[Federal Register Volume 73, Number 251 (Wednesday, December 31, 2008)]
[Notices]
[Pages 80468-80481]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-31094]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59154; File No. SR-BSE-2008-48]


Self-Regulatory Organizations; Boston Stock Exchange, 
Incorporated; Order Approving a Proposed Rule Change, as Modified by 
Amendment Nos. 1 and 2, To Establish New Rules for Membership, Member 
Conduct, and the Listing and Trading of Cash Equity Securities; Order 
Granting an Exemption for the Boston Stock Exchange, Incorporated From 
Section 11A(b) of the Securities Exchange Act of 1934

December 23, 2008.

I. Introduction

    On November 3, 2008, the Boston Stock Exchange (``BSE'' or 
``Exchange''), filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to: (i) Adopt new rules governing membership, the 
regulatory obligations of members, listing, and equity trading 
(``Equity Rules''); (ii) amend its certificate of incorporation 
(``Certificate'') and by-laws (``By-laws'') to reflect the proposed 
change in the name of the Exchange to NASDAQ OMX BX, Inc; (iii) amend 
and restate the Operating Agreement of BSX Group LLC (``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''); and (iv) to adopt a Delegation Agreement (``Delegation 
Agreement'') between the Exchange and BX Equities LLC (formerly, BSX 
Group LLC). The proposed rule change was published for comment in the 
Federal Register on November 19, 2008.\3\ On November 12, 2008, the 
Exchange filed Amendment No. 1 to the proposed rule change.\4\ On 
December 23, 2008, the Exchange filed Amendment No. 2 to the proposed 
rule change.\5\ Because Amendment Nos. 1 and 2 make technical 
modifications to the original rule proposal, the Commission is not 
publishing them for comment. The Commission received no comment letters 
regarding the proposed rule change. This order approves the proposed 
rule change, as modified by Amendment Nos. 1 and 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 58927 (November 10, 
2008), 73 FR 69685 (``Notice'').
    \4\ Amendment No. 1 states that the Board of Directors of the 
Exchange and the Board of Directors of BSX Group LLC have completed 
all action required to be taken in connection with the proposed rule 
change.
    \5\ Amendment No. 2 clarifies that: (1) Confidential information 
pertaining to the self-regulatory function of the Exchange or any 
market responsibility delegated by the Exchange to BX Equities LLC 
that comes into the possession of BX Equities LLC shall not be used 
for any non-regulatory purposes; and (2) the proposal to accept 
orders routed by Nasdaq Execution Services, LLC (``NES'') to the 
Exchange on a one-year pilot basis is made by the Exchange, rather 
than by The NASDAQ Stock Market, LLC (``Nasdaq'').
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    On December 23, 2008, the Exchange requested that the Commission 
grant BX Equities LLC a permanent exemption from the requirement under 
Section 11A(b) of the Act, and Rule 609 thereunder, that a securities 
information processor (``SIP'') acting as an exclusive processor 
register with the Commission.\6\ This order grants the requested 
exemption.
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    \6\ See letter from John Zecca, Chief Regulatory Officer, 
Exchange, to Dr. Erik Sirri, Director, Division of Trading and 
Markets, Commission, dated December 23, 2008 (``SIP Exemption 
Request Letter''). See also 15 U.S.C. 78k-1(b). Rule 609 under the 
Act, 17 CFR 242.609, requires that the registration of a securities 
information processor be on Form SIP, 17 CFR 249.1001.
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II. Background

    On August 7, 2008, the Commission approved, along with related 
proposals, a BSE proposed rule change relating to governing documents 
and certain rules of the Exchange to accommodate the acquisition of the 
Exchange by The NASDAQ OMX Group, Inc. (``NASDAQ OMX''), the parent 
corporation of Nasdaq.\7\ Among other things, the BSE Approval Order: 
(i) Amended and restated BSE's Certificate to reflect the Exchange's 
status as a wholly owned subsidiary of NASDAQ OMX; (ii) established new 
By-laws that are similar to the by-laws of Nasdaq; (iii) amended the 
Operating Agreement of BSX Group LLC, the entity that operated the 
Exchange's cash equities trading business prior to the Exchange's 
acquisition by NASDAQ OMX; \8\ (iv) prohibited an Exchange member or 
its associated persons from beneficially owning more than 20% of the 
outstanding voting securities of NASDAQ OMX; and (v) limited the 
circumstances under which the Exchange may be affiliated with a member, 
and approved the affiliation

[[Page 80469]]

between the Exchange and certain broker-dealer subsidiaries of NASDAQ 
OMX that would become members of the Exchange.
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    \7\ See Securities Exchange Act Release No. 58324, 73 FR 46936 
(August 12, 2008) (SR-BSE-2008-02; SR-BSE-2008-23; SR-BSE-2008-25; 
SR-BSECC-2008-01) (``BSE Approval Order'').
    \8\ BSX Group LLC was formed in 2004 as a joint venture between 
BSE and several investors to operate an electronic trading facility, 
the Boston Equities Exchange (``BeX''), for the trading of cash 
equity securities. BeX ceased its operations in September 2007. See 
Securities Exchange Act Release No. 57757 (May 1, 2008), 73 FR 
26159.
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    On August 29, 2008, the Exchange was acquired by 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 proposed new Equity Rules are 
based to a substantial extent on the rules of Nasdaq. As is the case 
with Nasdaq, administration and enforcement of many of the rules will 
be supported by the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') through a regulatory services agreement (``Regulatory 
Contract''). Other rules, such as listing rules, will be administered 
by personnel who will be dually employed by the Exchange and Nasdaq, 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'' (``BOX Rules''). 
Certain of the Rules of the Board of Governors that are cross-
referenced in the BOX Rules (``Grandfathered Rules'') will continue to 
apply to trading on the Exchange's Boston Options Exchange facility 
(``BOX''). The Grandfathered Rules and the BOX Rules collectively 
constitute the ``Options Rules.'' The Options Rules, together with the 
new Equity Rules will constitute the ``Rules of the Exchange.'' Unless 
an Exchange member is also an ``Options Participant,'' however, it will 
be subject only to the Equity Rules.\9\
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    \9\ 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 the Options 
Rules as if it were a member. Under the revised Rules of the 
Exchange, this principle 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. See Equity Rules 1013 and 1014; Chapter II of the BOX 
Rules.
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III. Discussion and Commission Findings

    After careful review of the rule proposal, the Commission finds 
that the rule proposal is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange.\10\ Specifically, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(1) of the Act,\11\ 
which requires, among other things, that a national securities exchange 
be so organized and have the capacity to carry out the purposes of the 
Act, and to comply and enforce compliance by its members and persons 
associated with its members, with the provisions of the Act, the rules 
and regulations thereunder, and Section 6(b)(2) of the Act,\12\ which 
requires that a national securities exchange have rules that provide 
that any registered broker or dealer or natural person associated with 
a registered broker or dealer may become a member, and any person may 
become associated with a member thereof. Further, the Commission finds 
that the rule proposal is consistent with Section 6(b)(5) of the 
Act,\13\ which requires, among other things, that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices; to promote just and equitable 
principles of trade; to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, and 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. Section 6(b)(5) also 
requires that the rules of an exchange not be designed to permit unfair 
discrimination among customers, issuers, brokers, or dealers. In 
addition, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(6) \14\ and Section 6(b)(7) of the 
Act,\15\ which require, in part, that the rules of an exchange provide 
a fair procedure for disciplining members and persons associated with 
members.
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    \10\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b)(1).
    \12\ 15 U.S.C. 78f(b)(2).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ 15 U.S.C. 78f(b)(6).
    \15\ 15 U.S.C. 78f(b)(7).
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    Overall, the Commission believes that approving the Exchange's 
proposed rule change could confer important benefits on the public and 
market participants. Approval of the proposal would establish the 
Equity Rules for the operation of an electronic facility for the 
trading of cash equity securities.\16\ In particular, the entry into 
the marketplace of a new trading facility would provide market 
participants with an additional venue for executing orders in cash 
equity securities, which could enhance innovation and increase 
competition between and among the equities exchanges, resulting in 
better prices and executions for investors.
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    \16\ The Exchange previously operated an electronic trading 
facility, BeX, for the trading of cash equity securities. BeX ceased 
its operations in September 2007. See supra note 8.
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    The discussion below does not review every detail of the proposed 
rule change, but rather focuses on the most significant rules and 
policy issues considered in review of the proposals.

A. Corporate Structure

    In the BSE Approval Order, the Commission approved a change in 
control of BSX Group LLC, the entity that operated BeX as a facility of 
BSE prior to the Exchange's acquisition by NASDAQ OMX. The Exchange now 
proposes to change the name of BSX Group LLC to BX Equities LLC and 
amend the Operating Agreement. The amended Operating Agreement would 
establish that BX Equities LLC will operate the NASDAQ OMX BX Equities 
Market (``BX Equities Market'') as a cash equities trading facility, as 
that term is defined in Section 3(a)(2) of the Act,\17\ of the 
Exchange. In addition, the Exchange and BX Equities LLC will enter into 
a Delegation Agreement, pursuant to which the Exchange will delegate to 
BX Equities LLC certain limited responsibilities and obligations with 
respect to the operation of the BX Equities Market as a facility of the 
Exchange.\18\
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    \17\ 15 U.S.C. 78(c)(2).
    \18\ The form of the Delegation Agreement is available at the 
Commission's Web site http://www.sec.gov.
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1. Ownership and Management of BX Equities LLC
    The Operating Agreement will reflect that BX Equities LLC is a 
closely held subsidiary of the Exchange, whose only owners and members 
are the Exchange and the Exchange's parent corporation, NASDAQ OMX.\19\ 
Although NASDAQ OMX will maintain a 46.79% ownership interest in BX 
Equities LLC and the Exchange will maintain a 53.21% ownership 
interest, the Operating Agreement provides that management of BX 
Equities LLC will be vested solely in Exchange.\20\ The Exchange will 
be

[[Page 80470]]

designated as the sole manager of BX Equities LLC and will have the 
power to do any and all acts necessary, convenient or incidental to or 
for the furtherance of the purposes described in the Operating 
Agreement.\21\ As a result, the Exchange will have control over 
substantially all of the activities of BX Equities LLC.\22\
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    \19\ See Section 1.1, Operating Agreement.
    \20\ In the Notice, the Exchange represented that NASDAQ OMX 
would remain a member of BX Equities LLC to avoid certain adverse 
tax consequences that would be associated with contributing its 
ownership interest to the Exchange. See Notice, supra note 3, 73 FR 
at 69691.
    \21\ See Section 4.1, Operating Agreement.
    \22\ NASDAQ OMX approval would be required for: (i) Converting 
loans made by a Member to BX Equities LLC into an increase in such 
Member's Capital Contribution; (ii) an election to dissolve BX 
Equities LLC; and (iii) any amendment to the Operating Agreement. 
See Sections 7.4, 11.1 and 18, respectively, Operating Agreement.
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    The Commission believes that the proposal to have the managerial 
powers vested solely in the Exchange is designed to preserve the 
Exchange's regulatory authority over BX Equities LLC, and any facility 
for the trading of cash equity securities that BX Equities LLC 
operates, and is consistent with the Act because these provisions will 
grant the Exchange the ability to direct BX Equities LLC to perform any 
required, necessary, or appropriate act. In particular, the Commission 
believes that the ownership and management provisions of the Operating 
Agreement are consistent with Section 6(b)(1) of the Act,\23\ which 
requires, among other things, that a national securities exchange be so 
organized and have the capacity to carry out the purposes of the Act, 
and to comply and enforce compliance by its members and persons 
associated with its members, with the provisions of the Act, the rules 
and regulations thereunder, and the rules of the exchange.
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    \23\ 15 U.S.C. 78f(b)(1).
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a. Transfers
    The Commission notes that the amended Operating Agreement contains 
restrictions on the transfer of interests in BX Equities LLC that are 
designed to prevent any person from exercising undue control over the 
operation of the Exchange and to ensure that the Exchange and the 
Commission are able to carry out their regulatory obligations under the 
Act. Specifically, the amended Operating Agreement prohibits any person 
from transferring or assigning its interest in BX Equities LLC, unless 
such transfer is filed with and approved by the Commission.\24\ In 
addition, the Operating Agreement currently contains a provision that 
requires any amendment to be submitted to the Exchange's Board of 
Directors (``Board'') for review, and, if such amendment is required to 
be filed, or filed with and approved by, the Commission before such 
amendment may be effective, then the amendment will not be effective 
until filed with, or filed with and approved by, the Commission.\25\
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    \24\ See Section 8.1, Operating Agreement.
    \25\ See Section 18.1, Operating Agreement.
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    The Operating Agreement no longer will require the Exchange to 
provide the Commission with written notice ten days prior to the 
closing date of any acquisition that results in a BX Equities LLC 
member's percentage ownership interest in BX Equities LLC, alone or 
with any affiliate, meeting or exceeding the 5%, 10%, or 15% 
thresholds. Nor will it provide that any transfer of BX Equities LLC 
interests that result in the acquisition and holding by any person, 
alone or together with an affiliate, of an interest that meets or 
crosses the 20% threshold or any successive 5% threshold (i.e., 25%, 
30%, etc.) triggers the requirement to file an amendment with the 
Commission under Section 19(b) of the Act.\26\ Further, the Operating 
Agreement no longer will require that any person that acquires a 
controlling interest (i.e., an interest of 25% or greater) in a BX 
Equities LLC member that holds 20% or more of BX Equities LLC interests 
to become a party to the Operating Agreement.
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    \26\ 15 U.S.C. 78f(b).
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    Although proposed changes to provisions in the Operating Agreement 
on transfer eliminate some of the protections previously contained in 
the Operating Agreement, the Commission finds that because any transfer 
of BX Equities LLC interests must be filed with and approved by the 
Commission,\27\ the elimination of the current notice and ownership 
restrictions in the Operating Agreement would not adversely affect the 
ability of the Exchange to carry out its self-regulatory 
responsibilities or the ability of the Commission to fulfill its 
responsibilities under the Act. The Commission finds that the proposed 
revisions to the Operating Agreement discussed above are consistent 
with the Act.
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    \27\ See id.
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b. Confidentiality Provisions
    The Operating Agreement provides that all confidential information 
pertaining to the self-regulatory function of the Exchange or the 
business of the Exchange related to the trading of U.S. equities 
(including disciplinary matters, trading data, trading practices and 
audit information) in the books and records of BX Equities LLC may not 
be made available to any persons.\28\ The rule proposal will allow such 
information to be made available to officers, employees and agents of 
BX Equities LLC who have a reasonable need to know the contents 
thereof. However, such confidential information shall be required to be 
retained in confidence by BX Equities LLC and its officers, employees 
and agents and shall not be used for any non-regulatory purposes.\29\ 
The Commission believes that the revised confidentiality provisions 
would not impair the Exchange's self-regulatory obligations with 
respect to BX Equities LLC and finds that this provision is consistent 
with the Act.
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    \28\ See Article 16, Operating Agreement. The Exchange also 
proposes that the provision would not be interpreted to limit or 
impede the ability of any officers, directors, employees or agents 
of BX Equities LLC to disclose confidential information to the 
Commission or the Exchange.
    \29\ See id.
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2. Status of the BX Equities Market as a Facility of BX and Delegation 
of Authority to BX Equities LLC
    As a facility of the Exchange, the BX Equities Market will be 
subject to the Commission's oversight and examination. Consequently, 
the Commission will have the same authority to oversee the premises, 
personnel, and records of BX Equities LLC as it currently has with 
respect to the Exchange. In addition, the Exchange will be fully 
responsible for all activity that takes place through the BX Equities 
Market, and BX Equities Market participants will be subject to the 
Exchange's rules applicable to the BX Equities Market and to Exchange 
oversight.
    As described in detail in the Notice, the Delegation Agreement 
provides that the Exchange will delegate to BX Equities LLC performance 
of certain limited responsibilities and obligations of the Exchange 
with respect to the operation of the BX Equities Market as a cash 
equities trading facility.\30\ The Exchange, however, expressly retains 
ultimate responsibility for the fulfillment of its statutory and self-
regulatory obligations under the Act. Accordingly, as described more 
fully below, the Exchange will retain ultimate responsibility for such 
delegated responsibilities and functions, and any actions taken 
pursuant to delegated authority will remain subject to review, approval 
or rejections by the Exchange's Board in accordance with procedures 
established by the Board. The Delegation Agreement will be a part of 
the Exchange's rules.
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    \30\ See Notice, supra note 3, 73 FR at 69691.

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[[Page 80471]]

    Pursuant to the Delegation Agreement, the Exchange expressly will 
retain the authority to: (1) Delegate authority to BX Equities LLC to 
take actions on behalf of the Exchange; and (2) 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.\31\ BX Equities LLC will have delegated 
authority to, among other things, operate the BX Equities Market, and 
establish and assess access fees, transaction fees, market data fees 
and other fees for the products and services offered by BX Equities 
LLC.\32\ In addition, BX Equities LLC will have the authority to act as 
a SIP for quotations and transaction information related to securities 
traded on the BX Equities Market and any trading facilities operated by 
BX Equities LLC.\33\
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    \31\ See Notice, supra note 3, 73 FR at 69694 and Delegation 
Agreement, Section I.
    \32\ See Notice, supra note 3, 73 FR at 69694 and Delegation 
Agreement, Section II.A.
    \33\ See Delegation Agreement, Section II.A.3.
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    BX Equities LLC will also have authority to develop, adopt, and 
administer rules governing participation in the BX Equities Market,\34\ 
but the Exchange represents that it will have ultimate responsibility 
for the operations, rules and regulations developed by BX Equities LLC, 
as well as their enforcement.\35\ Further, the Exchange represents that 
actions taken by BX Equities LLC pursuant to its delegated authority 
will remain subject to review, approval or rejection by the Exchange's 
Board.\36\ In addition, BX Equities LLC will be responsible for 
referring to the Exchange any complaints of a regulatory nature 
involving potential rule violations by member organizations or 
employees,\37\ and the Exchange will retain overall responsibility for 
ensuring that the statutory and self-regulatory functions of the 
Exchange are fulfilled.\38\
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    \34\ See Delegation Agreement, Section II.A.7.
    \35\ See Notice, supra note 3, 73 FR at 69694.
    \36\ See id.
    \37\ See Delegation Agreement, Section II.A.8.
    \38\ See Delegation Agreement, Section I.1.
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    The Commission finds that it is consistent with the Act for the 
Exchange to delegate the operation of the BX Equities Market to BX 
Equities LLC, while retaining ultimate responsibility for statutory and 
self-regulatory obligations and ensuring that BX Equities Market 
business is conducted in a manner consistent with the requirements of 
the Act.

B. Proposed Equity Rules

    The proposed new Equity Rules are based to a substantial extent on 
the rules of Nasdaq.\39\ In the Notice, the Exchange highlighted the 
differences between the proposed new Equity Rules and Nasdaq rules.
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    \39\ See Notice, supra note 3, 73 FR at 69686. The Equity Rules 
also have the same rule numbers as the corresponding Nasdaq rules.
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1. Membership, Registration and Qualifications
    The Exchange proposes that the criteria for membership in the 
Exchange be substantially the same as the criteria currently applicable 
to firms applying for membership in Nasdaq. As indicated in the Notice, 
the Equity Rules 1000 series governs membership, registration and 
qualification and is substantively identical to the corresponding rules 
for Nasdaq, with a few exceptions to account for the BX Equities 
Market's structure.\40\
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    \40\ See Notice, supra note 3, 73 FR at 69686.
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    Like Nasdaq rules, the Equity Rules will require a broker-dealer to 
be a member at all times of at least one other self-regulatory 
organization (``SRO'') before applying for membership in the 
Exchange.\41\ The Equity Rules provide 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 
is eligible for continued membership if it continues to satisfy the 
membership requirements of the Equity Rule 1000 Series.\42\ Continuing 
members are required to sign a revised membership agreement and 
maintain registrations of their associated persons, as required under 
the Equity Rules.\43\ Associated persons already registered with the 
Exchange likewise will be eligible for continued registration if they 
satisfy the requirements under the Equity Rules.\44\ Unlike members in 
the Exchange prior to the Exchange's acquisition by NASDAQ OMX, members 
under the Equity Rules do not possess an ownership interest in the 
Exchange.
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    \41\ See Equity Rules 1002 and 1014(a)(3).
    \42\ See Equity Rule 1002(f).
    \43\ Id.
    \44\ Id.
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    Several registration requirements and categories set forth in 
Nasdaq rules are not carried over to the BX Equities Market. Equity 
Rules 1022 and 1032 provide only for principal registration and 
representative registration categories, as these are the only types of 
pre-existing BSE membership categories that will be relevant to the 
future operation and market structure of the Exchange.\45\ In addition, 
because the Equity Rules are modeled on Nasdaq and FINRA rules, 
approved Nasdaq and FINRA members and their associated persons may 
apply for membership and registration in a category of registration 
recognized by the Exchange through an expedited process by submitting a 
Short Form Membership Application and Agreement.\46\
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    \45\ See Equity Rules 1022 and 1032.
    \46\ See Equity Rule 1013(a)(5)(C). The Exchange represents that 
the requirements for maintaining membership in the Exchange, 
including compliance with Exchange and Commission rules and 
submission to examinations, are the same for all members, regardless 
of the means by which they became members. Moreover, both waive-in 
members and continuing members are subject to review by FINRA to 
determine if any information available to FINRA about the member 
would present concerns regarding the member's standing under FINRA 
rules. If any such information were presented by FINRA, the Exchange 
would evaluate it in determining appropriate steps to take with 
regard to the member. See e-mail from John Yetter, Vice President 
and Deputy General Counsel, NASDAQ OMX, to Heidi Pilpel, Attorney-
Advisor, Division of Trading and Markets, Commission, on December 
23, 2008.
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    The Commission finds that the membership rules contained in the 
Equity Rules are consistent with Section 6 of the Act,\47\ specifically 
Section 6(b)(2) of the Act,\48\ which requires that a national 
securities exchange have rules that provide that any registered broker 
or dealer or natural person associated with a registered broker or 
dealer may become a member and any person may become associated with a 
member thereof. The Commission notes that pursuant to Section 6(c) of 
the Act,\49\ an exchange must deny membership to non-registered broker-
dealers and registered broker-dealers that do not satisfy certain 
standards, such as financial responsibility or operational capacity. In 
addition, the Commission notes that the membership, registration and 
qualifications, and access requirements are substantially similar to 
rules of Nasdaq previously approved by the Commission.\50\ The 
Commission further notes that, as a registered exchange, the Exchange 
must continue to determine independently if an applicant satisfies the 
standards set forth in the Act, regardless of whether an applicant is a 
member of another SRO.
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    \47\ 15 U.S.C. 78f(b).
    \48\ 15 U.S.C. 78f(b)(2).
    \49\ 15 U.S.C. 78f(c).
    \50\ See Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006) (order approving Nasdaq's 
application to register as a national securities exchange) (``Nasdaq 
Registration Approval Order'').
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2. Participation and Access
    The rules governing access to and participation on the BX Equities 
Market

[[Page 80472]]

also are substantively identical to the corresponding rules of 
Nasdaq.\51\ BX Equities Market participants may include Equities Market 
Makers, Equities ECNs and Order Entry Firms.\52\ The Exchange also will 
provide authorized access for Sponsored Participants.\53\ However, only 
Equities Market Makers, or participants acting in a market making 
capacity, will be permitted to submit quotes.\54\ In addition, like 
Nasdaq market makers, Equities Market Makers will be obligated to 
submit firm, continuous, two-sided quotations, with a minimum quotation 
increment of $0.01.\55\
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    \51\ See, e.g., Equity Rules 4610 et seq.
    \52\ See Equity Rule 4611.
    \53\ See Securities Exchange Act Release Nos. 55061 (January 8, 
2007), 72 FR 2052 (January 17, 2007) (notice of filing and immediate 
effectiveness of File No. SR-Nasdaq-2006-061) (adopting Nasdaq Rule 
4611(d)); and 55550 (March 28, 2007), 72 FR 12 16389 (April 4, 2007) 
(notice of filing and immediate effectiveness of File No. SR-Nasdaq-
2007-010) (revising Nasdaq Rule 4211(d)).
    \54\ See Equity Rule 4612.
    \55\ See Equity Rule 4613.
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    The Commission notes that the access and participation requirements 
in the Equity Rules are substantially similar to Nasdaq's access and 
participation requirements, and, accordingly, finds that they are 
consistent with the Act. In particular, the BX Equities Market system 
(``System'') is designed to match buying and selling interest of all 
Exchange participants. In addition, the Commission believes that the 
access and participation rules should help to ensure that Equities 
Market Makers perform their obligations in a manner that promotes just 
and equitable principles of trade.
3. BX Trading System and Regulation NMS Compliance
a. BX Trading System
    The Exchange's System for trading cash equity securities will 
operate using technology and rules similar to Nasdaq. Accordingly, the 
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).\56\ While the BX 
Equities Market and Nasdaq will operate similarly in most aspects, 
there will be certain differences between the two markets. In 
particular:
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    \56\ See Notice, supra note 3, 73 FR at 69688.
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     The 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.). Like Nasdaq, 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).\57\
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    \57\ See Equity Rule 4617.
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     The BX Equities Market will not operate an opening cross, 
a closing cross, or a halt cross. It 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 a.m. 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 p.m.\58\
---------------------------------------------------------------------------

    \58\ See Notice, supra note 3, 73 FR at 69688.
---------------------------------------------------------------------------

     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.\59\
---------------------------------------------------------------------------

    \59\ See Equity Rule 5752.
---------------------------------------------------------------------------

     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.\60\
---------------------------------------------------------------------------

    \60\ See Equity Rule 4120.
---------------------------------------------------------------------------

     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.\61\
---------------------------------------------------------------------------

    \61\ See Notice, supra note 3, 73 FR at 69688.
---------------------------------------------------------------------------

     Nasdaq rules relating to passive market making under Rule 
103 of Regulation M under the Act \62\ are not included because that 
rule does not apply to any other exchange, even if it adopts a similar 
market structure.\63\
---------------------------------------------------------------------------

    \62\ 17 CFR 242.103.
    \63\ See id.
---------------------------------------------------------------------------

     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.\64\
---------------------------------------------------------------------------

    \64\ See Equity Rule 4620.
---------------------------------------------------------------------------

     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.\65\
---------------------------------------------------------------------------

    \65\ See Notice, supra note 3, 73 FR at 69688.
---------------------------------------------------------------------------

     The Exchange will not support an automatic quotation 
refresh functionality.\66\ 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.\67\
---------------------------------------------------------------------------

    \66\ See id.
    \67\ See id.
---------------------------------------------------------------------------

    The Commission finds that the Exchange's execution priority rules 
and trading rules are consistent with Section 6(b)(5) of the Act, which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices; to promote just and equitable principles of trade; to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, and 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.\68\ Section 6(b)(5) also requires that the rules of an 
exchange not be designed to permit unfair discrimination among 
customers, issuers, brokers, or dealers. The Exchange market model for 
the trading of cash equity securities is similar to Nasdaq's equity 
market model and does not raise novel issues.
---------------------------------------------------------------------------

    \68\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

b. Regulation NMS
    The Exchange has designed its rules relating to orders, modifiers, 
and order execution to comply with requirements of Regulation NMS. 
Unlike Nasdaq, the Exchange will not route orders in equity securities 
to other market centers. The Equity Rules are consistent with 
Regulation NMS \69\ by requiring that all orders be processed in a 
manner that avoids trading through protected quotations and avoids 
locked and crossed markets.\70\ Specifically, Equity Rule 4755 provides 
that in addition to such other designations as may be chosen by a 
market participant,\71\ all orders that are not entered with a time in 
force of ``System Hours Immediate or Cancel'' \72\ must be designated 
as an

[[Page 80473]]

Intermarket Sweep Order, a Pegged Order, a Price to Comply Order, or a 
Price to Comply Post Order.\73\
---------------------------------------------------------------------------

    \69\ 17 CFR 242.611.
    \70\ See Equity Rule 4755(b).
    \71\ As is the case with Nasdaq, 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.
    \72\ 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 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. See Equity Rule 
4751(h)(1).
    \73\ See Equity Rule 4755(a)(2).
---------------------------------------------------------------------------

    As described in the Notice, a System Hours Immediate or Cancel 
Order is compliant with Regulation NMS because by its terms it would 
not execute or post at a price that would result in a trade-through of 
a protected quotation or lock or cross another market.\74\ A Pegged 
Order similarly is compliant with Regulation NMS because it continually 
re-prices to avoid locking or crossing.\75\
---------------------------------------------------------------------------

    \74\ See Notice, supra note 3, 73 FR at 69688; Equity Rule 
4751(h)(1).
    \75\ See Equity Rule 4751(f).
---------------------------------------------------------------------------

    The Equity Rules also permit BX Equities Market participants to 
submit Intermarket Sweep Orders to comply with Regulation NMS, which 
will allow orders so designated to be automatically matched and 
executed within the System.\76\ As described in the Notice, when a 
market participant enters an Intermarket Sweep Order it is representing 
that it is also simultaneously routing one or more additional limit 
orders (also marked as Intermarket Sweep 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.\77\
---------------------------------------------------------------------------

    \76\ See Equity Rules 4751(f)(6) and 4757.
    \77\ The Exchange represented that 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. See Notice, 
supra note 3, 73 FR at 69688.
---------------------------------------------------------------------------

    Both a Price to Comply and a Price Comply Post Order are designed 
to comply with the Regulation NMS.\78\ Specifically, if at the time of 
entry, a Price to Comply Order will 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).\79\ Thus, an incoming order priced to 
execute against the displayed price will receive the superior 
undisplayed price.\80\ If, at the time of entry, a Price to Comply Post 
Order will lock or cross the protected quote of an external market or 
will cause a violation of Rule 611 of Regulation NMS, 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).\81\
---------------------------------------------------------------------------

    \78\ See Notice, supra note 3, 73 FR at 69688-69689.
    \79\ See Rule 4751(f)(7).
    \80\ 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. 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.
    \81\ See Equity Rule 4751(f)(8). 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.
---------------------------------------------------------------------------

    The Commission believes that by requiring all orders to be entered 
with one of the designations described above, all Exchange orders 
should either be priced or cancelled in a manner consistent with the 
avoidance of trade-throughs and locked and crossed markets. The 
Commission also notes that, because the Exchange will not route orders 
to other market centers, the Exchange's Regulation NMS policies and 
procedures under Rule 611(a) will rely on information provided by 
Nasdaq 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).
    The Commission finds that the rules relating to orders, modifiers, 
and order execution that are designed to comply with Regulation NMS are 
consistent with Section 6(b)(5) of the Act, which requires among other 
things, that the rules of a national securities exchange be designed to 
prevent fraudulent and manipulative acts and practices; to promote just 
and equitable principles of trade; to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
and 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.
4. Section 11 of the Act
    Section 11(a)(1) of the Act \82\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises discretion 
(collectively, ``covered accounts''), unless an exception applies. Rule 
11a2-2(T) under the Act,\83\ known as the ``effect versus execute'' 
rule, provides exchange members with an exemption from the Section 
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member, 
subject to certain conditions, to effect transactions for covered 
accounts by arranging for an unaffiliated member to execute the 
transactions on the exchange. To comply with Rule 11a2-2(T)'s 
conditions, a member: (i) Must transmit the order from off the exchange 
floor; (ii) may not participate in the execution of the transaction 
once it has been transmitted to the member performing the execution; 
\84\ (iii) may not be affiliated with the executing member; and (iv) 
with respect to an account over which the member has investment 
discretion, neither the member nor its associated person may retain any 
compensation in connection with effecting the transaction except as 
provided in the Rule.
---------------------------------------------------------------------------

    \82\ 15 U.S.C. 78k(a)(1).
    \83\ 17 CFR 240.11a2-2(T).
    \84\ The member may, however, participate in clearing and 
settling the transaction.
---------------------------------------------------------------------------

    In a letter to the Commission,\85\ the Exchange requested that the 
Commission concur with its conclusion that Exchange members that enter 
orders into the System satisfy the requirements of Rule 11a2-2(T). For 
the reasons set forth below, the Commission believes that Exchange 
members entering orders into the System would satisfy the conditions of 
the Rule.
---------------------------------------------------------------------------

    \85\ See letter from John Zecca, Chief Regulatory Officer, 
Exchange, to Florence Harmon, Acting Secretary, Commission, dated 
December 23, 2008 (``BSE 11(a) Request Letter'').
---------------------------------------------------------------------------

    The Rule's first condition is that orders for covered accounts be 
transmitted from off the exchange floor. The System receives orders 
electronically through remote terminals or computer-to-computer 
interfaces. In the context of other automated trading systems, the 
Commission has found that the off-floor transmission requirement is met 
if a covered account order is transmitted from a remote location 
directly to an exchange's floor by electronic means.\86\ Since the 
System

[[Page 80474]]

receives orders electronically through remote terminals or computer-to-
computer interfaces, the Commission believes that the System satisfies 
the off-floor transmission requirement.
---------------------------------------------------------------------------

    \86\ See, e.g., Nasdaq Registration Approval Order, supra note 
50 Securities Exchange Act Release Nos. 49068 (January 13, 2004), 69 
FR 2775 (January 20, 2004) (order approving the Boston Options 
Exchange as an options trading facility of the Boston Stock 
Exchange); 44983 (October 25, 2001), 66 FR 55225 (November 1, 2001) 
(order approving Archipelago Exchange as electronic trading facility 
of the Pacific Exchange (``PCX'')); 29237 (May 24, 1991), 56 FR 
24853 (May 31, 1991) (regarding NYSE's Off-Hours Trading Facility); 
15533 (January 29, 1979), 44 FR 6084 (January 31, 1979) (regarding 
the American Stock Exchange (``Amex'') Post Execution Reporting 
System, the Amex Switching System, the Intermarket Trading System, 
the Multiple Dealer Trading Facility of the Cincinnati Stock 
Exchange, the PCX Communications and Execution System, and the 
Philadelphia Stock Exchange (``Phlx'') Automated Communications and 
Execution System (``1979 Release'')); and 14563 (March 14, 1978), 43 
FR 11542 (March 17, 1978) (regarding the NYSE's Designated Order 
Turnaround System (``1978 Release'')).
---------------------------------------------------------------------------

    Second, the rule requires that the member not participate in the 
execution of its order. The Exchange represented that at no time 
following the submission of an order is a member able to acquire 
control or influence over the result or timing of an order's 
execution.\87\ According to the Exchange, the execution of a member's 
order is determined solely by what orders, bids, or offers are present 
in the System at the time the member submits the order and on the 
priority of those orders, bids and offers. Accordingly, the Commission 
believes that an Exchange member does not participate in the execution 
of an order submitted into the System.
---------------------------------------------------------------------------

    \87\ See BSE 11(a) Request Letter, supra note 85. The member may 
only cancel or modify the order, or modify the instructions for 
executing the order, but only from off the Exchange floor. The 
Commission has stated that the non-participation requirement is 
satisfied under such circumstances so long as such modifications or 
cancellations are also transmitted from off the floor. See 
Securities Exchange Act Release No. 14563 (March 14, 1978), 43 FR 
11542 (March 17, 1978) (stating that the ``non-participation 
requirement does not prevent initiating members from canceling or 
modifying orders (or the instructions pursuant to which the 
initiating member wishes orders to be executed) after the orders 
have been transmitted to the executing member, provided that any 
such instructions are also transmitted from off the floor'').
---------------------------------------------------------------------------

    Third, Rule 11a2-2(T) requires that the order be executed by an 
exchange member who is unaffiliated with the member initiating the 
order. The Commission has stated that the requirement is satisfied when 
automated exchange facilities, such as the System, are used, as long as 
the design of these systems ensures that members do not possess any 
special or unique trading advantages in handling their orders after 
transmitting them to the Exchange.\88\ The Exchange has represented 
that the design of the System ensures that no member has any special or 
unique trading advantage in the handling of its orders after 
transmitting its orders to the Exchange.\89\ Based on the Exchange's 
representation, the Commission believes that the System satisfies this 
requirement.
---------------------------------------------------------------------------

    \88\ In considering the operation of automated execution systems 
operated by an exchange, the Commission noted that while there is no 
independent executing exchange member, the execution of an order is 
automatic once it has been transmitted into the systems. Because the 
design of these systems ensures that members do not possess any 
special or unique trading advantages in handling their orders after 
transmitting them to the exchange, the Commission has stated that 
executions obtained through these systems satisfy the independent 
execution requirement of Rule 11a2-2(T). See 1979 Release, supra 
note 86.
    \89\ See BSE 11(a) Request Letter, supra note 85.
---------------------------------------------------------------------------

    Fourth, in the case of a transaction effected for an account with 
respect to which the initiating member or an associated person thereof 
exercises investment discretion, neither the initiating member nor any 
associated person thereof may retain any compensation in connection 
with effecting the transaction, unless the person authorized to 
transact business for the account has expressly provided otherwise by 
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T).\90\ The Exchange represented that Exchange members trading for 
covered accounts over which they exercise investment discretion must 
comply with this condition in order to rely on the rule's 
exemption.\91\
---------------------------------------------------------------------------

    \90\ 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written 
contract to retain compensation, in connection with effecting 
transactions for covered accounts over which such member or 
associated person thereof exercises investment discretion, to 
furnish at least annually to the person authorized to transact 
business for the account a statement setting forth the total amount 
of compensation retained by the member in connection with effecting 
transactions for the account during the period covered by the 
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, supra 
note 86 (stating ``[t]he contractual and disclosure requirements are 
designed to assure that accounts electing to permit transaction-
related compensation do so only after deciding that such 
arrangements are suitable to their interests'').
    \91\ See BSE 11(a) Request Letter, supra note 85.
---------------------------------------------------------------------------

C. Exception to Limitation on Affiliation Between BX and its Members

    Although the Exchange will not route orders to other market 
centers, it proposes to receive orders routed to it by other market 
centers, including orders routed from Nasdaq.\92\ BSE Rule Chapter 
XXXIX, Section 2 prohibits BSE members from being affiliated with 
BSE.\93\ Proposed Equity Rule 2140(a) is identical to BSE Rule Chapter 
XXXIX, Section 2, and prohibits the Exchange or any entity with which 
it is affiliated, from acquiring or maintaining an ownership interest 
in a member without prior Commission approval.
---------------------------------------------------------------------------

    \92\ See Notice, supra note 3, 73 FR at 69689.
    \93\ See BSE Approval Order, supra note 7, 73 FR at 46943-49644. 
The Exchange proposed, and the Commission approved, that the 
affiliation also be subject to the following conditions and 
limitations: (1) NES is operated as a facility of Nasdaq; (2) for 
purposes of Commission Rule 17d-1 under the Act, 17 CFR 240.17d-1, 
the designated examining authority of NES is a self-regulatory 
organization unaffiliated with Nasdaq; and (3) use of NES to route 
orders to other market centers is optional. Id.
---------------------------------------------------------------------------

    NES is a broker-dealer that is a member of the Exchange, and 
currently provides to Nasdaq members optional routing services to other 
market centers. NES is owned by NASDAQ OMX, which also owns three 
registered securities exchanges--Nasdaq, the Exchange, and Phlx.\94\ 
Thus, NES is an affiliate of each of these exchanges. Absent Commission 
approval, Equity Rule 2140(a) would prohibit NES from being a member of 
the Exchange.
---------------------------------------------------------------------------

    \94\ See BSE Approval Order, supra note 7, 73 FR at 46943. See 
also Securities Exchange Act Release No. 58179 (July 17, 2008), 73 
FR 42874 (July 23, 2008) (order approving NASDAQ OMX's acquisition 
of Phlx.)
---------------------------------------------------------------------------

    In connection with NASDAQ OMX's acquisition of the Exchange, the 
Commission approved the current affiliation between the Exchange and 
NES for the limited purpose of permitting NES to provide routing 
services for Nasdaq for orders that first attempt to access liquidity 
on Nasdaq's system before routing to the Exchange, subject to certain 
other limitations and conditions.\95\ At the time of NASDAQ OMX's 
acquisition of the Exchange, the Exchange was not trading equity 
securities.\96\ Now, in connection with the Exchange's resumption of 
equity trading pursuant to the instant proposed rule change, the 
Exchange proposes to modify the conditions for the affiliation between 
NES and the Exchange, previously approved by the Commission, to permit 
the Exchange to receive orders routed by NES in its capacity as a 
facility of Nasdaq (including ``Directed Orders''),\97\ on a one-year 
pilot basis.\98\
---------------------------------------------------------------------------

    \95\ BSE Rule Chapter XXXIX, Section 2 was adopted in the BSE 
Approval Order (see supra note 7, 73 FR at 46944), and is proposed 
to be replaced by Equity Rule 2140(a).
    \96\ See BSE Approval Order, supra note 7, 73 FR at 49644, 
n.117.
    \97\ Nasdaq Rule 4751(f)(9) defines Directed Orders as 
immediate-or-cancel orders that are directed to an exchange other 
than Nasdaq without checking the Nasdaq book. Pursuant to Nasdaq 
Rule 4751(f)(9), Nasdaq currently may not route Directed Orders to a 
facility of an exchange that is an affiliate of Nasdaq.
    \98\ See Notice, supra note 3, 73 FR at 69689.
---------------------------------------------------------------------------

    NES operates as a facility of Nasdaq that provides outbound routing 
from Nasdaq to other market centers, subject to certain conditions.\99\ 
NES's operation as a facility providing outbound routing services for 
Nasdaq is subject to the conditions that: (1) NES is operated and 
regulated as a facility of Nasdaq; (2) NES only provides outbound 
routing services unless otherwise approved by the

[[Page 80475]]

Commission; (3) the designated examining authority of NES is a self-
regulatory organization unaffiliated with Nasdaq; and (4) the use of 
NES for outbound routing is available only to Nasdaq members and the 
use of NES remains optional. Currently, NES may not route Directed 
Orders to a facility of an exchange that is an affiliate of 
Nasdaq.\100\ Nasdaq has proposed, and the Commission approved today, a 
rule change to permit NES to route all forms of orders, including 
Directed Orders, to the BX Equities Market.\101\
---------------------------------------------------------------------------

    \99\ See Nasdaq Rules 4751 and 4758. See also Notice, supra note 
3, 73 FR at 69689.
    \100\ Id. See also supra note 7.
    \101\ See Securities Exchange Act Release No. 59154 (December 
23, 2008) (SR-Nasdaq-2008-091).
---------------------------------------------------------------------------

    The operation of NES as a facility of Nasdaq providing outbound 
routing services from that exchange will be subject to Nasdaq 
oversight, as well as Commission oversight. Nasdaq will be responsible 
for ensuring that NES's outbound routing function is operated 
consistent with Section 6 of the Act and Nasdaq rules. In addition, 
Nasdaq must file with the Commission rule changes and fees relating to 
NES's outbound routing function.
    Recognizing that the Commission has previously expressed concern 
regarding the potential for conflicts of interest in instances where a 
member firm is affiliated with an exchange of which it is a member, the 
Exchange previously proposed, and the Commission approved, limitations 
and conditions on NES's affiliation with the Exchange \102\ Also 
recognizing that the Commission has expressed concern regarding the 
potential for conflicts of interest in instances where a member firm is 
affiliated with an exchange to which it is routing orders, the Exchange 
now proposes to revise the conditions to NES's affiliation with the 
Exchange to permit the Exchange to accept inbound orders that NES 
routes in its capacity as a facility of Nasdaq, subject to the 
following limitations and conditions:
---------------------------------------------------------------------------

    \102\ See BSE Approval Order, supra note 7, 73 FR at 49644.
---------------------------------------------------------------------------

     First, the Exchange states that the Exchange and FINRA 
will enter into a Regulatory Contract, as well as an agreement pursuant 
to Rule 17d-2 under the Act (``17d-2 Agreement'').\103\ Pursuant to the 
Regulatory Contract and the 17d-2 Agreement, FINRA will be allocated 
regulatory responsibilities to review NES's compliance with certain 
Exchange rules.\104\ Pursuant to the Regulatory Contract, however, BX 
retains ultimate responsibility for enforcing its rules with respect to 
NES.
---------------------------------------------------------------------------

    \103\ 17 CFR 240.17d-2.
    \104\ The Exchange also states that NES is subject to 
independent oversight by FINRA, its Designated Examining Authority, 
for compliance with financial responsibility requirements. See 
Notice, supra note 3, 73 FR at 69689.
---------------------------------------------------------------------------

     Second, FINRA will monitor NES for compliance with the 
Exchange's trading rules, and will collect and maintain certain related 
information.\105\
---------------------------------------------------------------------------

    \105\ Pursuant to the Regulatory Contract, both FINRA and the 
Exchange will collect and maintain all alerts, complaints, 
investigations and enforcement actions in which NES (in its capacity 
as a facility of Nasdaq routing orders to the Exchange) is 
identified as a participant that has potentially violated applicable 
Commission 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 Commission's Office of 
Compliance Inspections and Examinations. See Notice, supra note 3, 
73 FR at 69689.
---------------------------------------------------------------------------

     Third, the Exchange states that FINRA has agreed with the 
Exchange that it will provide a report to the Exchange's chief 
regulatory officer (``CRO''), on a quarterly basis, that: (i) 
Quantifies all alerts (of which FINRA is aware) that identify NES as a 
participant that has potentially violated Commission or Exchange rules, 
and (ii) lists all investigations that identify NES as a participant 
that has potentially violated Commission or Exchange rules.\106\
---------------------------------------------------------------------------

    \106\ See id.
---------------------------------------------------------------------------

     Fourth, the Exchange proposes Rule 2140(c), which will 
require NASDAQ OMX, as the holding company owning both the Exchange and 
NES, to establish and maintain procedures and internal controls 
reasonably designed to ensure that NES does not develop or implement 
changes to its system, based on non-public information obtained 
regarding planned changes to the Exchange's systems as a result of its 
affiliation with the Exchange, until such information is available 
generally to similarly situated Exchange members, in connection with 
the provision of inbound order routing to the Exchange.\107\
---------------------------------------------------------------------------

    \107\ See Equity Rule 2140(c). See also Notice, supra note 3, 73 
FR at 69689-69690.
---------------------------------------------------------------------------

     Fifth, the Exchange proposes that routing of orders from 
NES to the Exchange, in NES's capacity as a facility of Nasdaq, be 
authorized for a pilot period of twelve months.\108\
---------------------------------------------------------------------------

    \108\ See Amendment No. 2, supra note 5. In Amendment No. 2, the 
Exchange clarified that its proposal, as opposed to Nasdaq's 
corresponding proposal, be approved on a twelve-month pilot basis. 
See also Notice, supra note 3, 73 FR at 69689, n.15 and accompanying 
text.
---------------------------------------------------------------------------

    In the past, the Commission has expressed concern that the 
affiliation of an exchange with one of its members raises potential 
conflicts of interest, and the potential for unfair competitive 
advantage.\109\ Although the Commission continues to be concerned about 
potential unfair competition and conflicts of interest between an 
exchange's self-regulatory obligations and its commercial interest when 
the exchange is affiliated with one of its members, for the reasons 
discussed below, the Commission believes that it is consistent with the 
Act to permit NES to provide inbound routing to the Exchange on a pilot 
basis, subject to the conditions described above.
---------------------------------------------------------------------------

    \109\ See, e.g., Securities Exchange Act Release Nos. 54170 
(July 18, 2006), 71 FR 42149 (July 25, 2006) (SR-NASDAQ-2006-006) 
(order approving Nasdaq's proposal to adopt Nasdaq Rule 2140, 
restricting affiliations between Nasdaq and its members); 53382 
(February 27, 2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) 
(order approving the combination of the New York Stock Exchange, 
Inc. and Archipelago Holdings, Inc.); and 58673 (September 29, 
2008), 73 FR 57707 (October 8, 2008) (SR-Amex-2008-62) (order 
approving the combination of NYSE Euronext and the American Stock 
Exchange LLC).
---------------------------------------------------------------------------

    The Exchange has proposed five conditions applicable to NES's 
routing activities, which are enumerated above. The Commission believes 
that these conditions mitigate its concerns about potential conflicts 
of interest and unfair competitive advantage. In particular, the 
Commission believes that FINRA's oversight of NES,\110\ combined with 
FINRA's monitoring of NES's compliance with the equity trading rules 
and quarterly reporting to the Exchange's CRO, will help to protect the 
independence of the Exchange's regulatory responsibilities with respect 
to NES. The Commission also believes that the proposed addition of 
Equity Rule 2140(c) is designed to ensure that NES cannot use any 
information advantage it may have because of its affiliation with the 
Exchange. Furthermore, the Commission believes that the Exchange's 
proposal to allow NES to route orders inbound to the Exchange from 
Nasdaq, on a pilot basis, will provide the Exchange and the Commission 
an opportunity to assess the impact of any conflicts of interest of 
allowing an affiliated member of the Exchange to route orders inbound 
to the Exchange and whether such affiliation provides an unfair 
competitive advantage.
---------------------------------------------------------------------------

    \110\ This oversight will be accomplished through the 17d-2 
Agreement between FINRA and the Exchange and the Regulatory 
Contract.
---------------------------------------------------------------------------

D. Securities Traded on the Exchange

    The Equity Rule 4000 series includes the rules governing listing 
and trading of cash equity securities on the Exchange. The Exchange 
proposes to adopt initial and continued 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

[[Page 80476]]

Receipts (``ADRs''), and limited partnership interests that are 
identical to Nasdaq's listing standards for the Nasdaq Capital Market, 
Nasdaq's most permissive listing standards.\111\ The standards for 
initial and continued listing of these securities are set forth in the 
proposed Equity Rule 4300 Series.\112\
---------------------------------------------------------------------------

    \111\ Nasdaq has three progressively higher listing tiers--the 
Nasdaq Capital Market, the Nasdaq Global Market, and the Nasdaq 
Global Select Market. Securities listed on the Nasdaq Capital Market 
are ``covered securities'' for purposes of Section 18 of the 
Securities Act of 1933, 15 U.S.C. 77r (``Securities Act''), and are 
therefore exempt 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). In the Notice, the Exchange stated 
that it anticipates petitioning the Commission to amend Rule 146 
under the Securities Act to recognize securities listed on the 
Exchange as covered securities. See Notice, supra note 3, 73 FR at 
69688.
    \112\ See Equity Rules 4310 and 4320.
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    In addition, the Exchange proposes to 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 would be 
substantively identical to those of the Nasdaq Global Market.\113\ The 
listing standards for SEEDS and ``other securities'' would differ 
slightly from the comparable Nasdaq standards, in that they require 
issuers of securities listed thereunder to be eligible for listing on 
the Nasdaq or the New York Stock Exchange (``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 Nasdaq or 
the NYSE, but it would nevertheless be required to demonstrate ability 
to meet such other listing standards before listing the SEED or ``other 
security.'' The proposed equity rules do not include the provisions of 
Nasdaq Rules 4426 and 4427, which establish standards for Nasdaq's 
Global Select Market tier.\114\ The Commission finds the Exchange's 
proposed initial and continued listing standards are consistent with 
the Act, including Section 6(b)(5), in that they are designed to 
protect investors and the public interest and to promote just and 
equitable principles of trade.\115\
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    \113\ See Equity Rules 4420 and 4450. 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 Equity Rule 
4420(h)(1)(B).
    \114\ The Equity Rule 4600 series is being reserved for the 
Exchange's listing fees, which will be included in a separate 
filing.
    \115\ 15 U.S.C. 78f(b)(5). The Commission notes that the 
Exchange's initial and continued 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, ADRs and limited partnership 
interests are identical to the existing standards for the Nasdaq 
Capital Market, which the Commission previously approved. Likewise, 
the Exchange's initial and continued listing standards for units, 
index warrants, portfolio depository receipts, index fund shares, 
trust issued receipts, linked securities, managed fund shares and 
other securities are identical to those approved for the Nasdaq 
Global Market, which the Commission also previously approved. See 
Nasdaq Registration Approval Order, supra note 50.
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E. Regulation of the Exchange and Its Members

    As a facility of the Exchange, the BX Equities Market will be 
subject to the Exchange's SRO functions and the Exchange will have 
regulatory responsibility for the activities of the 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 BX Equities Market as a facility of 
the Exchange.\116\ In addition, the amended Operating Agreement 
contains provisions relating to the governance of the BX Equities LLC 
that will ensure that the Exchange has authority over BX Equities LLC 
to fulfill the Exchange's responsibility for all regulatory functions 
related to the BX Equities Market. The Exchange represented that its 
proposed corporate and self-regulatory structure, 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 BX 
Equities Market will be operated and regulated in a manner that is 
consistent with the Act.\117\
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    \116\ See Notice, supra note 3, 73 FR at 69691, and BSE Approval 
Order, supra note 7, 73 FR at 46944 for a description of the 
protections, limitations, and requirements the Commission previously 
approved in connection with the governing structure of NASDAQ OMX 
and of the Exchange, which are designed to protect the self-
regulatory function of the Exchange and preserve its independence.
    \117\ See Notice, supra note 3, 73 FR at 69691.
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    In connection with the proposed rule change, the Exchange noted 
that its Regulatory Oversight Committee and its CRO will assume 
responsibility for regulating quoting and trading on the BX Equities 
Market and conduct by its members.\118\ The Exchange's CRO has general 
supervision of the regulatory operations of the Exchange, including 
overseeing surveillance, examination, and enforcement functions, and 
will administer the Regulatory Contract between the Exchange and 
FINRA.\119\
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    \118\ Each broker-dealer that participates in trading on the BX 
Equities Market must be a member of the Exchange. See Notice, supra 
note 3, 73 FR at 69693.
    \119\ Pursuant to the Regulatory Contract, FINRA will perform 
certain regulatory functions on behalf of the Exchange. 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 
Nasdaq Review Council. See Notice, supra note 3, 73 FR at 69690.
---------------------------------------------------------------------------

    The Regulatory Contract between the Exchange and FINRA governs the 
Exchange and its facilities and therefore will automatically govern the 
BX Equities Market and Exchange members trading on it.\120\ 
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.\121\ 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.\122\ The 
Exchange's rules also provide for the imposition of fines for minor 
rule violations in lieu of commencing disciplinary proceedings.\123\
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    \120\ See id. at 69692.
    \121\ See, e.g., Exchange By-Laws, Article IX, Section 2.
    \122\ See, e.g., Equity Rule 8310.
    \123\ See, e.g., Equity Rule 9216(b).
---------------------------------------------------------------------------

    The Exchange's 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 Exchange represents that the Regulation 
Department includes MarketWatch, which will perform real-time intraday 
surveillance over the Exchange's listed companies and participants in 
the 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

[[Page 80477]]

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. The Equity Rules 
governing unusual market conditions, extraordinary market volatility, 
and audit trail are modeled on the rules of Nasdaq.\124\ With regard to 
trading halts, 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 4120 relating to a ``display only'' 
period prior to the execution of the halt cross are not included.
---------------------------------------------------------------------------

    \124\ See, e.g., Equity Rules 4121, 4631, 6955.
---------------------------------------------------------------------------

    The Commission finds that the Exchange's proposed rules relating to 
the regulation of the BX Equities Market and its members are consistent 
with the requirements of the Act, and in particular with Section 
6(b)(1) of the Act, which requires an exchange to be so organized and 
have the capacity to be able to carry out the purposes of the Act and 
to comply, and to enforce compliance by its members and persons 
associated with its members, with the Act and the rules and regulations 
thereunder, and the rules of the Exchange,\125\ and with Sections 
6(b)(6) and 6(b)(7) of the Act,\126\ which require an Exchange to 
provide fair procedures for the disciplining of members and persons 
associated with members.
---------------------------------------------------------------------------

    \125\ 15 U.S.C. 78f(b)(1).
    \126\ 15 U.S.C. 78f(b)(6) and (b)(7).
---------------------------------------------------------------------------

1. Regulatory Contract
    The Exchange represents that the Regulatory Contract between the 
Exchange and FINRA governs the Exchange and its facilities.\127\ 
Therefore, because the BX Equities Market will be a facility of the 
Exchange, the Regulatory Contract will govern the BX Equities 
Market.\128\ The Exchange and FINRA also are parties to an agreement 
pursuant to Section 17(d) of the Act and Rule 17d-2 thereunder. A 
regulatory matter involving an Exchange member that is also a FINRA 
member, and that is governed by both the Regulatory Contract and the 
17d-2 Agreement will be administered by FINRA pursuant to the 17d-2 
Agreement.
---------------------------------------------------------------------------

    \127\ See Notice, supra note 3, 73 FR at 69692.
    \128\ The Commission notes that the Equity Rules provide that:
    ``[The] Rules that refer to the Exchange's Regulation 
Department, Regulation Department staff, Exchange staff, and 
Exchange departments should be understood as also referring to FINRA 
staff and FINRA departments acting on behalf of the Exchange 
pursuant to the FINRA Regulatory Contract. See Equity Rule 0130.
---------------------------------------------------------------------------

    The Commission notes that the Exchange will continue to bear 
ultimate regulatory responsibility for functions performed on its 
behalf under the Regulatory Contract. Further, the Exchange retains 
ultimate legal responsibility for the regulation of its members and its 
market (including its facility, the BX Equities Market).
    The Commission believes that it is consistent with the Act and the 
public interest to allow the Exchange to contract with FINRA to perform 
membership, disciplinary, and enforcement functions.\129\ Membership, 
discipline, and enforcement are fundamental elements to a regulatory 
program, and constitute core self-regulatory functions. It is essential 
to the public interest and the protection of investors that these 
functions are carried out in an exemplary manner. With respect to 
certain regulatory functions contracted to FINRA by the Exchange, 
including membership, disciplinary and enforcement functions, the 
Commission previously noted its belief that FINRA has the expertise and 
experience to perform such functions on behalf of an exchange, and that 
the contracting of such functions to FINRA is consistent with the Act 
and the public interest.\130\ The Commission continues to believe that 
this is true with respect to the inclusion in the Regulatory Contract 
of regulation of the Exchange and the conduct of its members.
---------------------------------------------------------------------------

    \129\ See, e.g., Securities Exchange Act Release No. 40760 
(December 8, 1998), 63 FR 70844 (December 22, 1998). See also 
Securities Exchange Act Release Nos. 57478 (March 12, 2008) 73 FR 
14521, (March 18, 2008) (order approving rules governing the trading 
of options on the NASDAQ Options Market) (``NOM Approval Order''); 
50122 (July 29, 2004), 69 FR 47962 (August 6, 2004) (order approving 
File No. SR-Amex-2004-32) (``Amex Approval Order''); 42455 (February 
24, 2000), 65 FR 11388 (March 2, 2000) (File No. 10-127) (approving 
ISE's registration as a national securities exchange) (``ISE 
Exchange Registration Order'') at III(D)(2); Nasdaq Registration 
Approval Order, supra note 50.
    \130\ See Nasdaq Registration Approval Order, supra note 50, at 
notes 10 and 11 and accompanying text.
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    The Exchange, unless relieved by the Commission of its 
responsibility,\131\ shall bear the responsibility for self-regulatory 
conduct and primary liability for self-regulatory failures, not the SRO 
retained to perform regulatory functions on the Exchange's behalf.\132\ 
In performing these functions, however, FINRA may nonetheless bear 
liability for causing or aiding and abetting the failure of the 
Exchange to perform its regulatory functions.\133\ Accordingly, 
although FINRA will not act on its own behalf under its SRO 
responsibilities in carrying out these regulatory services for the 
Exchange relating to the operation of the BX Equities Market, FINRA 
also may have secondary liability if, for example, the Commission finds 
that the contracted functions are being performed so inadequately as to 
cause a violation of the federal securities laws by the Exchange.\134\
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    \131\ See Section 17(d)(1) of the Act and Rule 17d-2 thereunder. 
15 U.S.C. 78q(d)(1); and 17 CFR 240.17d-2. The Commission notes that 
it is not approving the Regulatory Contract.
    \132\ See NOM Approval Order, supra note 129; Nasdaq 
Registration Approval Order, supra note 50, at notes 112 and 113 and 
accompanying text; Amex Approval Order, supra note 129; and ISE 
Registration Approval Order, supra note 129, at Section III(D)(2).
    \133\ Id.
    \134\ Id.
---------------------------------------------------------------------------

2. 17d-2 Agreement
    Rule 17d-2 allows SROs to file with the Commission plans under 
which the SROs allocate among themselves the responsibility to receive 
regulatory reports from, and examine and enforce compliance with, 
specified provisions of the Act and rules thereunder and SRO rules by 
firms that are members of more than one SRO (``common members''). An 
SRO that is a party to an effective 17d-2 plan is relieved of 
regulatory responsibility as to any common member for whom 
responsibility is allocated under the plan to another SRO.\135\ The 
Commission notes that the Exchange has entered into a 17d-2 Agreement 
with FINRA, covering common members of the Exchange and FINRA, and that 
the Exchange has filed this agreement with the Commission.\136\ The

[[Page 80478]]

proposed 17d-2 agreement allocates to FINRA regulatory responsibility, 
with respect to common members, as follows:
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    \135\ Rule 17d-2 provides that any two or more SROs may file 
with the Commission a plan for allocating among such SROs the 
responsibility to receive regulatory reports from persons who are 
members or participants of more than one of such SROs to examine 
such persons for compliance, or to enforce compliance by such 
persons, with specified provisions of the Act, the rules and 
regulations thereunder, and the rules of such SROs, or to carry out 
other specified regulatory functions with respect to such persons. 
17 CFR 240.17d-2.
    \136\ See Securities Exchange Act Release No. 59101 (December 
15, 2008) (File No. 4-575.)
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     FINRA will process and act upon all applications submitted 
on behalf of allied persons, partners, officers, registered personnel 
and any other person required to be approved by the rules of both the 
Exchange and FINRA or associated with common members thereof. Upon 
request, FINRA will advise the Exchange of any changes of allied 
members, partners, officers, registered personnel and other persons 
required to be approved by the rules of both the Exchange and FINRA.
     FINRA will investigate common members of the Exchange and 
FINRA for violations compliance with federal securities laws, rules and 
regulations, and rules of the Exchange that have been certified by BX 
as identical or substantially similar to a FINRA rule.
     FINRA will enforce compliance by common members with 
federal securities laws, rules and regulations, and rules of the 
Exchange that have been certified by the Exchange as identical or 
substantially similar to FINRA rules.
3. Minor Rule Violation Plan
    The Commission approved the Exchange's Minor Rule Violation Plan 
(``MRVP'') in 1989.\137\ The MRVP specifies those uncontested minor 
rule violations with sanctions not exceeding $2,500 that would not be 
subject to the provisions of Rule 19d-1(c)(1) under the Act \138\ 
requiring that an SRO promptly file notice with the Commission of any 
final disciplinary action taken with respect to any person or 
organization.\139\ The Exchange's MRVP includes the policies and 
procedures included in Equity Rule 9216(b), ``Procedure for Violations 
under Plan Pursuant to SEC Rule 19d-1(c)(2),'' and the rule violations 
included in Equity Rule IM-9216, ``Violations Appropriate for 
Disposition Under Plan Pursuant to SEC Rule 19d-1(c)(2).'' The 
Commission notes that the Exchange proposes to add to its MRVP the list 
of rules set forth in Equity Rule IM-9216, which rules are the same as 
those listed in Nasdaq's IM-9216.\140\
---------------------------------------------------------------------------

    \137\ See Securities Exchange Act Release No. 26737 (April 17, 
1989), 1989 WL 550708 (File No. SR-BSE-88-2) (``MRVP Order'').
    \138\ 17 CFR 240.19d-1(c)(1).
    \139\ The Commission adopted amendments to paragraph (c) of Rule 
19d-1 to allow SROs to submit for Commission approval plans for the 
abbreviated reporting of minor disciplinary infractions. See 
Securities Exchange Act Release No. 21013 (June 1, 1984), 49 FR 
23829 (June 8, 1984). Any disciplinary action taken by an SRO 
against any person for violation of a rule of the SRO which has been 
designated as a minor rule violation pursuant to such a plan filed 
with the Commission will not be considered ``final'' for purposes of 
Section 19(d)(1) of the Act, 78 U.S.C. 78s(d), if the sanction 
imposed consists of a fine not exceeding $2,500 and the sanctioned 
person has not sought an adjudication, including a hearing, or 
otherwise exhausted his administrative remedies.
    \140\ See Equity Rule IM-9216. The Exchange represented that 
these rules are in addition to existing provisions of the MRVP that 
remain in effect with respect to the Exchange's Boston Options 
Exchange facility. See Notice, supra note 3, 73 FR at 69690.
---------------------------------------------------------------------------

    The Commission finds that the Exchange's MRVP is consistent with 
Sections 6(b)(1), 6(b)(5) and 6(b)(6) of the Act, which require, in 
part, that an exchange have the capacity to enforce compliance with, 
and provide appropriate discipline for, violations of the rules of the 
Commission and of the exchange.\141\ In addition, because Equity Rule 
9216(b) will offer procedural rights to a person sanctioned for a 
violation listed in Equity Rule IM-9216, the Commission believes that 
the Exchange's rules provide a fair procedure for the disciplining of 
members and associated persons, consistent with Section 6(b)(7) of the 
Act.\142\
---------------------------------------------------------------------------

    \141\ 15 U.S.C. 78f(b)(1), 78f(b)(5) and 78f(b)(6).
    \142\ 15 U.S.C. 78f(b)(7).
---------------------------------------------------------------------------

    The Commission also finds that the proposal to include the rules 
listed in Equity Rule IM-9216 in the MRVP is consistent with the public 
interest, the protection of investors, or otherwise in furtherance of 
the purposes of the Act, as required by Rule 19d-1(c)(2) under the 
Act,\143\ because it should strengthen the Exchange's ability to carry 
out its oversight and enforcement responsibilities as an SRO in cases 
where full disciplinary proceedings are unsuitable in view of the minor 
nature of the particular violation.
---------------------------------------------------------------------------

    \143\ 17 CFR 240.19d-1(c)(2).
---------------------------------------------------------------------------

    In approving the proposed change to the Exchange's MRVP, the 
Commission in no way minimizes the importance of compliance with 
Exchange rules and all other rules subject to the imposition of fines 
under the MRVP. The Commission believes that the violation of any SRO 
rules, as well as Commission rules, is a serious matter. However, the 
Exchange's MRVP provides a reasonable means of addressing rule 
violations that do not rise to the level of requiring formal 
disciplinary proceedings, while providing greater flexibility in 
handling certain violations. The Commission expects that the Exchange 
will conduct surveillance with due diligence and make a determination 
based on its findings, on a case-by-case basis, whether a fine of more 
or less than the recommended amount is appropriate for a violation 
under the MRVP or whether a violation requires a formal disciplinary 
action under the Exchange's Equity Rule 9200 Series.

IV. Exemption From the Requirement To Register as a SIP

    As described above, BX Equities LLC will be delegated the authority 
to act as a SIP for quotations and transaction information related to 
securities traded on the BX Equities Market and any trading facilities 
operated by BX Equities LLC. In the SIP Exemption Request Letter,\144\ 
the Exchange, on behalf of BX Equities LLC, requested that the 
Commission grant BX Equities LLC a permanent exemption from the 
requirement under Section 11A(b) of the Act and Rule 609 thereunder 
that a securities information processor acting as an exclusive 
processor register with the Commission.\145\ For the reasons discussed 
below, the Commission grants the requested exemption, subject to the 
conditions specified in this Order.
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    \144\ See SIP Exemption Request Letter, supra note 6.
    \145\ 15 U.S.C. 78k-1(b). Rule 609 under the Act, 17 CFR 
242.609, requires that the registration of a securities information 
processor be on Form SIP, 17 CFR 249.1001.
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A. Overview

    BX Equities LLC is jointly owned by the Exchange and its parent 
corporation, NASDAQ OMX. BX Equities LLC has been established for the 
purpose of operating an Exchange facility for the trading of cash 
equity securities. Pursuant to the proposed rule change approved in 
this Order, the Operating Agreement has been amended to provide that 
management of BX Equities LLC is vested solely in the Exchange. In 
addition, the Exchange will delegate the performance of certain of its 
market functions to BX Equities LLC with respect to the quoting and 
trading of cash equity securities, including the authority to act as a 
securities information processor for quoting and trading information 
related to cash equity securities traded on the BX Equities Market and 
any trading facilities operated by BX Equities LLC. Because BX Equities 
LLC will be engaging, on an exclusive basis on behalf of the Exchange, 
in collecting, processing, or preparing for distribution or publication 
information with respect to transactions or quotations on, or effected 
or made by means of, a facility of the Exchange, it will be an 
exclusive processor required to register pursuant to Section 11A(b) of 
the Act. Nevertheless, as further described in the SIP Exemption 
Request Letter, the Exchange and BX Equities LLC believe that the 
purposes of Section 11A(b) of

[[Page 80479]]

the Act are not served by requiring BX Equities LLC to register as an 
exclusive processor under Section 11A(b) of the Act, because Section 
11A(b) subjects a registered securities information processor to a 
regulatory regime to which the BX Equities Market will be subject in 
all material respects as a facility of a registered national securities 
exchange.

B. Discussion

    Sections 11A(b)(1) and (2) of the Act and Rule 609 thereunder 
(formerly Rule 11Ab2-1) provide that a securities information processor 
\146\ that is acting as an exclusive processor \147\ register with the 
Commission by filing an application for registration on Form SIP. 
Section 11A(b)(1) of the Act and Rule 609(c) thereunder allow the 
Commission, by rule or order, to conditionally or unconditionally 
exempt any securities information processor from any provision of 
Section 11A(b) of the Act or the rules or regulations thereunder, if 
the Commission finds that such exemption is consistent with the public 
interest, the protection of investors, and the purposes of Section 
11A(b).\148\
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    \146\ Section 3(a)(22) of the Act, 15 U.S.C. 78c(a)(22)(A), 
defines the term securities information processor to mean any person 
engaged in the business of (i) collecting, processing, or preparing 
for distribution or publication, or assisting, participating in, or 
coordinating the distribution or publication of, information with 
respect to transactions in or quotations for any security (other 
than an exempted security) or (ii) distributing or publishing 
(whether by means of a ticker tape, a communications network, a 
terminal display device, or otherwise) on a current and continuing 
basis, information with respect to such transactions or quotations.
    \147\ Under Section 3(a)(22)(B) of the Act, 15 U.S.C. 
78c(a)(22)(B), an exclusive processor is defined as any securities 
information processor or self-regulatory organization which, 
directly or indirectly, engages on an exclusive basis on behalf of 
any national securities exchange or registered securities 
association, or any national securities exchange or registered 
securities association which engages on an exclusive basis on its 
own behalf, in collecting, processing, or preparing for distribution 
or publication any information with respect to (i) transactions or 
quotations on or effected or made by means of any facility of such 
exchange or (ii) quotations distributed or published by means of any 
electronic system operated or controlled by such association.
    \148\ See 15 U.S.C. 78k-1(b)(1) and 17 CFR 242.609(c).
---------------------------------------------------------------------------

    In its release adopting Rule 609, the Commission provides a 
framework for the consideration of exemption requests pursuant to 
Section 11A(b)(1) of the Act.\149\ Specifically, the Commission 
indicates that the need for registration of an exclusive processor 
should be considered in respect of Sections 11A(b)(1), (b)(3) and 
(b)(5) and Sections 17(a) and (b) of the Act, insofar as they provide a 
framework for the surveillance and regulation of registered securities 
information processors. The Commission stated that any application for 
an exemption from registration should show not only how such exemption 
would be consistent with the statutory purposes discussed in the 
release, but also should demonstrate why, by virtue of the applicant's 
organization, operation or other characteristics, the applicant should 
be exempted from registration, the requirements of Section 11A(b) and 
the Commission's authority under Sections 17(a) and 17(b) of the 
Act.\150\
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    \149\ See Securities Exchange Act Release No. 11673 (September 
23, 1975), 40 FR 45422 (October 2, 1975) (adopting Commission Rule 
11Ab2-1, which has been redesignated as Rule 609).
    \150\ Id. at 45423.
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    The Commission believes that BX Equities LLC will be acting as an 
exclusive processor as defined in Section 3(a)(22)(B) of the Act 
because it will engage on an exclusive basis on behalf of the Exchange, 
in collecting, processing, or preparing for distribution or publication 
information with respect to transactions or quotations on, or effected 
or made by means of, a facility of the Exchange. Further, BX Equities 
LLC, in carrying out market functions of the Exchange, will operate 
(and will be regulated) as a facility of the Exchange, which is a 
national securities exchange registered under Section 6 of the Act and 
the rules and regulations thereunder.\151\ In the SIP Exemption Request 
Letter, the Exchange represents that BX Equities LLC will not perform 
any exclusive processor functions other than in its capacity as a 
facility for the Exchange.\152\
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    \151\ Section 3(a)(2) of the Act, 15 U.S.C. 78c(a)(2), defines 
the term facility, with respect to an exchange, to include its 
premises, tangible or intangible property whether on the premises or 
not, any right to use such premises or property or any service 
thereof for the purpose of effecting or reporting a transaction on 
an exchange (including, among other things, any system of 
communication to or from the exchange, by ticker or otherwise, 
maintained by or with the consent of the exchange), and any right of 
the exchange to the use of any property or service.
    \152\ SIP Exemption Request Letter, supra note 6.
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    As discussed below, with respect to its operation as a facility of 
a registered national securities exchange, BX Equities LLC already will 
be subject to regulation and Commission oversight under the Act as a 
facility of a registered exchange.\153\ Oversight and regulation of 
registered exchanges encompass and exceed the oversight and regulation 
to which BX Equities LLC will be subject pursuant to registration under 
Section 11A(b)(1) of the Act and the rules and regulations thereunder. 
Accordingly, the Commission believes that registration of BX Equities 
LLC as an exclusive processor under Section 11A(b)(1) of the Act with 
respect to those functions that it will carry out as a facility of the 
Exchange would not further the purposes of the Act.
---------------------------------------------------------------------------

    \153\ The definition of an exchange under the Act includes ``the 
market facilities maintained by such exchange.'' See Section 3(a)(1) 
of the Act, 15 U.S.C. 78c(a)(1). The functions and operation of a 
national securities exchange encompass the collection, processing, 
and dissemination of information related to securities trading.
---------------------------------------------------------------------------

1. Denial of Access to Services Provided by a Securities Information 
Processor or a National Securities Exchange
    Section 11A(b)(5)(A) of the Act (1) requires a registered 
securities information processor to promptly file notice with the 
Commission if the processor prohibits or limits any person in respect 
of access to services offered, directly or indirectly, by the 
processor, and (2) provides that any such prohibition or limitation 
will be subject to Commission review, on its own motion or upon 
application by any person aggrieved.\154\ If the prohibition or 
limitation is reviewed, the Commission shall dismiss the proceeding if 
it finds (after notice and opportunity for a hearing) that such 
prohibition or limitation is consistent with the provisions of the Act 
and the rules and regulations thereunder and that such person has not 
been discriminated against unfairly. If the Commission does not make 
such a finding, or if it finds that such prohibition or limitation 
imposes any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act, the Commission shall set aside 
the prohibition or limitation and require the securities information 
processor to permit such person access to services offered by the 
processor.\155\
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    \154\ See 15 U.S.C. 78k-1(b)(5)(A).
    \155\ See Section 11A(b)(5)(B) under the Act, 15 U.S.C. 78k-
1(b)(5)(B).
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    BX Equities LLC, however, will be subject to similar Commission 
regulation and oversight pursuant to Sections 6(b)(7), 6(d), 19(d), and 
19(f) of the Act with respect to its activities as a facility of the 
Exchange.\156\ Section 19(d)(1) requires, in part, that an exchange 
promptly file notice with the Commission if the exchange prohibits or 
limits any person in respect to access to services offered by such 
exchange or member thereof.\157\ Any such action for which the exchange 
must file notice is subject to Commission review.\158\
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    \156\ 15 U.S.C. 78f(b)(7) and (d) and 78s(d) and (f).
    \157\ 15 U.S.C. 78s(d)(1).
    \158\ 15 U.S.C. 78s(d)(2). See also Section 19(f) of the Act, 15 
U.S.C. 78s(f).

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[[Page 80480]]

    Section 19(f) of the Act,\159\ among other things, allows the 
Commission to set aside an SRO's prohibition or limitation with respect 
to access to services offered by the SRO if the Commission finds that 
the prohibition or limitation imposes any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act.
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    \159\ 15 U.S.C. 78s(f).
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    Section 6(b)(7) of the Act provides that the rules of an exchange, 
among other things, must provide a fair procedure for the prohibition 
or limitation by the exchange of any person with respect to access to 
services offered by the exchange or a member thereof.\160\
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    \160\ 15 U.S.C. 78f(b)(7). Section 6(d)(2), 15 U.S.C. 78f(d)(2), 
provides procedural requirements for any such proceeding by an 
exchange.
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    Section 6(d) of the Act \161\ requires, among other things, that a 
national securities exchange that initiates a proceeding to determine 
whether to prohibit or limit a person's access to services offered by 
the exchange notify the person of the specific grounds for the 
prohibition or limitation and provide an opportunity to be heard. In 
addition, Section 6(d) provides that an exchange's determination to 
prohibit or limit a person's access to the exchange's services must be 
supported by a statement setting forth the specific grounds on which 
the prohibition or limitation is based.
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    \161\ 15 U.S.C. 78f(d).
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    The Commission therefore believes that regulation of the Exchange 
as a national securities exchange provides for equivalent regulation 
and Commission oversight of actions that BX Equities LLC may take in 
its capacity as a facility to deny access to services as would be the 
case were it to register as an exclusive processor under Section 11A(b) 
of the Act.
2. Limitation on Activities of a Securities Information Processor or a 
National Securities Exchange
    Section 11A(b)(6) of the Act grants the Commission authority to 
censure or place limitations on the activities, functions, or 
operations of any registered securities information processor or 
suspend for a period not exceeding twelve months or revoke the 
registration of any such processor.\162\ Likewise, Section 19(h)(1) of 
the Act grants the Commission authority to suspend for a period not 
exceeding twelve months or revoke the registration of an exchange, or 
to censure or impose limitations upon the activities, functions, and 
operations of an exchange.\163\ The Commission therefore has the 
authority to place limitations on the activities of BX Equities LLC as 
a facility of a registered national securities exchange.
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    \162\ 15 U.S.C. 78k-1(b)(6).
    \163\ 15 U.S.C. 78s(h)(1). See also Sections 19(h)(2), (h)(3), 
and (h)(4) of the Act, 15 U.S.C. 78s(h)(2), (h)(3), and (h)(4).
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3. Access to Books and Records of a Securities Information Processor or 
a National Securities Exchange
    Section 17(a)(1) of the Act requires that national securities 
exchanges and registered securities information processors make and 
keep for prescribed periods such records, furnish such copies thereof, 
and make and disseminate such reports as the Commission, by rule, 
prescribes as necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.\164\ Section 17(b) of the Act requires that such records be 
subject at any time, or from time to time, to such reasonable periodic, 
special, or other examinations by representatives of the Commission and 
the appropriate regulatory agency for such persons.\165\
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    \164\ 15 U.S.C. 78q(a). The Commission has promulgated rules 
pursuant to Section 17(a) of the Act that apply to national 
securities exchanges, but not registered securities information 
processors. See, e.g., Rule 17a-1 under the Act, 17 CFR 240.17a-1 
(requiring in part a national securities exchange to preserve, for a 
period of not less than five years, the first two in an easily 
accessible place, at least one copy of all documents that are made 
or received by it in the course of its business as such and in the 
conduct of its self-regulatory activity, and to furnish copies of 
such records to any representative of the Commission upon request). 
Form SIP, the application for registration of a securities 
information processor, does require that a securities information 
processor provide the Commission with certain information relating 
to its business organization, financial information, operational 
capability, and access to services. 17 CFR 249.1001.
    \165\ 15 U.S.C. 78q(b).
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    The record retention and production requirements set out in 
Sections 17(a) and (b) of the Act therefore will be applicable to BX 
Equities LLC with respect to its activities as a facility of BX. Thus, 
requiring BX Equities LLC to register as an exclusive processor with 
respect to its activities as a facility of a registered exchange would 
serve no additional regulatory purpose in this instance.

C. Conclusion

    On the basis of the foregoing, the Commission finds that, with 
respect to its activities as a facility of the Exchange, granting an 
exemption to BX Equities LLC from the requirement to register as a 
securities information processor pursuant to Section 11A(b) of the Act 
is consistent with the public interest, the protection of investors, 
and the purposes of Section 11A(b) of the Act, including maintenance of 
fair and orderly markets in securities and the removal of impediments 
to, and perfection of the mechanism of, a national market system.\166\ 
This exemption is limited only to the exclusive processor activities 
that BX Equities LLC performs as a facility of the Exchange.
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    \166\ The Commission may grant this exemption pursuant to 
delegated authority. 17 CFR 200.30-3(49).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\167\ that the proposed rule change (SR-BSE-2008-48), as modified 
by Amendment Nos. 1 and 2, be, and hereby is, approved, except for 
inbound routing of orders from NES to the BX Equities Market, which is 
approved on a pilot basis through December 23, 2009.
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    \167\ 15 U.S.C. 78s(b)(2).
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    Although the Commission's approval of the rule proposal, as 
amended, is final and the proposed rules are therefore effective,\168\ 
it is further ordered that the operation of the BX Equities Market is 
conditioned on the satisfaction of the requirements below:
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    \168\ As noted above, inbound routing of orders from NES to the 
BX Equities Market, which is part of the Rule Proposal, is approved 
on a pilot basis through December 23, 2009.
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    A. Examination by the Commission. The Exchange must have, and 
represent in a letter to the staff in the Commission's Office of 
Compliance Inspections and Examinations that it has, adequate 
surveillance procedures and programs in place to effectively regulate 
the BX Equities Market.
    B. 17d-2 Agreement. An agreement pursuant to Rule 17d-2 between 
FINRA and the Exchange that allocates to FINRA regulatory 
responsibility for those matters specified above \169\ must be approved 
by the Commission, or the Exchange must demonstrate that it 
independently has the ability to fulfill all of its regulatory 
obligations.
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    \169\ See supra notes 104 through 110 and accompanying text, 
notes 135 to 136 and accompanying text.
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    C. Delegation Agreement. The Exchange and BX Equities LLC must 
enter into the Delegation Agreement as described above.\170\
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    \170\ See supra notes 30 to 38 and accompanying text.
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    It is further ordered, pursuant to Section 11A(b) of the Act,\171\ 
that BX Equities LLC shall be exempt from registering as a securities 
information

[[Page 80481]]

processor, subject to the conditions specified in this order.
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    \171\ 15 U.S.C. 78k-1(b).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\172\
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    \172\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-31094 Filed 12-30-08; 8:45 am]
BILLING CODE 8011-01-P