[Federal Register Volume 77, Number 101 (Thursday, May 24, 2012)]
[Notices]
[Pages 31053-31055]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-12619]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67026; File No. SR-Phlx-2012-68]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change, as Modified by Amendment No. 1, by 
NASDAQ OMX PHLX LLC To Accept Inbound Orders From NASDAQ OMX BX's New 
Options Market

 May 18, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 15, 2012, NASDAQ OMX PHLX LLC (``Exchange'' or ``PHLX'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Item I below, which Item has been 
prepared by the Exchange. On May 17, 2012, the Exchange submitted 
Amendment No. 1 to the proposed rule change.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange made a technical amendment 
to the Item 3.a of the Form 19b-4 and Item II of Exhibit 1 in the 
third bullet point, which begins with the word ``Third'' to add the 
words ``the Exchange or'' in front of the word ``FINRA'' in the 
second parenthetical.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to file with the Commission a proposal for 
PHLX to accept inbound orders routed by NASDAQ Options Services LLC 
(``NOS'') from NASDAQ OMX BX's new options market (with the attendant 
obligations and conditions), as described further below, on a one year 
pilot basis.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 
at the principal office of the Exchange, and at the Commission's Public 
Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these

[[Page 31054]]

statements may be examined at the places specified in Item IV below. 
The Exchange has prepared summaries, set forth in sections A, B, and C 
below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In conjunction with a proposal by NASDAQ OMX BX (``BX'') to 
establish a new options market and provide outbound routing services to 
all markets using its affiliated routing broker, NOS,\4\ PHLX proposes 
that NOS be permitted to route orders from BX to PHLX on a one year 
pilot basis.
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    \4\ See SR-BX-2012-030.
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    NOS is a broker-dealer and member of PHLX, BX and The NASDAQ Stock 
Market (``NASDAQ''). NOS provides all routing functions for NASDAQ \5\ 
and PHLX,\6\ and BX has proposed that NOS do so for BX as well.\7\ 
NASDAQ, PHLX, BX and NOS are affiliates. Accordingly, the affiliate 
relationship between PHLX and NOS, its member, raises the issue of an 
exchange's affiliation with a member of such exchange.\8\ Specifically, 
in connection with prior filings, the Commission has expressed concern 
that the affiliation of an exchange with one of its members raises the 
potential for unfair competitive advantage and potential conflicts of 
interest between an exchange's self-regulatory obligations and its 
commercial interests.\9\
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    \5\ See NOM Rules Chapter VI, Section 11(e). See also Securities 
Exchange Act Release No. 57478 (March 12, 2008), 73 FR 14521 (March 
18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-080).
    \6\ See Securities Exchange Act Release No. 59995 (May 28, 
2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32).
    \7\ See SR-BX-2012-030.
    \8\ Absent an effective filing, Exchange Rule 985(b) would 
prohibit NOS from being a member of the Exchange.
    \9\ See Securities Exchange Act Release Nos. 59153 (December 23, 
2008), 73 FR 80485 (SR-NASDAQ-2008-098); and 62736 (August 17, 
2010), 75 FR 51861 (August 23, 2010) (SR-NASDAQ-2010-100).
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    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, 
PHLX previously proposed, and the Commission approved, limitations and 
conditions on NOS's affiliation with PHLX.\10\ 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, PHLX previously 
proposed, and the Commission approved,\11\ NOS's affiliation with PHLX 
to permit PHLX to accept inbound orders that NOS routes in its capacity 
as a facility of NASDAQ, subject to the certain limitations and 
conditions. PHLX now proposes to accept inbound options orders that NOS 
routes in its capacity as a facility of BX, subject to these same 
limitations and conditions:
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    \10\ See Securities Exchange Act Release No. 59995 (May 28, 
2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32).
    \11\ See e.g., Securities Exchange Act Release No. 65399 
(September 26, 2011), 76 FR 60955 (September 20, 2011) (SR-Phlx-
2011-111).
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     First, PHLX and the Financial Industry Regulatory 
Authority (``FINRA'') will maintain a Regulatory Contract, as well as 
an agreement pursuant to Rule 17d-2 under the Act (``17d-2 
Agreement'').\12\ Pursuant to the Regulatory Contract and the 17d-2 
Agreement, FINRA will be allocated regulatory responsibilities to 
review NOS's compliance with certain PHLX rules.\13\ Pursuant to the 
Regulatory Contract, however, PHLX retains ultimate responsibility for 
enforcing its rules with respect to NOS.
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    \12\ 17 CFR 240.17d-2.
    \13\ NOS is also subject to independent oversight by FINRA, its 
designated examining authority, for compliance with financial 
responsibility requirements.
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     Second, FINRA will monitor NOS for compliance with PHLX's 
trading rules, and will collect and maintain certain related 
information.\14\
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    \14\ Pursuant to the Regulatory Contract, both FINRA and PHLX 
will collect and maintain all alerts, complaints, investigations and 
enforcement actions in which NOS (in its capacity as a facility of 
BX routing orders to PHLX) is identified as a participant that has 
potentially violated applicable Commission or Exchange rules. PHLX 
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.
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     Third, FINRA will provide a report to PHLX's chief 
regulatory officer (``CRO''), on a quarterly basis, that: (i) 
Quantifies all alerts (of which the Exchange or FINRA is aware) that 
identify NOS as a participant that has potentially violated Commission 
or Exchange rules, and (ii) lists all investigations that identify NOS 
as a participant that has potentially violated Commission or Exchange 
rules.
     Fourth, PHLX has in place PHLX Rule 985, which requires 
NASDAQ OMX, as the holding company owning both PHLX and NOS, to 
establish and maintain procedures and internal controls reasonably 
designed to ensure that NOS does not develop or implement changes to 
its system, based on non-public information obtained regarding planned 
changes to PHLX's systems as a result of its affiliation with PHLX, 
until such information is available generally to similarly situated 
Exchange members, in connection with the provision of inbound order 
routing to PHLX.
     Fifth, PHLX proposes that the routing of orders from NOS 
to PHLX, in NOS's capacity as a facility of BX be authorized for a 
pilot period of one year.
    PHLX believes that the above-listed conditions protect the 
independence of PHLX's regulatory responsibility with respect to NOS, 
and that these mitigate the aforementioned concerns about potential 
conflicts of interest and unfair competitive advantage.
2. Statutory Basis
    PHLX believes that the proposed rule change is consistent with the 
provisions of Section 6 of the Act,\15\ in general, and with Section 
6(b)(5) of the Act,\16\ in particular, in that the proposal is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest, because the proposed rule 
change will allow PHLX to receive inbound routes of orders from NOS, 
acting in its capacity as a facility of BX, in a manner consistent with 
prior approvals and established protections. PHLX believes that the 
proposed conditions establish mechanisms that protect the independence 
of PHLX's regulatory responsibility with respect to NOS, as well as 
ensure that NOS cannot use any information it may have because of its 
affiliation with PHLX to its advantage.
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    \15\ 15 U.S.C. 78f.
    \16\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

[[Page 31055]]

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve or disapprove such proposed rule change; or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-Phlx-2012-68 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2012-68. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-Phlx-2012-68 and should be 
submitted on or before June 14, 2012.
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    \17\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-12619 Filed 5-23-12; 8:45 am]
BILLING CODE 8011-01-P