market are ``covered securities'' for purposes of
Section 18 of the Securities Act of 1933 (the ``Securities Act''),
and are therefore exempted from State law registration requirements.
See Securities Act Release No. 8791 (April 18, 2007), 72 FR 20410
(April 24, 2008) (File No. S7-18-06). Accordingly, following
adoption of these Rules, the Exchange expects to petition the
Commission to amend Rule 146 under the Securities Act for purposes
of recognizing securities listed on the Exchange as covered
securities.
\7\ The Exchange's proposed listing standards for units combine
elements of the standards of the Nasdaq Capital Market and the
Nasdaq Global Market, in that they require the equity component of a
unit to satisfy standards equivalent to Nasdaq Capital Market
standards but allow the inclusion of a debt component that is not
itself eligible for listing but that meets the requirements of Rule
4420(h)(1)(B).
\8\ The Rule 4600 Series is being reserved for the Exchange's
listing fees, which will be included in a separate filing.
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Trading System Rules
The Exchange's system for trading cash equities, designated in the
Equity Rules as the ``NASDAQ OMX BX Equities Market'' or the
``System'', will operate using NASDAQ OMX's INET technology, in
accordance with rules based to a significant extent on the rules of the
Nasdaq Market Center. As a result, the NASDAQ OMX BX Equities Market
will feature an electronic central limit order book, with executions
occurring in price/time priority (but with displayed orders receiving
priority over non-displayed orders). The differences between the two
systems will be as follows:
The NASDAQ OMX BX Equities Market will operate from 8 a.m.
to 7 p.m. Eastern Time (rather than from 7 a.m. to 8 p.m.). As with the
Nasdaq Market Center, regular market hours will be from 9:30 a.m. to 4
p.m. (or 4:15 p.m. for any exchange-traded funds that may be so
designated by the Exchange).
The NASDAQ OMX BX Equities Market will not operate an
opening cross, a closing cross, or a halt cross. The NASDAQ OMX BX
Equities Market will begin to process all eligible Quotes/Orders at 8
a.m., adding in time priority all eligible Orders in accordance with
each order's defined characteristics. All trades executed prior to 9:30
will be automatically appended with the ``.T'' modifier. The official
opening price for a security listed on the Exchange will be the price
of the first trade executed at or after 9:30 a.m. and the official
closing price will be the price of the last trade executed at or prior
to 4:00 p.m.
Quoting Market Participants may instruct the Exchange to
open their Quotes at 9:25 a.m. at a price of $0.01 (bid) and $999,999
(offer) and a size of one round lot in order to provide a two-sided
quotation. In all other cases, the quote of a participant will be at
the price and size entered by the participant.
If trading of a security is halted under Equity Rule 4120,
the security will be released for trading at a time announced to market
participants by the Exchange. Because the Exchange will not have a halt
cross, provisions of NASDAQ Rule 4120 relating to a Display Only Period
prior to the execution of the halt cross have been omitted.
The Exchange's quotation and trade reporting information
is disseminated under the Consolidated Quotation Plan (``CQ Plan'') and
Consolidated Tape Association Plan (``CTA Plan''), rather than the
Nasdaq UTP Plan. Accordingly, the NASDAQ Exchange's IM-4390, which
relates to securities dually listed on the New York Stock Exchange
(``NYSE'') and the NASDAQ Exchange is not included in the Equity Rules,
since a security listed on the Exchange and NYSE would automatically be
included in the CQ Plan and the CTA Plan by virtue of either of its
listings.
Provisions of Rules of the NASDAQ Exchange relating to
passive market making under Rule 103 of Regulation M under the Act \9\
are being omitted since that rule does not apply to any other exchange,
even if it adopts a similar market structure.
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\9\ 17 CFR 242.103.
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Equity Rule 4620 provides that an Exchange Market Maker
that terminates its registration in a security listed on the Exchange
may not re-register as a market maker in that security for a period of
twenty business days, with a one-day exclusion period for all other
securities. The comparable NASDAQ Exchange rule provides for an
exclusion period of twenty days for securities listed on the NASDAQ
Exchange and one day for all other securities.
In contrast to the NASDAQ Exchange, the Exchange will not
support discretionary orders, orders with a ``market hours'' time-in-
force designation (with the exception of ``market hours day'' orders),
or orders with a ``system hours good till cancelled'' time-in-force
designation.
The Exchange will not support an automatic quotation
refresh functionality. Thus, market makers will be required to maintain
continuous two-sided quotations without the assistance of the
functionality. In addition, the Exchange will not allow market
participants to maintain quotes or orders on the book overnight;
rather, all quotes and orders will be cancelled at the end of the
trading day and must be re-entered, if market participants so desire,
the following day. Accordingly, the Exchange will not have a rule such
as NASDAQ Exchange Rule 4761, which provides for overnight adjustment
of open quotes and orders to reflect corporate events such as dividends
and splits. The Exchange believes that these differences will reduce
burdens on Exchange system resources, and that market participants will
be able to maintain comparable functionality using their own systems if
they wish.
The Exchange will not route orders to other market
centers. Rather, to ensure the Exchange's compliance with Regulation
NMS, Equity Rule 4755 provides that in addition to such other
designations as may be chosen by a market participant,\10\ all orders
that are not entered with a time in force of ``System Hours Immediate
or Cancel'' \11\ must be designated as an Intermarket Sweep Order, a
Pegged Order, a Price to Comply Order, or a Price to Comply Post Order,
and all orders will be processed in a manner that avoids trading
through protected quotations and avoids locked and crossed markets.
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\10\ As is the case with the NASDAQ Exchange, different order
designations can be combined. Thus, for example, a Price to Comply
Order could be entered with reserve size or as a non-displayed
order.
\11\ A ``System Hours Immediate or Cancel'' order is an
immediate or cancel order that may be entered between 8 a.m. and 7
p.m. Eastern Time, the hours of operation of the NASDAQ OMX BX
Equities Market. If a System Hours Immediate or Cancel order (or a
portion thereof) is not marketable, the order (or unexecuted portion
thereof) is canceled and returned to the entering Participant.
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A System Hours Immediate or Cancel Order is compliant with
Regulation NMS because it will not, by its terms, execute or post at a
price that would result in a trade-through of a protected quotation or
lock or cross another market.
A Pegged Order is compliant with Regulation NMS because it
is continually re-priced to avoid locking or crossing.
In entering an Intermarket Sweep Order, the market
participant represents that it is simultaneously routing one or more
additional limit orders, as necessary, to execute against the full
displayed size of any protected bid or offer (as defined in Rule 600(b)
of Regulation NMS) in the case of a limit order to sell or buy with a
price that is superior to the limit price of the order identified as an
Intermarket Sweep Order. These additional routed orders must also be
identified as Intermarket Sweep Orders. As provided by Regulation NMS,
the Exchange will automatically execute orders identified as
Intermarket Sweep Orders. Members will be responsible for ensuring that
their use of Intermarket Sweep Orders complies with Regulation NMS, and
the Exchange's T+1 surveillance program will monitor members' use of
Intermarket Sweep Orders.
If, at the time of entry, a Price to Comply Order would
lock or cross the quotation of an external market, the order will be
priced to the current low offer (for bids) or to the current best bid
(for offers) but displayed at a price one minimum price increment lower
than the offer (for bids) or higher than the bid (for offers). Thus, an
incoming order priced to execute against the displayed
[[Page 69689]]
price will receive the superior undisplayed price.\12\ The displayed
and undisplayed prices of a Price to Comply order may be adjusted once
or multiple times depending upon the method of order entry and changes
to the prevailing national best bid/best offer.
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\12\ For example, if the national best bid and best offer is
$9.97 x $10.00, and a participant enters a price to comply order to
buy 10,000 shares at $10.01, the order will display at $9.99, but
will reside on the System book at $10.00. If a seller then enters an
order at $9.99, it will execute at $10.00, up to the full 10,000
shares of the order.
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If, at the time of entry, a Price to Comply Post Order
would lock or cross the protected quote of an external market or would
cause an Order Protection Rule violation, the order will be re-priced
and displayed to one minimum price increment (i.e., $0.01 or $0.0001)
below the current low offer (for bids) or to one penny above the
current best bid (for offers).\13\
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\13\ For example, if the national best bid and best offer is
$9.97 x $10.00, and a participant enters a price to comply post
order to buy at $10.01, the order will be repriced and displayed at
$9.99. If a seller enters an order at $9.99, it will execute at that
price.
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By requiring all orders to be entered with one of these
designations, the Exchange will ensure that all orders will either be
priced or cancelled in a manner consistent with avoidance of trade-
throughs and locked and crossed markets, or will execute as Intermarket
Sweep Orders along with other Intermarket Sweep Orders sent to
protected quotes. Because the Exchange will not route to other market
centers, its policies and procedures under Rule 611(a) under Regulation
NMS will contemplate reliance on information provided by the NASDAQ
Exchange for purposes of determining whether another trading center is
experiencing a failure, material delay, or malfunction of its systems
or equipment within the meaning of Rule 611(b)(1).
Affiliation With NASDAQ Execution Services, LLC
Although the Exchange will not route to other market centers, the
Exchange will receive orders routed to it by other market centers,
including the NASDAQ Exchange. Nasdaq Execution Services, LLC (``NES'')
is the approved outbound routing facility of the NASDAQ Exchange for
cash equities. Rules 4751 and 4758 of the NASDAQ Exchange establish the
conditions under which the NASDAQ Exchange is permitted to own and
operate NES in its capacity as a facility of the NASDAQ Exchange that
routes orders from the NASDAQ Exchange to other market centers. These
conditions include requirements that: (1) NES is operated and regulated
as a facility of the NASDAQ Exchange; (2) NES will not engage in any
business other than as an outbound router for the NASDAQ Exchange and
any other activities as approved by the Commission;\14\ (3) the primary
regulatory responsibility for NES lies with an unaffiliated self-
regulatory organization; (4) use of NES for outbound routing is
optional for other NASDAQ Exchange members; and (5) the NASDAQ Exchange
will not route orders to an affiliated exchange, such as the Exchange,
unless they check the NASDAQ Exchange book prior to routing.
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\14\ Because only NASDAQ Exchange members may enter orders into
the NASDAQ Exchange, it also follows that routing by NES is
conducted only with respect to orders of NASDAQ Exchange members.
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In connection with the Exchange's resumption of equity trading
pursuant to this filing, the NASDAQ Exchange will file a proposed rule
change to modify the last of these conditions to allow it to route all
forms of orders, including Directed Orders, to the Exchange on a one-
year pilot basis.\15\ Directed Orders are orders that route directly to
other exchanges on an immediate-or-cancel basis without first checking
the NASDAQ Exchange book for available liquidity. In order to
appropriately address concerns previously raised by the Commission
regarding the potential for conflicts of interest and informational
advantages that may arise from the use of affiliated members to route
orders between exchanges owned by a common parent, the Exchange is
proposing certain restrictions and undertakings.
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\15\ This proposal and the anticipated Nasdaq proposal to permit
NES to route Directed Orders to the Exchange marks a departure from
the Exchange's representation in Securities Exchange Act Release No.
57757 (May 1, 2008), 73 FR 26159 (May 8, 2008) (SR-BSE-2008-23),
that NES would not route Directed Orders to the Exchange or its
facilities. Email from John Yetter Vice President and Deputy General
Counsel, Nasdaq, to Heidi Pilpel, Attorney, Commission, November 6,
2008.
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In order to manage the concerns raised by the Commission regarding
conflicts of interest in instances where a member firm is affiliated
with an exchange to which it is routing orders, the Exchange notes
that, with respect to orders routed to the Exchange by NES in its
capacity as a facility of the NASDAQ Exchange, NES is subject to
independent oversight and enforcement by FINRA, an unaffiliated SRO
that is NES's designated examining authority. In this capacity, FINRA
is responsible for examining NES with respect to its books and records
and capital obligations and also has the responsibility for reviewing
NES's compliance with intermarket trading rules such as SEC Regulation
NMS. In addition, the Exchange intends to enter into a regulatory
services agreement with FINRA as well as an agreement with FINRA
pursuant to the provisions of Rule 17d-2 under the Act,\16\ under which
FINRA staff will review NES's compliance with the Exchange's rules
through FINRA's examination program. FINRA and the Exchange\17\ will
also monitor NES for compliance with the Exchange's trading rules,
subject, of course, to SEC oversight of the regulatory program of the
Exchange and FINRA. The Exchange will, however, retain ultimate
responsibility for enforcing its rules with respect to NES except to
the extent that they are covered by an agreement with FINRA pursuant to
Rule 17d-2, in which case regulatory responsibility will be allocated
to FINRA as provided in Rule 17d-2(d).
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\16\ 17 CFR 240.17d-2.
\17\ Employees of the Exchange performing real-time oversight of
equity trading may also be employed by the NASDAQ Exchange to
perform similar functions with respect to its rules.
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Furthermore, in order to minimize the potential for conflicts of
interest, the Exchange and FINRA will collect and maintain all alerts,
complaints, investigations and enforcement actions in which NES (in its
capacity as a facility of the NASDAQ Exchange, routing orders to the
Exchange) is identified as a participant that has potentially violated
applicable SEC or Exchange rules. The Exchange and FINRA will retain
these records in an easily accessible manner in order to facilitate any
potential review conducted by the SEC's Office of Compliance
Inspections and Examinations. FINRA will then provide a report to the
Exchange's Chief Regulatory Officer, on at least a quarterly basis,
which (i) quantifies all alerts (of which the Exchange and FINRA become
aware) that identify NES as a participant that has potentially violated
Exchange or SEC rules and (ii) quantifies the number of all
investigations that identify NES as a participant that has potentially
violated Exchange or SEC rules.\18\
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\18\ The Exchange, FINRA, and SEC staff may agree going forward
to reduce the number of applicable or relevant surveillances that
form the scope of the agreed upon report.
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In order to address the Commission's concerns about potential for
information advantages that could place an affiliated member of an
exchange at a competitive advantage vis-[agrave]-vis other non-
affiliated members, the Exchange is proposing Rule 2140(c). Rule
2140(c) will require the implementation of policies and
[[Page 69690]]
procedures that are reasonably designed to prevent NES from acting on
non-public information regarding Exchange systems prior to the time
that such information is made available generally to all members of
such entity performing inbound routing functions. These policies and
procedures would include systems development protocols to facilitate an
audit of the efficacy of these policies and procedures.
Specifically, new Rule 2140(c) shall provide as follows:
The NASDAQ OMX Group, Inc., which is the holding company owning
both the Exchange and NASDAQ Execution Services, LLC, shall
establish and maintain procedures and internal controls reasonably
designed to ensure that NASDAQ Execution Services, LLC does not
develop or implement changes to its system on the basis of non-
public information regarding planned changes to Exchange systems,
obtained as a result of its affiliation with the Exchange, until
such information is available generally to similarly situated
members of the Exchange in connection with the provision of inbound
routing to the Exchange.
In addition, the NASDAQ Exchange, in its filing regarding routing
to the Exchange, will amend Rule 4758 to provide that NES will
establish and maintain procedures and internal controls reasonably
designed to adequately restrict the flow of confidential and
proprietary information between the NASDAQ \19\ Exchange and its
facilities (including the NES), and any other entity (including the
Exchange). The Exchange believes these measures will effectively
address the concerns identified by the Commission regarding the
potential for informational advantages favoring NES vis-[agrave]-vis
other non-affiliated Exchange members.
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\19\ E-mail from John Yetter Vice President and Deputy General
Counsel, Nasdaq, to Heidi Pilpel, Attorney, Commission, November 6,
2008.
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5000, 6000, and 8000 Series
As with the NASDAQ Exchange Rules, the Equity Rule 5000 Series will
be reserved for future use. The Equity Rule 8000 Series governs
investigations and sanctions of members by the Exchange, and is
substantively identical to the comparable rules of the NASDAQ Exchange.
The Equity Rule 6000 Series contains rules implementing a version of
the Order Audit Trail System (``OATS'') for the Exchange. The Exchange
believes that as an affiliate of the NASDAQ Exchange, it should ensure
that its regulatory requirements are generally consistent with those of
the NASDAQ Exchange. As provided in NASDAQ Exchange rules, Exchange
members that are also FINRA members must comply with the FINRA OATS
rules requiring daily reporting of audit trail information for
transactions in securities listed on the NASDAQ Exchange. In addition,
as provided in NASDAQ Exchange rules, Exchange members that are not
FINRA members must compile and maintain audit trail information for
securities listed on the NASDAQ Exchange, but are required to transmit
this information to FINRA only if requested. Similarly, the Exchange
will require all members to maintain audit trail information for
securities listed on the Exchange, and to transmit the information to
FINRA upon request, but will not require daily OATS reporting for
securities listed on the Exchange.\20\ As is true with respect to the
NASDAQ Exchange, OATS data will be used by the Exchange for regulatory
purposes only.\21\
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\20\ The Rule 7000 Series is reserved for the Exchange's fees
other than listing fees, which will be included in a separate
filing.
\21\ See Securities Exchange Act Release No. 53128 (January 13,
2006); 71 FR 3350 (January 23, 2006) (File No. 10-131).
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9000 Series
The 9000 Series governs procedures for disciplinary proceedings
against members and associated persons. The sole substantive difference
between these rules and the corresponding NASDAQ Exchange rules
pertains to the permissible composition of a Hearing Panel authorized
to hear cases under the rule series. Under NASDAQ Exchange rules, a
hearing panel is composed of a Hearing Office and two Panelists.
Panelist may be drawn from a pool consisting of persons who previously
served on the Nasdaq Review Council (the ``appellate body'' that
reviews disciplinary matters) or a subcommittee thereof; previously
served as a director of the NASDAQ Exchange; previously served on
FINRA's National Adjudicatory Council or a subcommittee thereof prior
to the date that the NASDAQ Exchange commenced operating as a national
securities exchange; or currently serves or previously, within the past
four years, served on the NASDAQ Exchange Market Regulation Committee.
Under NASDAQ Exchange rules, however, current and former members of the
Market Regulation Committee may serve on a Panel only if the case
involves quotations of securities, execution of transactions, reporting
of transactions, or trading practices.
The Exchange's rules regarding Hearing Panel composition will allow
Panelists to be drawn from a pool consisting of persons who previously
served on the Exchange Review Council, the appellate body comparable to
the Nasdaq Review Council or a subcommittee thereof; previously served
as a director of the Exchange or as a Governor of the exchange prior to
its acquisition by NASDAQ OMX; or currently serves or previously,
within the past four years, served on the Exchange's Market Regulation
Committee. Former members of the FINRA National Adjudicatory Council
would not be eligible for service on a Panel, however, since that
aspect of the NASDAQ Exchange's rules is a function of the NASDAQ
Exchange's genesis as a subsidiary of the National Association of
Securities Dealers, FINRA's predecessor. However, to ensure that there
is an adequate supply of Panelists available to hear cases under the
9000 Series rules, the Exchange will not limit the types of cases that
may be heard by Panelists currently or previously serving on the
Exchange's Market Regulation Committee. The absence of this limitation
is reflected in Equity Rules 9212, 9221, 9231, and 9232, all of which
differ from corresponding NASDAQ Exchange rules in this respect.
The 9000 Series also contains, in IM-9216, a list of rules being
added to the Exchange's Minor Rule Violation Plan. These are in
addition to the existing provisions of the Plan, as described in
Chapter X of the Options Rules and Chapter XXXIV of the Grandfathered
Rules, which remains in effect with respect to BOX.
10000 Series
The Equity Rule 10000 Series incorporates by reference the NASD
Code of Arbitration Procedure for Customer Disputes and the NASD Code
of Arbitration Procedure for Industry Disputes. The Exchange's
arbitration program will be administered by FINRA under the FINRA
Regulatory Contract. The Equity Rule 10000 Series is substantively
identical to the corresponding rules of the NASDAQ Exchange.
11000 Series
The Equity Rule 11000 Series adopts the Uniform Practice Code as
rules of the Exchange, and is substantively identical to the
corresponding NASDAQ Exchange rules. Exchange Rule 11890 governs
nullification and modification of clearly erroneous transactions on the
Exchange, and is generally consistent with the corresponding NASDAQ
Exchange rule. Trades in securities listed on the Exchange will be
adjudicated under the standards applicable to NASDAQ Exchange-listed
securities under that rule. In addition, language in the rule
pertaining to trades
[[Page 69691]]
occurring in the closing or opening crosses is omitted, since the
Exchange will not be operating crossing sessions.
Certificate and By-Laws
The Exchange proposes to amend its Certificate of Incorporation and
By-Laws to adopt NASDAQ OMX BX, Inc. as the new name of the Exchange.
NASDAQ OMX BX Equities LLC
The Exchange will operate the NASDAQ OMX BX Equities Market through
BSX Group LLC, the same entity that operated the Exchange's cash
equities trading business prior to the acquisition of the Exchange by
NASDAQ OMX. However, to reflect the limited liability company's status
as a closely held subsidiary of the Exchange, whose only members are
the Exchange and the Exchange's parent corporation, NASDAQ OMX, the
Exchange proposes to amend and restate the Operating Agreement to vest
management rights directly in the Exchange, rather than in a Board of
Directors. The model for this corporate form is The NASDAQ Options
Market LLC, which operates the NASDAQ Options Market as a subsidiary of
the NASDAQ Exchange, but with management rights vested in the NASDAQ
Exchange. The Exchange also proposes to change the name of the entity
from BSX Group LLC to NASDAQ OMX BX Equities LLC. Although NASDAQ OMX
will remain a Member of the Company to avoid certain adverse tax
consequences that would be associated with contributing its ownership
interest to the Exchange, the amendments to the Operating Agreement
will leave it with no direct management role in the operation of the
entity, with the exception of its role as ``tax matters member'' under
Sections 10.9 and 12.6 and in the definition of ``Capital Account,''
and its limited rights with regard to dissolution of the entity under
Article 11 and capital contributions under Section 7.4.
In addition, and also in keeping with the model established by the
NASDAQ Exchange and the NASDAQ Options Market LLC, the Exchange and BX
Equities LLC will enter into a Delegation Agreement, under which the
Exchange will delegate certain authority to BX Equities LLC, and BX
Equities LLC will agree to abide by certain regulatory requirements.
The Delegation Agreement is described in greater detail below.
BX Equities LLC will be an extension of the Exchange, and the
NASDAQ OMX BX Equities Market and BX Equities LLC will be subject to
self-regulation by the Exchange and oversight by the Commission. As a
facility of the Exchange, the NASDAQ OMX BX Equities Market will be
subject to the Exchange's self-regulatory organization functions and
the Exchange will have regulatory responsibility for the activities of
the NASDAQ OMX BX Equities Market. The Exchange represents that it has
the ability to discharge all regulatory functions related to the
facility that it has undertaken to perform by virtue of operating the
NASDAQ OMX BX Equities Market as a facility of the Exchange.
The amended and restated Operating Agreement for BX Equities LLC
contains provisions relating to the governance of the Company that will
ensure that the Exchange has authority over the Company to fulfill the
Exchange's responsibility for all regulatory functions related to the
NASDAQ OMX BX Equities Market. Thus, this rule filing is intended to
establish that the Exchange's corporate and self-regulatory structures
along with the proposed structure of BX Equities LLC as a controlled
subsidiary of the Exchange are sufficient to ensure that BX Equities
LLC and the NASDAQ OMX BX Equities Market will be operated and
regulated in a manner that is consistent with the Act.
Corporate Structure
The Commission, in approving the Exchange's amended and restated
Certificate of Incorporation and By-Laws in connection with its
acquisition by NASDAQ OMX, determined that the Exchange's current
structure and self-regulatory functions are adequately designed to
ensure the completeness and independence of regulation of the
Exchange.\22\ NASDAQ OMX is currently organized as a holding company
with multiple subsidiaries, including the Exchange and the NASDAQ
Exchange. Although NASDAQ OMX does not itself carry out regulatory
functions, its activities with respect to the operation of the Exchange
were designed to be consistent with, and not interfere with, the
Exchange's self-regulatory obligations. Thus, NASDAQ OMX's corporate
documents include provisions that maintain the independence of the
Exchange's self-regulatory function from NASDAQ OMX, enable the
Exchange to operate in a manner that complies with the federal
securities laws, and facilitate the ability of the Exchange and the
Commission to fulfill their regulatory and oversight obligations under
the Act.
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\22\ Securities Exchange Act Release No. 58324 (August 7, 2008),
73 FR 46936 (August 12, 2008) (SR-BSE-2008-02; -23; -25; SR-BSECC-
2008-01).
---------------------------------------------------------------------------
For example, NASDAQ OMX submitted to the Commission's jurisdiction
with respect to activities relating to the Exchange, and agreed to
provide the Commission with access to its books and records. NASDAQ OMX
also agreed to keep confidential non-public information relating to the
self-regulatory function of the Exchange and not to use such
information for any non-regulatory purpose. In addition, the board of
directors of NASDAQ OMX, as well as its officers, employees, and agents
are required to give due regard to the preservation of the independence
of the Exchange's self-regulatory function. NASDAQ OMX's By-Laws
require that any changes to the NASDAQ OMX Certificate of Incorporation
or By-Laws be submitted to the Board of Directors of the Exchange
(``Exchange Board''), and, if such amendment is required to be filed
with the Commission pursuant to Section 19(b) of the Act, such change
shall not be effective until filed with, or filed with and approved by,
the Commission.
NASDAQ OMX's Certificate of Incorporation imposes limits on direct
and indirect changes in control, which prevent any stockholder from
exercising undue control over the operation of the Exchange.
Specifically, no person who beneficially owns NASDAQ OMX common stock
or other voting securities in excess of five percent of the total
outstanding voting securities may vote the excess shares. The
Exchange's rules also prohibit Exchange members and persons associated
with Exchange members from beneficially owning more than twenty percent
of the then-outstanding voting securities of NASDAQ OMX. These rules
prevent a member that is a stockholder of NASDAQ OMX from exerting a
controlling influence to direct or otherwise cause the Exchange to
refrain from diligently monitoring and surveiling the member's conduct
or diligently enforcing its rules and the federal securities laws with
respect to conduct by the member that may violate such provisions.
The protections, limitations, and requirements provided by the
structure established in NASDAQ OMX's governing documents will continue
to exist and, under this proposal, will apply with equal force to BX
Equities LLC as a facility and subsidiary of the Exchange. Moreover,
Commission approval would be required in order to modify the
protections provided by NASDAQ OMX's governing documents.
In addition to protections contained in the NASDAQ OMX structure,
the Exchange structure also provides protections via the composition of
its
[[Page 69692]]
Board of Directors, Board Committees, and several regulatory
structures. Under the Exchange's By-Laws, twenty percent of the
Directors on the Exchange Board, which is the governing body of the
Exchange and possesses all of the powers necessary for the execution of
its responsibilities as a self-regulatory organization (``SRO''), must
be ``Member Representative Directors.'' In addition, the number of
``Non-Industry Directors'' must equal or exceed the sum of the number
of ``Industry Directors'' and ``Member Representative Directors.'' The
Exchange Board must also include at least one ``Public Director'' and
at least one Director who is representative of issuers and investors.
The requirement that twenty percent of the directors be ``Member
Representative Directors'' and the means by which they are selected by
members provides for the fair representation of members in the
selection of directors and the administration of the Exchange
consistent with the requirement in Section 6(b)(3) of the Act.\23\ This
requirement helps to ensure that members have a voice in the use of
self-regulatory authority, and that the Exchange is administered in a
way that is equitable to all those who trade on its market or through
its facilities. In the Exchange's view, the protections provided by the
composition and selection of the Exchange's Board of Directors carry
through to the NASDAQ OMX BX Equities Market by virtue of the fact that
all of its participants will be members of the Exchange. As a result,
NASDAQ OMX BX Equities Market participants will have an equal
opportunity to participate in the selection of Member Representative
Directors who, along with the entire Exchange Board, will have a duty
to ensure that the NASDAQ OMX BX Equities Market is administered in a
fair and equitable manner.
---------------------------------------------------------------------------
\23\ 15 U.S.C. 78f(b)(3).
---------------------------------------------------------------------------
As Exchange members, NASDAQ OMX BX Equities Market participants
will also be protected by several committees established by the
Exchange's By-Laws that are composed solely of directors: an Executive
Committee, a Finance Committee, a Management Compensation Committee, an
Audit Committee, and a Regulatory Oversight Committee (``ROC''). In
addition, the Exchange has these other committees that are not required
to be composed solely of directors: the Exchange Listing and Hearing
Review Committee, the Exchange Review Council (the ``Review Council''),
a Nominating Committee, a Member Nominating Committee, a Quality of
Markets Committee, a Market Operations Review Committee, an Arbitration
and Mediation Committee, and a Market Regulation Committee. The
Exchange's committees enable it to carry out its responsibilities under
the Act.
The ROC will play a central role in the regulation of the Exchange
and its facilities. It consists of three members, each of whom must be
a Public Director and ``independent director'' as defined by NASDAQ
Exchange Rule 4200. The ROC is responsible for monitoring the adequacy
and effectiveness of the Exchange's regulatory program, assessing the
Exchange's regulatory performance, and assisting the Exchange Board in
reviewing the Exchange's regulatory plan and the overall effectiveness
of the Exchange's regulatory functions. The ROC meets with the Chief
Regulatory Officer (``CRO'') in executive session at regularly
scheduled meetings and at any time upon request of the CRO or any
member of the ROC. The ROC is informed about the CRO's compensation,
promotion, or termination (including reasons). Finally, the Exchange
regulatory budget is presented to the ROC so that its members may
inquire as to the adequacy of resources available for the Exchange's
regulatory program. Under this proposal, the ROC and the Exchange CRO
will assume responsibility for regulating quoting and trading on the
NASDAQ OMX BX Equities Market and conduct by its market participants.
The Exchange's CRO has general supervision of the regulatory
operations of the Exchange, including overseeing surveillance,
examination, and enforcement functions. The CRO will administer the
Exchange's regulatory services agreement with FINRA. Although the
Exchange is an SRO with all of the attendant regulatory obligations
under the Act, it has entered into the Regulatory Contract with FINRA,
under which FINRA will perform certain regulatory functions on its
behalf. In addition to performing certain membership functions for the
Exchange, FINRA will perform certain disciplinary and enforcement
functions for the Exchange. Generally, FINRA will investigate members,
issue complaints, and conduct hearings pursuant to the Exchange's
rules. Appeals of disciplinary hearings, however, will be handled by
the Review Council. The Regulatory Contract between the Exchange and
FINRA governs the Exchange and its facilities and therefore will
automatically govern the NASDAQ OMX BX Equities Market and Exchange
members trading on it.
Notwithstanding the Regulatory Contract, the Exchange retains
ultimate legal responsibility for the regulation of its members and its
market. The Exchange's By-Laws and rules provide that it has
disciplinary jurisdiction over its members so that it can enforce its
members' compliance with its rules and the federal securities laws. The
Exchange's rules also permit it to sanction members for violations of
its rules and violations of the federal securities laws by, among other
things, expelling or suspending members, limiting members' activities,
functions, or operations, fining or censuring members, or suspending or
barring a person from being associated with a member. The Exchange's
rules also provide for the imposition of fines for minor rule
violations in lieu of commencing disciplinary proceedings.
The Exchange's independent Regulation Department will carry out
many of the Exchange's regulatory functions, including administering
its membership and disciplinary rules, and is functionally separate
from the Exchange's business lines. The Regulation Department includes
MarketWatch, which will perform real-time intraday surveillance over
the Exchange's listed companies and participants in the NASDAQ OMX BX
Equities Market. More specifically, MarketWatch will oversee the
complete and timely disclosure of issuers' material information to
determine if a trading halt is necessary to maintain an orderly market
for the release of material news. In addition, MarketWatch, through its
automated detection system, will monitor the trading activity of each
security and will generate a price and volume alert to aid in the
assessment of unusual market activity. MarketWatch will also coordinate
and execute the release of initial public offerings; administer market
participants' excused withdrawal requests; and handle the clearly
erroneous trade adjudication process. If MarketWatch observes any
activity that may involve a violation of Commission or Exchange rules,
MarketWatch will immediately refer the activity to FINRA's Market
Regulation Department for further investigation and potential
disciplinary action.
BX Equities LLC Structure
BX Equities LLC will be established as a facility of and controlled
subsidiary owned and operated by the Exchange in a manner designed to
extend to cash equities trading on the NASDAQ OMX BX Equities Market
each and every
[[Page 69693]]
regulatory protection provided by the NASDAQ OMX and Exchange
structures described above. BX Equities LLC is a limited liability
company under the laws of the State of Delaware. BX Equities LLC will
be governed by the amended and restated Operating Agreement, filed
herewith. The Operating Agreement provides that the Exchange and NASDAQ
OMX are the sole members of BX Equities LLC, and Articles 3 and 4 state
that the Exchange shall have all powers necessary to act for BX
Equities LLC, as well as to exercise all rights and powers conferred to
BX Equities LLC under Delaware law. Section 4.2(b) requires BX Equities
LLC and its members to comply with the federal securities laws and the
rules and regulations thereunder, and to cooperate with the SEC and the
Exchange pursuant to their regulatory authority.
By virtue of BX Equities LLC's structure as a facility of the
Exchange, and the Exchange's exclusive management rights, BX Equities
LLC will, by that fact, be bound by all of the regulatory obligations
of its SRO-member, and it will be endowed with all of the self-
regulatory protections provided by the NASDAQ OMX and Exchange
governance documents. BX Equities LLC will be under the complete
control and discretion of the Exchange and can act only through the
action of the Exchange and its officers and directors by virtue of the
fact that there will be no separate BX Equities LLC board and all BX
Equities LLC officers will be officers of the Exchange. The Exchange,
in turn, is governed by its By-Laws, its Exchange Board, and its
Committees, as described above. All actions by BX Equities LLC that, if
taken by the Exchange would require a vote of the Exchange Board, will
also require a vote of the Exchange Board. Any action by BX Equities
LLC that, were it taken by the Exchange would require a proposed rule
change under Section 19 of the Act, will require a proposed rule change
under Section 19 of the Act.
Not only is BX Equities LLC limited to acting exclusively through
the Exchange, it is also limited to acting only through officers of the
Exchange. Under Article 5 of the Operating Agreement, each officer of
BX Equities LLC will also be an officer of the Exchange with the same
powers, obligations, and responsibilities as an officer of the
Exchange. Moreover, the Operating Agreement requires BX Equities LLC
officers separately to agree to comply with the federal securities laws
and the rules and regulations thereunder, and to cooperate with the SEC
and the Exchange pursuant to their regulatory authority and the
provisions of the Operating Agreement. Any violation of federal
securities laws by an individual officer acting in his or her capacity
as a BX Equities LLC officer would also be a violation by an Exchange
officer and, in both cases, such violations would be subject to
Commission jurisdiction.
Each broker-dealer that participates in trading on the NASDAQ OMX
BX Equities Market must be a member of the Exchange. As a result, all
cash equities trading and all market participants will operate pursuant
to Exchange rules, subject to Exchange regulation, and Commission
oversight. The Exchange will regulate NASDAQ OMX BX Equities Market
activity via a combination of structural regulation by the Exchange,
the Exchange Board, the ROC, and the Exchange CRO, real-time
surveillance by the Exchange, and the Regulatory Contract with FINRA.
The specific changes being made to the Operating Agreement to
implement the structure described above are as follows:
The introductory paragraphs are being amended to reflect
the new names of the Company and the Exchange, to remove language
referring to the possibility of additional members becoming party to
the Agreement, and to remove language describing the past history of
the entity that is no longer necessary.
Article I is being amended to remove definitions of the
terms ``Board'', ``BSE Facilities Services Agreement'', ``BeX'',
``DGCL'', ``Directors'', ``Disclosing Member'', ``Excess Units'',
``Initial Funding Date'', ``Member Entities'', ``Member Information'',
``Ownership Concentration Limit'', ``Regulatory Services Provider'',
``Self-Regulatory Organization'', ``Senior Executive'', ``Total
Votes'', ``Transfer'', ``Transferee'', and ``Transferring Member''. The
Article is also being amended to add a new definition of ``Officer'',
to simplify the definition of ``Confidential Information,'' to reflect
the new name of the Exchange, to reflect NASDAQ OMX's role as the tax
matters member of the Company, and to amend the definition of
``Member'' to clearly reflect that NASDAQ OMX and the Exchange are the
sole Members of the Company.
Article 16 and Sections 2.1, 2.8, 7.1, 18.1, and 18.6, as
well as Schedules 1, 2, and 3, are being amended to reflect the new
names of the Company and the Exchange.
Section 2.2 is amended to provide that the Exchange may
determine the principal place of business of the Company.
Articles 6, 15, and 16 and Sections 2.2, 2.4, 2.5, 2.8,
7.3, 7.4, 7.5, 7.6, 9.1, 9.2, 11.1, 12.1, 12.2, 14.1, 18.1 are amended
to reflect that management authority is vested in the Exchange
directly, rather than in a Board of Directors.
Section 2.8(e) is being amended to stipulate that the
legend printed on certificates representing ownership interests in the
Company must include language stating that the interests may not be
sold, assigned or transferred unless such sale, assignment or transfer
has been filed with and approved by the Commission under Section 19 of
the Act \24\ and the rules promulgated thereunder.
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\24\ 15 U.S.C. 78s.
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Articles 3, 4, and 5 are being amended in their entirety
to adopt language drawn from LLC Agreement of The NASDAQ Options Market
LLC. The effect of the language is to place management authority
directly in the Exchange. As a result, provisions relating to the
current governance structure of the entity are being removed. Moreover,
because BX Equities LLC will be operated directly by the Exchange,
references to the BSE Facilities Services Agreement formerly in place
between the Exchange and BSX Group LLC are being deleted. The new
provisions include language stating that:
[cir] BX Equities LLC's purposes include (i) supporting the
operation, regulation, and surveillance of a cash equities exchange,
(ii) preventing fraudulent and manipulative acts and practices,
promoting just and equitable principles of trade, fostering cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, removing impediments to and perfecting the
mechanisms of a free and open market and a national market system, and,
in general, protecting investors and the public interest, (iii)
supporting the various elements of the national market system pursuant
to Section 11A of the Act and the rules thereunder, (iv) fulfilling
self-regulatory responsibilities, and (v) supporting such other
initiatives as the Members may deem appropriate.
[cir] BX Equities LLC and its Members shall comply with the federal
securities laws and the rules and regulations thereunder; shall
cooperate with the SEC and the Exchange pursuant to its regulatory
authority and the provisions of the Operating Agreement; and shall
engage in conduct that fosters and does not interfere with BX Equities
LLC's ability: to prevent fraudulent and
[[Page 69694]]
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in,
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
[cir] All persons appointed as officers of the Company must also be
officers of the Exchange. Each officer shall comply with the federal
securities laws of the United States and the rules and regulations
thereunder; shall cooperate with the SEC pursuant to its regulatory
authority and the provisions of the Operating Agreement; and shall
engage in conduct that fosters and does not interfere with the
Company's ability: to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in, securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
[cir] Article 8 and Section 7.3 are being amended to stipulate that
the Members may not transfer membership Units, and BX Equities LLC may
not issue additional Units, without the approval of the SEC pursuant to
Section 19 of the Act \25\ and the rules promulgated thereunder.
Because any transfer or dilution would require direct SEC approval, the
more complex provisions of Article 8 relating to transfers, ownership
concentration limits, and voting limits are being deleted as
unnecessary.
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\25\ 15 U.S.C. 78s.
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Article 11 is being amended to make provisions relating to
dissolution of the Company more consistent with comparable provisions
in the LLC Agreement of The NASDAQ Options Market LLC.
Section 12.3 is being amended to make the fiscal year of
the Company consistent with that of NASDAQ OMX.
Article 14 and Sections 7.5, 18.1 and 18.10 (redesignated
as Section 18.8) are being amended to remove references to ``Related
Agreements'' that were formerly in place between the Exchange and BSX
Group LLC but that are unnecessary due to the Exchange's direct rights
to manage the Company.
Article 15 is being deleted as unnecessary in light of,
and in some respects inconsistent with, the Exchange's direct
management authority.
Most of Article 16 and all of Article 17 are being
deleted, because specific restrictions on intellectual property and use
of confidential information are unnecessary in the context of a closely
held entity such as BX Equities LLC. However, current Section 16.7
(redesignated as Article 16), which relates to confidential regulatory
information, is being retained. Similarly, Section 18.8 is being
deleted as unnecessary in the context of a closely held subsidiary.
Sections 18.6 and 18.12 (redesignated as 18.10) are being
amended to make changes to conform to changes made elsewhere in the
Operating Agreement.
Schedule 3 is being amended to eliminate representations
and warranties and covenants that are unnecessary in light of BX
Equities LLC's status as a closely held subsidiary, and to make
conforming changes. In light of the proposal to operate the NASDAQ OMX
BX Equities Market through BX Equities LLC, however, the provisions
describing the Exchange's capital contribution to BX Equities LLC are
substantively unchanged. Schedule 4, which described the BSE Facility
Services Agreement, is being deleted, in light of the proposal to adopt
a Delegation Agreement as described below.
Delegation Agreement
The Exchange intends to delegate to BX Equities LLC certain limited
responsibilities and obligations solely with respect to the operation
of a cash equities trading facility pursuant to a Delegation Agreement.
The delegation is limited to the Exchange's cash equities market
functions and does not include other functions not specifically
mentioned in the limited delegation.
Specifically, the Exchange will delegate performance of the
following functions to BX Equities LLC pursuant to the Delegation
Agreement:
1. To operate the NASDAQ OMX BX Equities Market, including
automated systems supporting it.
2. To provide and maintain a communications network infrastructure
linking market participants for the efficient process and handling of
quotations, orders, transaction reports and comparisons of transactions
in cash equities.
3. To act as a Securities Information Processor for quotations and
transaction information related to securities traded on the NASDAQ OMX
BX Equities Market and any trading facilities operated by BX Equities
LLC.
4. To administer the participation of the Exchange in the National
Market System plans governing the quoting, trading, and regulation of
cash equities and Commission regulations related thereto.
5. To collect, process, consolidate and provide to the Exchange
accurate information requisite to operation of a surveillance audit
trail for the quoting and trading of cash equities.
6. To establish and assess access fees, transaction fees, market
data fees and other fees for the products and services offered by BX
Equities LLC.
7. To develop, adopt and administer rules governing participation
in the NASDAQ OMX BX Equities Market.
8. To refer to the Exchange any complaints of a regulatory nature
involving potential rule violations by member organizations or
employees.
9. To establish the annual budget for BX Equities LLC for approval
by the Exchange.
10. To determine allocation of BX Equities LLC resources.
11. To manage external relations on matters related to trading on
and the operation and functions of the NASDAQ OMX BX Equities Market
with Congress, the Commission, state regulators, other SROs, business
groups, and the public.
The Exchange will have ultimate responsibility for the operations,
rules and regulations developed by the NASDAQ OMX BX Equities Market,
as well as their enforcement. Actions taken pursuant to delegated
authority will remain subject to review, approval or rejection by the
board of directors of the Exchange in accordance with procedures
established by that board of directors.
In addition, the Exchange will expressly retain the following
authority and functions:
1. To exercise overall responsibility for ensuring that statutory
and self-regulatory obligations and functions of the Exchange are
fulfilled and to perform any duties and functions not delegated.
2. To delegate authority to BX Equities LLC to take actions on
behalf of the Exchange.
3. To direct BX Equities LLC to take action necessary to effectuate
the purposes and functions of the Exchange, consistent with the
independence of the Exchange's regulatory functions, exchange rules,
policies and procedures and the federal securities laws.
In addition, for so long as BX Equities LLC has any delegated
market responsibility pursuant to the
[[Page 69695]]
Delegation Agreement, BX Equities LLC agrees that:
1. To the fullest extent permitted by applicable law, all
confidential information pertaining to the self-regulatory function of
the Exchange or any delegated market responsibility (including but not
limited to disciplinary matters, trading data, trading practices and
audit information) contained in the books and records of the Exchange
that shall come into the possession of BX Equities LLC shall: (a) Not
be made available to any person (other than as provided in the proviso
at the end of this sentence) other than to those officers, employees
and agents of the BX Equities LLC who have a reasonable need to know
the contents thereof; (b) be retained in confidence by BX Equities LLC
and the officers, employees and agents of BX Equities LLC; and (c) not
be used for any commercial purposes; provided, that nothing in this
sentence shall be interpreted so as to limit or impede the rights of
the Commission or the Exchange to access and examine such confidential
information pursuant to the federal securities laws and the rules and
regulations thereunder, or to limit or impede the ability of any
officers, employees or agents of BX Equities LLC to disclose such
confidential information to the Commission or the Exchange.
2. BX Equities LLC's books and records shall be subject at all
times to inspection and copying by (a) the Commission and (b) by the
Exchange.
3. BX Equities LLC's books and records shall be maintained within
the United States.
4. The books, records, premises, officers, and employees of BX
Equities LLC shall be deemed to be the books, records, premises,
officers and employees of the Exchange for purposes of and subject to
oversight pursuant to the Act.
5. BX Equities LLC shall comply with the federal securities laws
and the rules and regulations thereunder and shall cooperate with the
Commission and the Exchange pursuant to and to the extent of its
regulatory authority, and shall take reasonable steps necessary to
cause its agents to cooperate, with the Commission and, where
applicable, the Exchange pursuant to their regulatory authority.
6. BX Equities LLC and its officers and employees shall give due
regard to the preservation of the independence of the self-regulatory
function of the Exchange and to obligations to investors and the
general public and shall not take any actions that would interfere with
the effectuation of any decisions by the board of directors or managers
of the Exchange relating to their regulatory functions (including
disciplinary matters) or that would interfere with the ability of the
Exchange to carry out its responsibilities under the Act.
7. BX Equities LLC, its officers, and those of its employees whose
principal place of business and residence is outside of the United
States shall be deemed to irrevocably submit to the jurisdiction of the
United States federal courts and the Commission for the purposes of any
suit, action or proceeding pursuant to the United States federal
securities laws and the rules and regulations thereunder, commenced or
initiated by the Commission arising out of, or relating to, the
activities of the Exchange or any delegated market responsibility (and
shall be deemed to agree that BX Equities LLC may serve as the U.S.
agent for purposes of service of process in such suit, action or
proceeding), and BX Equities LLC and each such officer or employee, in
the case of any such officer or employee by virtue of his acceptance of
any such position, shall be deemed to waive, and agree not to assert by
way of motion, as a defense or otherwise in any such suit, action or
proceeding, any claims that it or they are not personally subject to
the jurisdiction of the Commission, that such suit, action or
proceeding is an inconvenient forum or that the venue of such suit,
action or proceeding is improper, or that the subject matter thereof
may not be enforced in or by such courts or agency.
For so long as BX Equities LLC has any delegated market
responsibility pursuant to the Delegation Agreement, the Exchange
agrees that it may not transfer or assign any of its ownership of BX
Equities LLC. The Delegation Agreement may not be modified except
pursuant to a written agreement among the Exchange and BX Equities LLC;
provided that, prior to the effectiveness of any such amendment, such
amendment shall be filed with, and approved by, the Commission under
Section 19 of the Act and the rules promulgated thereunder.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6 of the Act,\26\ in general, and with
Section 6(b)(1) and (b)(5) of the Act,\27\ in particular, in that the
proposal enables the Exchange to be so organized as to have the
capacity to be able to carry out the purposes of the Act and to comply
with and enforce compliance by Exchange Members and persons associated
with Exchange Members with provisions of the Act, the rules and
regulations thereunder, and the rules of the Exchange; and is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
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\26\ 15 U.S.C. 78f.
\27\ 15 U.S.C. 78f(b)(1), (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
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended.
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
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date 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 the proposed rule change, or
(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 e-mail to [email protected]. Please include
File
[[Page 69696]]
Number SR-BSE-2008-48 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-BSE-2008-48. This file
number should be included on the subject line if e-mail 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 inspection and
copying in the Commission's Public Reference Section, 100 F Street,
NE., Washington, DC 20549, on official business days between the hours
of 10 a.m. and 3 p.m. Copies of the filing will also be available for
inspection and copying at the principal office of the self-regulatory
organization. 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-BSE-
2008-48 and should be submitted on or before December 10, 2008.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-27422 Filed 11-18-08; 8:45 am]
BILLING CODE 8011-01-P