[Federal Register Volume 78, Number 174 (Monday, September 9, 2013)]
[Notices]
[Pages 55126-55128]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-21816]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70303]
Order Exempting Broker-Dealers Participating in NYSE Arca, Inc.'s
Lead Market Maker Incentive Program From Section 11(d)(1) of the
Securities Exchange Act of 1934 and Rule 11d1-2 Thereunder
September 3, 2013.
On June 6, 2013, the Securities and Exchange Commission
(``Commission'') approved a proposed rule change of NYSE Arca, Inc.
(``Exchange'' or ``NYSE Arca'') to adopt new NYSE Arca Equities Rule
8.800 (``Rule 8.800''). Rule 8.800 establishes an incentive program on
a pilot basis (``Incentive Program'') for Lead Market Makers (``LMMs'')
in certain exchange-traded products (``ETPs'').\1\ The Incentive
Program is designed to encourage market makers to take LMM assignments
in certain lower volume ETPs by offering an alternative fee structure
for those LMMs and ``LMM Payments'' that would be funded from the
Exchange's general revenues if the LMM meets or exceeds certain
performance standards set forth in Rule 8.800(c) that relate to the
LMM's quoting activity in the ETP. The costs of the Incentive Program
would be funded by charging participating issuers non-refundable
``Optional Incentive Fees'' which may be paid by sponsors on behalf of
the issuer.
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\1\ Securities Exchange Act Release No. 69706 (June 6, 2013), 78
FR 35340 (June 12, 2013) (SR-NYSEArca-2013-34) (the ``Approval
Order''). The Approval Order contains a detailed description of the
Incentive Program. On March 21, 2013, the Exchange filed with the
Commission, pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934, as amended (``Act'' or ``Exchange Act'') and Rule 19b-4
thereunder, a proposed rule change to establish the Program. The
proposed rule change, as modified by Amendment No. 1 thereto, was
published for comment in the Federal Register on April 11, 2013.
Securities Exchange Act Release No. 69335 (Apr. 5, 2013), 78 FR
21681 (Apr. 11, 2013). The Approval Order grants approval of the
proposed rule change, as modified by Amendments No. 1 and 2.
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Section 11(d)(1) of the Exchange Act \2\ generally prohibits a
broker-dealer from extending or maintaining credit, or arranging for
the extension or maintenance of credit, on shares of new issue
securities, if the broker-dealer participated in the distribution of
the new issue securities within the preceding 30 days. Shares of open-
end investment companies and unit investment trusts registered under
the Investment Company Act of 1940, such as exchange traded fund
(``ETF'') shares, are distributed in a continuous manner. Broker-
dealers that sell such securities are therefore participating in the
``distribution'' of a new issue for purposes of Section 11(d)(1).\3\
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\2\ 15 U.S.C. 78k(d)(1).
\3\ See, e.g., Exchange Act Release Nos. 6726 (Feb. 8, 1962), 27
FR 1415 (Feb. 15, 1962) and 21577 (Dec. 18, 1984), 49 FR 50174 (Dec.
27, 1984).
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The Division of Trading and Markets, acting under delegated
authority, granted an exemption from Section 11(d)(1) and Rule 11d1-2
thereunder to broker-dealers that have entered into an agreement with
an ETF's distributor to place orders with the distributor to purchase
or redeem the ETF's shares (``Broker-Dealer APs'').\4\ The SIA
Exemption allows a Broker-Dealer AP to extend or maintain credit, or
arrange for the extension or maintenance of credit, to or for customers
on the shares of qualifying ETFs subject to the condition that neither
the Broker-Dealer AP, nor any natural person associated with the
Broker-Dealer AP, directly or indirectly (including through any
affiliate of the Broker-Dealer AP), receives from the fund complex any
payment, compensation, or other economic incentive to promote or sell
the shares of the ETF to persons outside the fund complex, other than
non-cash compensation permitted under NASD Rule 2830(l)(5)(A), (B), or
(C). This condition is intended to eliminate special incentives that
Broker-Dealer APs and their associated persons might otherwise have to
``push'' ETF shares.
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\4\ See Letter from Catherine McGuire, Chief Counsel, Division
of Trading and Markets, Securities and Exchange Commission to
Securities Industry Association (Nov. 21, 2005) (``SIA Exemption'').
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The Incentive Program will permit certain ETPs, including ETFs and
commodity-based exchange traded trusts, to voluntarily incur increased
listing fees payable to the Exchange. In turn, the Exchange will use a
portion of the fees to make LMM Payments to market makers that improve
the market quality of participating issuers'
[[Page 55127]]
securities.\5\ LMM Payments will be accrued solely for quoting activity
on the Exchange. Broker-dealers receiving the incentive payments would
not be in compliance with the compensation condition of the SIA
Exemption discussed above.\6\ Therefore, an LMM that is also a Broker-
Dealer AP for an ETF (or an associated person or an affiliate of a
Broker-Dealer AP) that receives the incentives will not be able to rely
on the SIA Exemption from Section 11(d)(1).\7\
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\5\ Among other things, the Incentive Program requires LMMs to:
(1) Maintain continuous, two-sided trading interest where the price
of the bid (offer) interest is not more than a designated percentage
away from the then current NBBO; (2) maintain quotes or orders at
the NBBO or better (the ``Inside'') during the month during Core
Trading Hours in accordance with certain maximum width and minimum
depth thresholds based on daily share volume and share price, unless
the thresholds are otherwise met by quotes or orders of all market
participants across all markets trading the security; (3) maintain
quotes or orders on NYSE Arca at the NBBO that meet either a time-
at-the-Inside requirement or a size-setting NBBO requirement; and
(4) for at least 90% of the time when quotes may be entered during
Core Trading Hours each trading day, as averaged over the course of
a month, maintain (A) at least 2,500 shares of attributable,
displayed posted buy liquidity on the Exchange that is priced no
more than 2% away from the NBB for the particular ETP; and (B) at
least 2,500 shares of attributable, displayed posted offer liquidity
on the Exchange that is priced no more than 2% away from the NBO for
the particular ETP. If an LMM does not meet these quoting
requirements, it will not receive an LMM Payment, and an LMM that
does not meet or exceed these performance standards for any two of
the three months of a quarter or for five months during the pilot
period may lose its LMM status. Request Letter at 5.
\6\ The incentive payments market makers may receive under Rule
8.800 are indirect payments from the fund complex to the market
maker and that those payments are compensation to promote or sell
the shares of the ETF.
\7\ See Approval Order, supra note 1, at 31-33.
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Thus, NYSE Arca has requested, on behalf of itself and those
broker-dealers that receive payments under the Incentive Program as
discussed in its letter, an exemption from the requirements of Section
11(d)(1) of the Exchange Act and Rule 11d1-2 thereunder.\8\
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\8\ Letter from Janet McGinness, Senior Vice President and
Secretary, NYSE Euronext to David Blass, Chief Counsel, Division of
Trading and Markets, Securities and Exchange Commission (September
3, 2013) (``Request Letter''). The relief requested is similar to
the relief the Commission previously granted to NASDAQ Stock Market
LLC in connection with its pilot Market Quality Program. See
Exchange Act Release No. 69892 (June 28, 2013).
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NYSE Arca maintains that a Broker-Dealer AP and a broker-dealer
that is not a Broker-Dealer AP in a particular ETF, but effects
transactions in shares of the ETF exclusively in the secondary market
(``Non-AP Broker-Dealer'') should be able to rely on the SIA Exemption,
notwithstanding the receipt of payments under the Incentive Program.
Among other things, the Exchange notes that the LMM Payment is provided
only to LMMs that meet or exceed market quality standards and that the
Incentive Program will not provide an incentive for LMMs to ``push''
the securities of participating issuers.\9\ Rather, the Exchange states
that the Incentive Program is intended to foster enhanced liquidity,
robust quoting activity, narrowed spreads, and reduced transaction
costs for investors in participating ETPs. NYSE Arca notes that the LMM
Payments are not attributable to LMMs executing transactions in
securities, but only for LMMs' two-sided quoting activity. The Exchange
also states that the disclosure provisions of the Incentive Program
will alert and educate investors about the program and the LMM
Payments.\10\
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\9\ Congress adopted Section 11(d)(1) in response to concerns
about potential conflicts of interest faced by persons acting as
both brokers and dealers in the distribution of new issue
securities. In a House report accompanying the Exchange Act,
Congress noted:
It is difficult to serve two masters. And it is particularly
difficult to give impartial advice to a client if the dealer-broker
has his own securities to sell, particularly when they are new
securities for which there is no ready market.
H.R. Rep. No. 1383, 73d Cong., 2d Sess. 15 (1934). Congress
concluded that forcing the separation of brokers and dealers would
have led brokers to abandon their dealer business, impairing the
mechanism to distribute new securities. In lieu of this measure,
Congress required broker-dealers to disclose to customers the
capacity in which they were acting and adopted section 11(d)(1)
prohibiting broker-dealers from extending margin on new issue
securities in the distribution of which the broker-dealer had
participated. Id.
\10\ Request Letter at 7. The Exchange notes that its new rules
are designed to provide comprehensive and accessible disclosure to
investors about the MQP Program through the Exchange's Web site or
the Web sites of the participating issuers. New Rules 8.800(b)(6)
and (7) require the Exchange to disclose on its Web site the
following information with respect to the operation of the Incentive
Program: (i) The ETPs participating in the Incentive Program and the
LMM assigned to each participating ETP; (ii) the date a particular
ETP begins participating or ceases participating in the Incentive
Program; (iii) the date the Exchange receives written notice of an
issuer's intent to withdraw its ETP from the Incentive Program, or
an LMM's intent to withdraw from its ETP assignment(s) in the
Incentive Program, and, in each case, the intended withdrawal date,
if provided; and (iv) the amount of the Optional Incentive Fee for
each ETP. The Exchange also will include on its Web site a fair and
balanced description of the Incentive Program, including a
description of the potential benefits and risks that may be
attendant with an ETP's participation in the program. An issuer of
an ETP that is approved to participate in the Incentive Program will
also be required to (i) issue a press release to the public when an
ETP commences or ceases participation in the Incentive Program, (ii)
post such press release on its Web site, and (iii) provide on its
Web site a hyperlink to the Exchange's Web page describing the
Incentive Program.
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NYSE Arca also asserts that the Incentive Program's goal of
enhancing market quality is most likely to be accomplished if the
program attracts as many participating market makers as possible. In
the Exchange's view, eligible market makers may decline to participate
in the program if no exemption from Section 11(d)(1) and Rule 11d1-2 is
available, either because the market makers may already extend credit
to customers on the securities of participating issuers or because the
value to market makers of offering credit services to customers on such
securities may outweigh the value of participating in the Incentive
Program.\11\ The Commission recognizes that broker-dealers that have to
choose between participating in the Incentive Program and having the
ability to offer credit services to customers in reliance on the SIA
Exemption for business reasons may determine to continue to offer the
credit services and decline to participate in the Incentive Program. In
other words, the lack of an available exemption from Section 11(d)(1)
and Rule 11d1-2 thereunder could serve to reduce the number of market
makers in the Incentive Program.
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\11\ Request Letter at 6.
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The Commission finds that it is appropriate in the public interest,
and is consistent with the protection of investors, to grant a limited
exemption from Section 11(d)(1) of the Exchange Act and Rule 11d1-2
thereunder to Broker-Dealer APs and Non-AP Broker-Dealers that
participate in the Incentive Program. The Incentive Program is intended
to improve market quality by promoting enhanced liquidity, reduced
spreads, and reduced cost of investing in the securities of
participating issuers. The Commission believes that granting the
exemption will encourage a larger number of market makers to
participate in the Incentive Program and that a larger number of
participating market makers should create greater potential for the
market quality improvements the Incentive Program aims to achieve. The
Commission notes in particular that the Exchange will determine to pay
an LMM Payment only if an LMM maintains certain minimum quoting
standards.\12\ No portion of the LMM Payment is attributable to sales
of ETP securities and thus the LMM Payment should provide no direct
incentive for LMMs to promote the sale of ETP securities. Thus, the
Commission does not believe that the LMM Payment will provide the kind
of incentive for ``share-pushing'' with which Congress was concerned
when it enacted Section 11(d).\13\ Moreover, the required Web site
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disclosures, discussed above,\14\ should also help LMMs' customers
understand the Program's effect on LMMs' incentives and thus will help
investors to make informed decisions in light of the additional
incentives LMMs may have in providing quotes for these securities.
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\12\ See note 5, supra.
\13\ See note 9, supra.
\14\ See note 10, supra.
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Conclusion
It is therefore ordered, that Broker-Dealer APs and Non-AP Broker-
Dealers that participate in the Incentive Program, may rely on the SIA
Exemption pertaining to Section 11(d)(1) and Rule 11d1-2
thereunder,\15\ subject to the conditions provided in that exemption,
notwithstanding that Broker-Dealer APs and Non-AP Broker-Dealers may
receive LMM Payments for participating in the Incentive Program as
described in your request.
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\15\ See note 4, supra.
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This exemption will expire when the Incentive Program terminates,
and is subject to modification or revocation at any time the Commission
determines that such action is necessary or appropriate in furtherance
of the purposes of the Exchange Act.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(62).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-21816 Filed 9-6-13; 8:45 am]
BILLING CODE 8011-01-P