[Federal Register Volume 82, Number 139 (Friday, July 21, 2017)]
[Proposed Rules]
[Pages 33839-33851]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-15216]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

[Release No. 33-10390; File No. S7-06-17]
RIN 3235-AM07


Covered Securities Pursuant to Section 18 of the Securities Act 
of 1933

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') 
proposes for comment an amendment to Rule 146 under Section 18 of the 
Securities Act of 1933 (``Securities Act''), as amended, to designate 
certain securities on Investors Exchange LLC (``IEX'' or ``Exchange'') 
as covered securities for purposes of Section 18(b) of the Securities 
Act. Covered securities under Section 18(b) of the Securities Act are 
exempt from state law registration requirements.

DATES: Comments should be received on or before August 21, 2017.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

 Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
 Send an email to [email protected]. Please include File 
Number S7-06-17 on the subject line.
 Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

 Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-06-17. 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/proposed.shtml). Comments are also 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. 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. Studies, memoranda or other substantive items 
may be added by the Commission or staff to the comment file during this 
rulemaking. A notification of the inclusion in the comment file of any 
such materials will be made available on the Commission's Web site. To 
ensure direct electronic receipt of such notifications, sign up through 
the ``Stay Connected'' option at www.sec.gov to receive notifications 
by email.

FOR FURTHER INFORMATION CONTACT: Richard Holley III, Assistant 
Director; Edward Cho, Special Counsel; or Michael Ogershok, Attorney-
Adviser, Office of Market Supervision, at (202) 551-5777, Division of 
Trading and Markets, Securities and Exchange Commission, 100 F Street 
NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

I. Introduction

    In 1996, Congress amended Section 18 of the Securities Act to 
exempt from state registration requirements securities listed, or 
authorized for listing, on the New York Stock Exchange LLC (``NYSE''), 
the American Stock Exchange LLC (``Amex'') (now known as NYSE American 
LLC),\1\ or the National

[[Page 33840]]

Market System of The Nasdaq Stock Market LLC (``Nasdaq/NGM'') \2\ 
(collectively, ``Named Markets''), or any national securities exchange 
designated by the Commission to have ``substantially similar'' listing 
standards to those of the Named Markets.\3\ Specifically, Section 18(a) 
of the Securities Act provides that ``no law, rule, regulation, or 
order, or other administrative action of any State . . . requiring, or 
with respect to, registration or qualification of securities . . . 
shall directly or indirectly apply to a security that--(A) is a covered 
security. . . .'' \4\ Covered securities are defined in Section 
18(b)(1) of the Securities Act to include those securities listed, or 
authorized for listing, on the Named Markets, or securities listed, or 
authorized for listing, on a national securities exchange (or tier or 
segment thereof) that has listing standards that the Commission 
determines by rule are ``substantially similar'' to those of the Named 
Markets (``Covered Securities'').\5\
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    \1\ On October 1, 2008, NYSE Euronext acquired The Amex 
Membership Corporation (``AMC'') pursuant to an Agreement and Plan 
of Merger, dated January 17, 2008 (``Merger''). In connection with 
the Merger, NYSE Amex's predecessor, Amex, a subsidiary of AMC, 
became a subsidiary of NYSE Euronext called NYSE Alternext US LLC 
(``NYSE Alternext''). See Securities Exchange Act Release No. 58673 
(September 29, 2008), 73 FR 57707 (October 3, 2008) (SR-NYSE-2008-60 
and SR-Amex 2008-62) (approving the Merger). In 2009, NYSE Alternext 
changed its name to NYSE Amex LLC (``NYSE Amex''). See Securities 
Exchange Act Release No. 59575 (March 13, 2009), 74 FR 11803 (March 
19, 2009) (SR-NYSEALTR-2009-24) (approving the name change). In 
2012, NYSE Amex changed its name from NYSE Amex LLC to NYSE MKT LLC 
(``NYSE MKT''). See Securities Exchange Act Release No. 67037 (May 
21, 2012), 77 FR 31415 (May 25, 2012) (SR-NYSEAmex-2012-32) 
(publishing notice of the name change to NYSE MKT LLC). Effective 
July 24, 2017, NYSE MKT intends to change its name from NYSE MKT LLC 
to NYSE American LLC (``NYSE American''). See Securities Exchange 
Act Release No. 80283 (March 21, 2017), 82 FR 15244 (March 27, 2017) 
(SR-NYSEMKT-2017-14). See also NYSE Trader Update, NYSE Group--
Pillar Migration Update (April 13, 2017), available at https://www.nyse.com/publicdocs/nyse/notifications/trader-update/Pillar%20Migration%20Update.pdf (providing notification of the 
expected implementation date of the name change).
    \2\ As of July 1, 2006, the National Market System of The Nasdaq 
Stock Market LLC is known as the Nasdaq Global Market (``NGM''). See 
Securities Exchange Act Release Nos. 53799 (May 12, 2006), 71 FR 
29195 (May 19, 2006) and 54071 (June 29, 2006), 71 FR 38922 (July 
10, 2006).
    \3\ See National Securities Markets Improvement Act of 1996, 
Public Law 104-290, 110 Stat. 3416 (October 11, 1996).
    \4\ 15 U.S.C. 77r(a).
    \5\ 15 U.S.C. 77r(b)(1)(A) and (B). In addition, securities of 
the same issuer that are equal in seniority or senior to a security 
listed on a Named Market or national securities exchange designated 
by the Commission as having substantially similar listing standards 
to a Named Market are covered securities for purposes of Section 
18(b) of the Securities Act. See 15 U.S.C. 77r(b)(1)(C).
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    In 1998, the Chicago Board Options Exchange, Incorporated 
(``CBOE''), the Pacific Exchange, Inc. (``PCX'') (now known as NYSE 
Arca, Inc.), the Philadelphia Stock Exchange, Inc. (``Phlx'') (now 
known as NASDAQ PHLX LLC),\6\ and the Chicago Stock Exchange, Inc. 
(``CHX'') each petitioned the Commission to determine by rule that 
specified portions of the exchanges' listing standards were 
substantially similar to the listing standards of the Named Markets.\7\ 
In response to the petitions, and after extensive review of the 
petitioners' listing standards, the Commission adopted Rule 146(b) 
pursuant to Section 18(b)(1)(B) of the Securities Act, having 
determined that the listing standards of CBOE, Tier 1 of PCX, and Tier 
1 of Phlx were substantially similar to those of the Named Markets, and 
thus securities listed pursuant to those standards are deemed Covered 
Securities.\8\
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    \6\ On July 24, 2008, The NASDAQ OMX Group, Inc. acquired Phlx 
and renamed it ``NASDAQ OMX PHLX LLC.'' See Securities Exchange Act 
Release Nos. 58179 (July 17, 2008), 73 FR 42874 (July 23, 2008) (SR-
Phlx-2008-31); and 58183 (July 17, 2008), 73 FR 42850 (July 23, 
2008) (SR-NASDAQ-2008-035). See also Securities Exchange Act Release 
No. 62783 (August 27, 2010), 75 FR 54204 (September 3, 2010) (SR-
Phlx-2010-104). NASDAQ OMX PHLX LLC subsequently changed its name to 
``NASDAQ PHLX LLC.'' See Securities Exchange Act Release No. 76654 
(December 15, 2015), 80 FR 79396 (December 21, 2015) (SR-Phlx-2015-
105).
    \7\ See Letter from David P. Semak, Vice President, Regulation, 
PCX, to Arthur Levitt, Jr., Chairman, Commission, dated November 15, 
1996; Letter from Alger B. Chapman, Chairman, CBOE, to Jonathan G. 
Katz, Secretary, Commission, dated November 18, 1996; Letter from J. 
Craig Long, Esq., Foley & Lardner, Counsel to CHX, to Jonathan G. 
Katz, Secretary, Commission, dated February 4, 1997; and Letter from 
Michele R. Weisbaum, Vice President and Associate General Counsel, 
Phlx, to Jonathan G. Katz, Secretary, Commission, dated March 31, 
1997.
    \8\ See Securities Exchange Act Release No. 39542 (January 13, 
1998), 63 FR 3032 (January 21, 1998) (determining that the listing 
standards of CBOE, Tier 1 of PCX, and Tier 1 of Phlx were 
substantially similar to those of the Named Markets). The Commission 
did not include Tier 1 of CHX in Rule 146 because of ``concerns 
regarding the CHX's listing and maintenance procedures.'' Id. at 
3032.
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    Accordingly, Rule 146(b) lists those national securities exchanges, 
or segments or tiers thereof, that the Commission has determined to 
have listing standards that are ``substantially similar'' to those of 
the Named Markets and thus securities listed on such exchanges are 
deemed Covered Securities.\9\
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    \9\ 17 CFR 230.146(b).
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    The Commission has since amended Rule 146(b) several times in 
response to petitions after having determined that the listing 
standards for securities listed, or authorized for listing, on the 
petitioning markets were substantially similar to those of the Named 
Markets and, accordingly, that such securities listed pursuant to such 
listing standards qualified as Covered Securities for purposes of 
Section 18(b) of the Securities Act.\10\
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    \10\ In 2004, the Commission amended Rule 146(b) to designate 
options listed on the International Securities Exchange, Inc. 
(``ISE'') (now known as Nasdaq ISE, LLC) as Covered Securities for 
purposes of Section 18(b) of the Securities Act. See Securities Act 
Release No. 8442 (July 14, 2004), 69 FR 43295 (July 20, 2004). The 
Commission notes that, in March 2017, ISE changed its name from 
International Securities Exchange, LLC to ``Nasdaq ISE, LLC.'' See 
Securities Exchange Act Release No. 80325 (March 29, 2017), 82 FR 
16445 (April 4, 2017) (SR-ISE-2017-25) (publishing notice of the 
name change to Nasdaq ISE, LLC). In 2007, the Commission amended 
Rule 146(b) to designate securities listed on the Nasdaq Capital 
Market (``NCM'') as Covered Securities for purposes of Section 18(b) 
of the Securities Act. See Securities Act Release No. 8791 (April 
18, 2007), 72 FR 20410 (April 24, 2007). In 2012, the Commission 
amended Rule 146(b) to designate securities listed on Tiers I and II 
of BATS Exchange, Inc. (``BATS'') as Covered Securities for purposes 
of Section 18(b) of the Securities Act. See Securities Act Release 
No. 9295 (January 20, 2012), 77 FR 3590 (January 25, 2012). The 
Commission notes that, in March 2016, BATS changed its name from 
BATS Exchange, Inc. to ``Bats BZX Exchange, Inc.'' See Securities 
Exchange Act Release No. 77307 (March 7, 2016), 81 FR 12996 (March 
11, 2016) (SR-BATS-2016-25) (publishing notice of the name change to 
Bats BZX Exchange, Inc.).
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II. Petition From IEX

    In June 2016, the Commission granted the application of IEX to 
become a registered national securities exchange.\11\ IEX's exchange 
registration application included a rulebook, which contained a 
complete set of listing rules and standards that were based on those of 
Nasdaq/NGM.\12\ When the Commission granted IEX's exchange registration 
it stated, among other things, that it believed IEX's proposed initial 
and continuing listing standards are consistent with the requirements 
of the Securities Exchange Act of 1934 (``Exchange Act'').\13\
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    \11\ See Securities Exchange Act Release No. 78101 (June 17, 
2016), 81 FR 41142 (June 23, 2016) (File No. 10-222) (order granting 
IEX's exchange registration).
    \12\ See Securities Exchange Act Release No. 75925 (September 
15, 2015), 80 FR 57261 (September 22, 2015) (File No. 10-222) 
(Notice of Filing of Application of IEX). See also Securities 
Exchange Act Release Nos. 77406 (March 18, 2016), 81 FR 15765 (March 
24, 2016) (File No. 10-222) (Notice of Filing of Amendment Nos. 2, 
3, and 4 to, and Order Instituting Proceedings To Determine Whether 
To Grant or Deny, and Notice of Designation of Longer Period for 
Commission Action on Proceedings To Determine Whether To Grant or 
Deny, an Application for Registration as a National Securities 
Exchange Under Section 6 of the Securities Exchange Act of 1934, as 
Modified by Amendment Nos. 1, 2, 3, and 4 Thereto).
    \13\ See Securities Exchange Act Release No. 78101 (June 17, 
2016), 81 FR 41142, 41136 (June 23, 2016) (File No. 10-222) (order 
granting IEX's exchange registration).
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    Subsequent to its exchange registration, IEX petitioned the 
Commission to amend Rule 146(b) and determine that the listing 
standards for securities listed on IEX are substantially similar to 
those of the Named Markets, such that IEX listed securities would be 
Covered Securities under Section 18(b) of the Securities Act.\14\
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    \14\ See Letter from Sophia Lee, General Counsel, IEX, to Brent 
J. Fields, Secretary, Commission, dated September 22, 2016 (``IEX 
Petition'').
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    For the reasons discussed below, the Commission preliminarily 
believes that IEX's listing standards are substantially similar to 
those of the Named Markets and, therefore, securities listed, or 
authorized for listing, on IEX would be eligible to be designated as 
Covered Securities under Rule 146(b)(1) under the Securities Act, 
which, as described above, are exempt from state law registration 
requirements. The

[[Page 33841]]

Commission notes that, as provided in Rule 146(b)(2) under the 
Securities Act, the designation of IEX's listed securities as Covered 
Securities under Rule 146(b)(1) would be conditioned on IEX maintaining 
listing standards for equity securities that continue to be 
substantially similar to those of the Named Markets.\15\
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    \15\ See 17 CFR 240.146(b)(2). In response to recent proposed 
rule changes made by Nasdaq to its NGM listing standards since IEX 
first adopted its listing standards as part of its Form 1 exchange 
application, IEX submitted several proposed rule changes to conform 
its listing standards to those recent changes made by Nasdaq. See, 
e.g., Securities Exchange Act Release Nos. 79652 (December 21, 
2016), 81 FR 95664 (December 28, 2016) (SR-IEX-2016-21) 
(incorporating substantially similar changes concerning substitution 
listing events in response to changes made by Nasdaq); and 80905 
(June 12, 2017), 82 FR 27748 (June 16, 2017) (SR-IEX-2017-14) 
(incorporating substantially similar continued listing requirements 
approved for Nasdaq).
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III. Discussion

    Under Section 18(b)(1)(B) of the Securities Act,\16\ the Commission 
has the authority to determine that the listing standards of an 
exchange, or tier or segment thereof, are substantially similar with 
those of the NYSE, NYSE American, or Nasdaq/NGM. The Commission has 
compared IEX's listing standards with these Named Markets.\17\ In 
addition, as it has done previously, the Commission has interpreted the 
``substantially similar'' standard to require listing standards at 
least as comprehensive as those of the Named Markets.\18\ If a 
petitioner's listing standards are higher than the Named Markets, then 
the Commission may still determine that the petitioner's listing 
standards are substantially similar to those of the Named Markets.\19\ 
Finally, the Commission notes that differences in language or approach 
would not necessarily lead to a determination that the listing 
standards of the petitioner are not substantially similar to those of 
any Named Market.\20\
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    \16\ 15 U.S.C. 77r(b)(1)(B).
    \17\ Specifically, the Commission compared IEX's listing 
standards with those of Nasdaq/NGM, upon which IEX based almost all 
of its listing rules. If, as discussed further below, a particular 
listing standard was not substantially similar to the standards of 
that market, the Commission compared IEX's listing standard to one 
of the other two Named Markets. This approach is consistent with the 
approach that the Commission has previously taken. See, e.g., 
Securities Act Release No. 7494 (January 13, 1998), 63 FR 3032 
(January 21, 1998).
    \18\ See id.
    \19\ See id.
    \20\ See id.
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    The Commission has reviewed the listing standards for securities to 
be listed and traded on IEX and, for the reasons discussed below, 
preliminarily believes that the standards are substantially similar to 
those of the Named Markets.\21\
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    \21\ See generally IEX Rules Chapters 14 (IEX Listing Rules) and 
16 (Other Securities). See also Securities Exchange Act Release No. 
75925, supra note 12, 80 FR 57261. In making its preliminary 
determination of substantial similarity, as discussed in detail 
below, the Commission compared IEX's qualitative listing standards 
to Nasdaq/NGM's qualitative listing standards and, with respect to 
the rules relating to the listing application process and internal 
audit function, with NYSE's and NYSE American's applicable 
qualitative listing standards; IEX's quantitative listing standards 
with Nasdaq/NGM's quantitative listing standards; and IEX's listing 
standards for other securities, including portfolio depository 
receipts, index fund shares, and managed fund shares, with the 
corresponding listing standards of Nasdaq/NGM.
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A. IEX Quantitative Listing Standards

    The Commission preliminarily believes that IEX's initial and 
continued quantitative listing standards for its securities are 
substantively identical to, and thus substantially similar to, the 
initial and continued quantitative listing standards for securities 
listed on Nasdaq/NGM.\22\ Therefore, the Commission preliminarily 
believes that IEX's quantitative listing standards are substantially 
similar to a Named Market.
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    \22\ Quantitative listing standards relate to, among other 
things, the requirements for bid price, number of publicly held 
shares, number of shareholders, market value of publicly held 
shares, and market capitalization. Compare IEX Rules 14.300 series 
with Nasdaq/NGM Rule 5300 and 5400 series (providing for identical 
rules concerning initial listing and maintenance standards for 
units, primary equity securities, preferred stock and secondary 
classes of common stock, rights, warrants, and convertible debt on 
IEX and Nasdaq/NGM).
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    The Commission requests comment on whether IEX's quantitative 
listing rules are ``substantially similar'' to Nasdaq/NGM's listing 
rules.

B. IEX Qualitative Listing Standards

    The Commission preliminarily believes that IEX's initial and 
continued qualitative listing standards for its securities are 
substantively identical to, and thus substantially similar to, the 
qualitative listing standards for securities listed on Nasdaq/NGM, with 
the exception of IEX Rule 14.201 (Confidential Pre-Application Review 
of Eligibility), discussed below, which is substantively similar to 
rules of NYSE and NYSE American, and IEX Rule 14.414 (Internal Audit 
Function), also discussed below, which is substantively similar to a 
rule of NYSE.\23\
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    \23\ Qualitative listing standards relate to, among other 
things, the number of independent directors required, conflicts of 
interest, composition of the audit committee, executive 
compensation, shareholder meeting requirements, voting rights, 
quorum, code of conduct, proxies, shareholder approval of certain 
corporate actions, and the annual and interim reports requirements. 
Compare IEX Rules 14.200 and 14.400 series with Nasdaq/NGM Rule 5200 
and 5600 series (providing for virtually identical rules concerning 
procedures and prerequisites for initial and continued listing, 
obligations of security issuers, the application and qualification 
process, and corporate governance standards on IEX and Nasdaq/NGM).
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    With respect to the standards relating to the listing and delisting 
of companies, including prerequisites for initial and continued listing 
on IEX, obligations of security issuers listed on IEX, as well as rules 
describing the application and qualification process,\24\ IEX's listing 
rules for securities are virtually identical to, and thus the 
Commission preliminarily believes they are substantially similar to, 
those of Nasdaq/NGM.\25\ With respect to IEX Rule 14.201, which relates 
to confidential pre-application review for listing eligibility, the 
Commission preliminarily believes that this rule is substantially 
similar to the corresponding rules of NYSE and NYSE American.\26\ This 
rule requires a company seeking the initial listing of one or more 
classes of securities to participate in a free, confidential pre-
application eligibility review to determine whether the company meets 
the applicable listing criteria and, if, upon completion of this 
review, IEX determines that a company is eligible for listing, IEX will 
notify that company in writing that it has been cleared to submit an 
original listing application.\27\
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    \24\ See IEX Rule 14.200 series. The Commission notes that, 
while IEX Rule 14.201 is substantially similar to the equivalent 
NYSE and NYSE American rules (all of which relate to the 
confidential pre-application review for eligibility for companies 
seeking to list on the Exchange), IEX's rule contains an additional 
provision stating that a company deemed eligible for listing will be 
provided with written notification valid for nine months that it has 
been cleared to submit an original listing application. See IEX Rule 
14.201. See also NYSE Listed Company Manual Sections 101 and 104; 
NYSE American Company Guide Section 201.
    \25\ See Nasdaq/NGM Rule 5200 series.
    \26\ See IEX Rule 14.201; NYSE Listed Company Manual Sections 
101 and 104; and NYSE American Company Guide Section 201.
    \27\ IEX represents that an issuer that does not clear the pre-
application eligibility review process or receive a timely response 
as part of that process on IEX after the confidential pre-
application eligibility review would be permitted to appeal such 
determination under the procedures set forth in IEX Rule Series 
9.500. See IEX Petition, supra note 14, at 5.
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    The Commission also notes that IEX's corporate governance standards 
in connection with securities to be listed and traded on IEX are 
virtually identical to, and thus the Commission preliminarily believes 
they are substantially similar to, the current rules of Nasdaq/NGM and 
NYSE.\28\ With respect to IEX Rule 14.414, concerning the internal 
audit function for a listed issuer, the Commission preliminarily

[[Page 33842]]

believes that this rule is substantially similar to the corresponding 
rule of NYSE.\29\ Therefore, the Commission preliminarily believes that 
IEX's qualitative listing standards are substantially similar to a 
Named Market.
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    \28\ Compare IEX Rule 14.400 series with Nasdaq/NGM Rule 5600 
series.
    \29\ Compare NYSE Listed Company Manual Section 303A.07(c) 
(requiring listed companies to maintain an internal audit function 
to provide management and the audit committee with ongoing 
assessments of the listed company's risk management processes and 
system of internal control) with IEX Rule 14.414.
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    The Commission requests comment on whether IEX's qualitative 
listing standards are ``substantially similar'' to Nasdaq/NGM's and 
NYSE's listing standards.

C. Other Securities, Including Securities of Exchange-Traded Funds and 
Other Exchange-Traded Derivative Securities Products

    IEX has listing standards for other types of securities and 
exchange-traded derivative securities products, including, for example, 
portfolio depository receipts; index fund shares; securities linked to 
the performance of indexes, commodities, and currencies; index-linked 
exchangeable notes; partnership units; trust units; and managed fund 
shares.\30\ The Commission notes that IEX's listing rules for these 
other securities are virtually identical to, and thus the Commission 
preliminarily believes they are substantially similar to, those of 
Nasdaq/NGM.\31\ Therefore, the Commission preliminarily believes that 
IEX's standards for these other securities are substantially similar to 
those of a Named Market.
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    \30\ See generally IEX Rules Chapter 16 (Other Securities). See 
also IEX Rule 16.105(a) (Portfolio Depository Receipts); Rule 
16.105(b) (Index Fund Shares); Rule 16.110 (Securities Linked to the 
Performance of Indexes and Commodities (Including Currencies); Rule 
16.111(a) (Index-Linked Exchangeable Notes); Rule 16.111(b) (Equity 
Gold Shares); Rule 16.111(c) (Trust Certificates); Rule 16.111(d) 
(Commodity-Based Trust Shares); Rule 16.111(e) (Currency Trust 
Shares); Rule 16.111(f) (Commodity Index Trust Shares); Rule 
16.111(g) (Commodity Futures Trust Shares); Rule 16.111(h) 
(Partnership Units); Rule 16.111 (i) (Trust Units); Rule 16.111 (j) 
(Managed Trust Securities); Rule 16.113 (Paired Class Shares); Rule 
16.115 (Selected Equity-linked Debt Securities (``SEEDS'')); Rule 
16.120 (Trust Issued Receipts); Rule 16.125 (Index Warrants); Rule 
16.130 (Listing Requirements for Securities Not Otherwise Specified 
(Other Securities)); and Rule 16.135 (Managed Funds Shares).
    \31\ See Nasdaq/NGM Rule 5700 series.
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    The Commission requests comment on whether IEX's listing standards 
relating to other securities are ``substantially similar'' to Nasdaq/
NGM's listing standards.

D. Other Proposed Amendments to Rule 146

    Paragraphs (b)(1) and (b)(2) of Rule 146 use the term ``NYSE Amex'' 
to refer to the national securities exchange formerly known as the 
American Stock Exchange LLC. As noted above, in 2012, NYSE Amex changed 
its name from NYSE Amex LLC to NYSE MKT LLC, and, in 2017, NYSE MKT LLC 
intends to change its name to NYSE American LLC.\32\ In addition, 
paragraph (b)(1) of Rule 146 refers to Tier I of the NASDAQ OMX PHLX 
LLC. As noted above, in December 2015, NASDAQ OMX PHLX LLC changed its 
name to NASDAQ PHLX LLC.\33\ In addition, paragraph (b)(1) of Rule 146 
refers to Tier I and Tier II of BATS Exchange, Inc. As noted above, in 
March 2016, BATS Exchange, Inc. changed its name to Bats BZX Exchange, 
Inc.\34\ Lastly, paragraph (b)(1) of Rule 146 refers to Options listed 
on the International Securities Exchange, LLC. As noted above, in March 
2017, the International Securities Exchange, LLC changed its name to 
Nasdaq ISE, LLC.\35\ This proposed rule includes changes to Rule 146(b) 
to account for these name changes.
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    \32\ See supra note 1 and accompanying text.
    \33\ See supra note 6 and accompanying text.
    \34\ See supra note 10 and accompanying text.
    \35\ See id.
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E. Comments

    To date, the Commission has not received any comment letters on the 
IEX Petition.

IV. Solicitation of Comments

    The Commission seeks comment generally on amending Rule 146(b) to 
include securities listed, or authorized for listing, on IEX. As 
discussed above, based on its review of IEX's listing standards, the 
Commission preliminarily believes that the initial and continued 
listing standards for IEX are substantially similar to those of the 
Named Markets. In addition to the questions posed above, commenters are 
welcome to offer their views on any other matter raised by the proposed 
amendment to Rule 146(b).

V. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 does not apply because the 
proposed amendment to Rule 146(b) does not impose recordkeeping or 
information collection requirements or other collection of information, 
which require the approval of the Office of Management and Budget under 
44 U.S.C. 3501 et seq.

VI. Economic Analysis

    The Commission is sensitive to the economic consequences of its 
rules, including the benefits, costs, and effects on efficiency, 
competition, and capital formation. As noted above, the Commission 
preliminarily believes that the overall listing standards for 
securities to be listed and traded on IEX are substantially similar to 
those of a Named Market. As such, the Commission proposes to amend Rule 
146 under Section 18 of the Securities Act, as amended, to designate 
securities listed, or authorized for listing, on IEX as Covered 
Securities. The following analysis considers the economic effects that 
may result from the proposed amendment.
    Where possible, the Commission has quantified the economic effects 
of the proposed amendment; however, as explained further below, the 
Commission is unable to quantify all of the economic effects because it 
lacks the information necessary to provide reasonable estimates. In 
some cases, quantification depends heavily on factors outside of the 
control of the Commission, particularly due to the flexibility that an 
issuer has when choosing if and where to list and the flexibility of a 
registered national securities exchange to tailor its policies and 
rules to the nature of its business and technology. These factors make 
it difficult to quantify the changes in market share of Named and 
Designated Markets that may result from the proposed amendment. In 
addition, the incumbent Named and Designated Markets and IEX each may 
react to the proposed amendments with respect to listing fees and 
services. These reactions are also difficult to quantify or predict, 
which further complicates quantification of changes to market share, 
and also makes quantification of the economic effects of the proposed 
amendment difficult. Therefore, some of the discussions below are 
qualitative in nature. The Commission encourages commenters to provide 
data and information to help quantify the costs, benefits, and the 
potential impacts on efficiency, competition, and capital formation of 
the proposed amendment.

A. Baseline

    We compare the economic effects of the proposed rule, including 
benefits, costs, and effects on efficiency, competition, and capital 
formation, to a baseline that consists of the existing regulatory 
framework and market structure.

[[Page 33843]]

1. Regulatory Framework and Affected Parties
    The listing standards of Named and Designated Markets are 
quantitative and qualitative requirements that issuers must satisfy 
before they may list on these markets. Securities listed on a Named or 
Designated Market are Covered Securities, which are exempt from 
complying with state securities law registration and qualification 
requirements. As mentioned above,\36\ subsequent to its exchange 
registration, IEX petitioned the Commission to amend Rule 146(b) and 
determine that the listing standards for securities listed on IEX are 
substantially similar to those of the Named Markets.
---------------------------------------------------------------------------

    \36\ See supra notes 11-14 and accompanying text.
---------------------------------------------------------------------------

    Pursuant to unlisted trading privileges (``UTP''), a national 
securities exchange such as IEX currently can trade securities that are 
listed on other exchanges.\37\ While IEX may offer to list securities 
for trading, currently, those securities would not be Covered 
Securities. Issuers of securities that are not Covered Securities must 
comply with state securities law registration and qualification 
requirements, which generally require the issuer to register such 
securities in each state or jurisdiction in which the issuer will offer 
or sell its securities. State registration and qualification 
requirements generally vary across the 54 U.S. jurisdictions, 
comprising the 50 states, the District of Columbia, and the three U.S. 
territories of Puerto Rico, the Virgin Islands, and Guam.\38\ These 
requirements typically include: (1) Filing state administrative forms 
and other paperwork necessary for compliance with state registration 
requirements; (2) adherence to disclosure standards; and (3) in some 
states, requirements based upon the merits of the offering or 
issuer.\39\
---------------------------------------------------------------------------

    \37\ See 15 U.S.C. 781(f) and Rule 12f-2.
    \38\ See Office of Investor Education and Advocacy, ``Blue Sky 
Laws'' (2014), available at https://www.sec.gov/fast-answers/answers-blueskyhtm.html.
    \39\ See, e.g., Stuart R. Cohn, Securities Counseling for Small 
and Emerging Companies Sec.  12:8 (2016) (describing merit review as 
``the authority of state administrators to deny, suspend or revoke 
an offering because the administrator believes that the offering has 
substantive weaknesses in structure, financial strength or fairness 
to investors''). Typical elements of merit review include: Offering 
expenses, including underwriter's compensation, issuer 
capitalization requirements, dilution, financial condition of the 
issuer, cheap stock held by insiders, types of offering (e.g., blind 
pool offerings), the quantity of securities subject to options and 
warrants, loans to insiders, and the price at which the securities 
will be offered. See id. The North American Securities 
Administrators Association (NASAA), an association of state and 
provincial securities regulators composed of the securities 
administrators from each state, Mexico, and 13 Canadian provinces, 
has issued guidelines intended to provide uniformity among state 
merit review standards. See NASAA Statements of Policy, available at 
http://www.nasaa.org/regulatory-activity/statements-of-policy/. Some 
exchange listing standards impose merit regulation on issuers.
---------------------------------------------------------------------------

    The Commission lacks comprehensive, independent data to precisely 
estimate the total time, registration and compliance costs associated 
with state registration and qualification. Moreover, those total costs 
may vary widely for issuers depending on how many states an issuer 
needs to register in. To provide some information about potential costs 
for state registration, we list examples of Blue Sky registration 
filing fees for several states below in Table 1.
---------------------------------------------------------------------------

    \40\ See CA Corp Code Sec.  25608(e) for California filing fees; 
http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0500-0599/0517/Sections/0517.081.html for Florida filing fees; http://www.cyberdriveillinois.com/departments/securities/sellingsec.html 
for Illinois filing fees; https://ag.ny.gov/investor-protection/broker-dealer-and-securities-registration-information-sheet for New 
York filing fees; and https://www.ssb.texas.gov/texas-securities-act-board-rules/fee-schedule#one for Texas filing fees.

       Table 1--Examples of Blue Sky Registration Filing Fees \40\
------------------------------------------------------------------------
            State                              Filing fee
------------------------------------------------------------------------
California...................  $200 plus \1/5\ of 1 percent of the
                                aggregate value of the securities
                                proposed to be sold, with a maximum fee
                                of $2,500.
Florida......................  $1,000.
Illinois.....................  \1/20\ of 1 percent of the aggregate
                                offering in Illinois, with a minimum fee
                                of $500 and a maximum fee of $2,500.
New York.....................  Based on total offerings: $500,000 or
                                less: $300 More than $500,000: $1,200.
Texas........................  $100 filing fee, plus examination fee of
                                \1/10\ of 1 percent of the aggregate
                                amount of securities sold in Texas.
------------------------------------------------------------------------

    The issuer of a non-Covered Security in multiple jurisdictions 
would have more compliance obligations than the issuer of a Covered 
Security, including the potential for considerable additional costs and 
legal fees associated with reviews of offering-related materials at the 
state level.\41\ Additionally, as discussed above, many state 
securities regulators also review securities offerings based upon the 
merits of the offering and/or the issuer of the securities, which can 
further increase an issuer's compliance obligations and associated 
costs.\42\ In addition, the Commission notes that one commenter 
estimated that an issuer seeking state registration in 50 states would 
incur $50,000 to $70,000 in filing fees and $80,000 to $100,000 in 
legal fees.\43\ The Commission encourages commenters to provide 
additional information on the costs associated with complying with Blue 
Sky laws.\44\
---------------------------------------------------------------------------

    \41\ For a discussion of state securities law registration and 
qualification requirements, the obligations of issuers with respect 
to such requirements, and developments in coordinated state 
securities law review programs for offerings in multiple 
jurisdictions, see generally Securities Act Release No. 9741 (March 
25, 2015), 80 FR 21806 (April 20, 2015) (Amendments for Small and 
Additional Issues Exemptions under the Securities Act (Regulation 
A), at Section II.H.3 (``Regulation A Release'').
    \42\ See id. See also Factors that May Affect Trends in 
Regulation A Offerings, GAO-12-839 (July 2012) (discussing the 
varying standards and degrees of stringency applied during the 
qualification and review process in merit review states), available 
at http://www.gao.gov/assets/600/592113.pdf.
    \43\ See Regulation A Release, supra note 41; and Letter from 
Michael L. Zuppone, Paul Hastings LLP, to Commission, dated November 
26, 2013, at 2 (further noting the ``significant costs and 
uncertainties associated with `Blue Sky' law compliance''). See also 
Regulation A Release, supra note 41, at n.1024 and accompanying 
text. The commenter did not address whether these estimated costs 
vary by the size of the offering. Also, we note that the estimate 
concerns the initial costs associated with registration. The 
Commission believes that the ongoing costs of compliance that the 
issuer bears will be lower than these initial costs.
    \44\ See Regulation A Release, supra note 41; and Letter from 
Daniel Zinn, General Counsel, OTC Markets Group Inc., to Elizabeth 
M. Murphy, Secretary, Commission, dated March 24, 2014 (``OTC 
Markets Group Letter''), at 4-5 (describing the costs for issuers 
associated with Blue Sky laws).
---------------------------------------------------------------------------

    In addition, the Commission preliminarily believes that the state 
registration and qualification requirements applicable to non-Covered 
Securities also impose costs on broker-dealers. Specifically, broker-
dealers may incur costs to ensure that they are

[[Page 33844]]

complying with applicable state laws governing non-Covered Securities 
in each state in which they are transacting in those securities on 
behalf of their customers or providing advice or other information to 
customers related to those securities. For example, broker-dealers 
could incur costs associated with maintaining a compliance program to 
verify an issuer's state registration status and comply with any state 
requirements applicable to broker-dealers that transact in non-Covered 
Securities, which could vary depending on where the customer resides 
and the transaction occurs. In addition, the types and content of 
communications broker-dealers may have with their customers regarding 
non-Covered securities may be subject to regulation under Blue Sky 
laws, so broker-dealers may incur costs to ensure they are compliant 
with such requirements in each state in which they advising 
customers.\45\ While some portion of these costs may be passed on to a 
broker-dealer's customers--i.e., the investors that transact through 
the broker-dealer in non-Covered Securities--through commissions or 
transaction fees, the Commission preliminarily believes that the 
compliance costs associated with Blue Sky requirements may lead some 
broker-dealers to only offer their services for Covered Securities.\46\ 
However, the Commission lacks the data necessary to quantify the costs 
that broker-dealers and their customers face, and encourages commenters 
to provide information on these costs and the extent to which the Blue 
Sky requirements affect the services broker-dealers offer for non-
Covered Securities.
---------------------------------------------------------------------------

    \45\ See OTC Markets Group Letter, supra note 44, at 4 
(describing impact of Blue Sky laws on broker-dealers).
    \46\ The OTC Markets letter also notes that broker-dealers may 
have increased ``rescission risk'' for failing to comply with each 
jurisdiction's Blue Sky requirements, which OTC Markets argues ``may 
chill some broker-dealers' willingness to allow their customers to 
transact in those securities at all, including securities of SEC 
reporting companies.'' See OTC Markets Group letter, supra note 44, 
at 4.
---------------------------------------------------------------------------

    The proposed amendment, which would make IEX a Designated Market, 
would preempt the application of state securities law registration and 
qualification requirements for securities that are listed or authorized 
for listing on IEX, and would impact (1) issuers who currently list 
their securities on a Named or Designated Market; (2) issuers with 
securities not currently listed on any incumbent Named or Designated 
Market but who would consider listing on IEX, or on an incumbent Named 
or Designated Market, as a result of the competition from IEX if IEX 
enters the listing market; and (3) issuers with securities not 
currently listed on any incumbent Named or Designated Market and would 
eventually list on a Named or Designated Market, regardless of IEX's 
entry into the market. Given that issuers who meet the listing 
standards of IEX are likely to meet the listing standards of other 
Named or Designated Markets, the number of issuers that would list on a 
Named or Designated Market solely as a result of the proposed amendment 
(i.e., those in category (ii) above) may be small. The proposed 
amendment would also affect IEX and the existing trading venues for 
securities that IEX would be able to list.\47\
---------------------------------------------------------------------------

    \47\ The Commission preliminarily believes that the proposed 
amendment may also impact exchanges that are not Named or Designated 
Markets indirectly as explained below.
---------------------------------------------------------------------------

2. Current Practices in the Market for Listings
    Issuers of public securities make several considerations when 
deciding on which exchange to list their securities. These 
considerations include, among other things, the visibility and 
publicity provided by the exchange, the listing services and fees, and 
the exchange's listing standards. The Named and Designated Markets may 
provide issuers of Covered Securities with additional visibility over 
that of securities traded over the counter, which may, in turn, 
increase the pool of potential investors for an issuer and thereby 
improve an investor's access to capital. In addition, the Named and 
Designated Markets provide listing services for their listed issuers, 
which can include monitoring, communication, and regulatory compliance 
services. These services may help issuers by reducing the cost of 
raising capital and the costs associated with going or remaining 
public. However, many issuers that list for the first time do so as 
part of an initial public offering, which can include considerations 
not related to listing on an exchange, such as SEC reporting 
obligations, as well as legal, accounting, and other expenses (both for 
the initial offering and the ongoing requirements of remaining public), 
as well as the benefits of going public, such as increased access to 
capital and providing investors with a signal of an issuer's ability to 
meet obligations, such as reporting requirements, that apply to public 
companies. In this case, the decision of which exchange to list on is 
made along with the decision about whether or not to go public.
    Issuers must pay listing fees and meet listing standards to list on 
a Named or Designated Market. Listing fees may include an initial 
application fee as well as an ongoing annual fee, and may vary by the 
number of shares in the initial offering or be a fixed fee. However, 
listing fees typically represent a small portion of the overall cost of 
an initial public offering or the ongoing costs of remaining 
public,\48\ and thus may not be a significant factor that issuers 
consider when deciding (1) whether to list on a Named or Designated 
Market; and (2) which Named or Designated market to list on. Listing 
exchanges also impose listing standards on issuers, which can include 
corporate governance standards as well as quantitative requirements 
such as minimum income, market capitalization, and operating history 
requirements. While an exchange's listing standards may prevent 
potential issuers who do not meet those standards from listing on the 
exchange, the stringency of an exchange's listing standards may provide 
a valuable signal to investors about the quality of issuers that are 
able to list, which may improve the issuers' access to capital.\49\
---------------------------------------------------------------------------

    \48\ Listing fees for equity securities can range from $55,000 
(NYSE American) to $295,000 (NYSE). See NYSE MKT Company Guide at 
Sec. 140, available at http://wallstreet.cch.com/MKTtools/PlatformViewer.asp?SelectedNode=chp_1_1_1&manual=/MKT/CompanyGuide/mkt-company-guide/; and NYSE Listed Company Manual at 902.02, 
available at http://nysemanual.nyse.com/LCMTools/bookmark.asp?id=sx-ruling-nyse-policymanual_902.02&manual=/lcm/sections/lcm-sections/. 
See also supra notes 40-44 and accompanying text, which discusses 
the overall costs of state securities registration. See also 
Proskauer Rose LLP, 2016 IPO Study, at 52, available at http://www.proskauer.com/files/uploads/Proskauer-2016-IPO-Study.pdf, which 
examined 258 IPOs from 2013 to 2015 and found that the average total 
IPO expense, excluding underwriting fees, was $4.15 million.
    \49\ See infra Section VI.A.3, for further discussion of listing 
standards and signaling to investors.
---------------------------------------------------------------------------

3. Competitive Landscape
    Because securities listed on the Named or Designated Markets are 
Covered Securities, being a Named Market or achieving status as a 
Designated Market permits exchanges to compete to provide listing 
services to issuers of Covered Securities.\50\ Because Covered 
Securities are exempt from state securities registration laws, issuers 
of Covered Securities are not subject to costs from state securities 
registration laws and the costs associated with complying with state 
securities registration laws are lower for broker-dealers that transact 
on behalf of their customers in Covered Securities.
---------------------------------------------------------------------------

    \50\ The Commission views the term ``listing exchange'' as 
equivalent to the term ``Named or Designated Market,'' for purposes 
of this release.
---------------------------------------------------------------------------

    Furthermore, as described below in SectionVI.A.3.b, evidence that 
the

[[Page 33845]]

listing status and listing designation (i.e., whether a security is a 
Covered Security and where it is listed) of securities are related to 
where and how the securities trade leads the Commission to believe that 
the proposed rule could also impact the market for trading services. In 
this section, we discuss competition between Named and Designated 
Markets for listings, as well as competition between Named and 
Designated Markets and other trading platforms for trading services.
(a) Competition for Listings
    Listing exchanges compete with each other on many dimensions for 
listing securities, including, but not limited to, listing fees, 
listing standards, and listing services. When issuers choose which 
listing exchange to list on, issuers compare the listing fees and the 
costs of compliance with listing standards against the quality of 
listing services across listing exchanges. Although issuers may incur 
costs to meet an exchange's listing standards, high listing standards 
may also yield benefits as they may serve as a positive signal to 
investors of an issuer's ability to satisfy high qualitative and 
quantitative listing requirements. Investors may interpret the 
reputation of listing exchanges and their listing standards as a 
credible signal of the quality of listed security, and the reputation 
of an exchange is one of the factors that issuers consider when 
choosing which listing exchange to list on.\51\
---------------------------------------------------------------------------

    \51\ See, e.g., Thomas J. Chemmanur & Paolo Fulghieri, 
Competition and Cooperation Among Exchanges: A Theory of Cross-
listing and Endogenous Listing Standards, 82 J. Fin. Econ. 455-89 
(2006), available at http://www.sciencedirect.com/science/article/pii/S0304405X06001139.
---------------------------------------------------------------------------

    Currently, there are three Named Markets under Section 18(b)(1)(A) 
of the Securities Act: NYSE, NYSE American, and Nasdaq/NGM. In 
addition, there are currently six Designated Markets: (1) Tier I of the 
NYSE Arca, Inc.; (2) Tier I of the NASDAQ OMX PHLX LLC; (3) CBOE; (4) 
options listed on ISE; (5) The Nasdaq Capital Market; and (6) Tier I 
and Tier II of BATS. As of June 2, 2017, NYSE listed 3,172, Nasdaq 
listed 3,183, NYSE Arca listed 1,529, NYSE American listed 359, and 
BATS listed 176.\52\
---------------------------------------------------------------------------

    \52\ These estimates of listed equities include equity 
securities reported to a securities information processor, and do 
not include options or corporate debt securities. The estimates also 
include multiple securities from the same issuer, which means the 
total number of securities may differ from the total number of 
issuers potentially affected by this rulemaking. Listing information 
is from the master files of the daily trade and quotation data 
(``TAQ Data'').
---------------------------------------------------------------------------

    While the number of equities listed on an exchange may be 
informative about the general size of exchanges, the market shares for 
recent equity issue listings may provide a better picture of the nature 
of competition between exchanges and the size of the new listings 
market. In Table 2, we show the number of new equity issue listings 
from 2008 to 2016.\53\
---------------------------------------------------------------------------

    \53\ The listings data for NYSE, Nasdaq, NYSE American, and NYSE 
Arca were taken from Compustat Merged (copyright) 2016 Center for 
Research in Securities Prices (``CRSP''), The University of Chicago 
Booth School of Business. As CRSP does not have BATS listings data, 
BATS listings are from TAQ Data. See supra note 52.

                     Table 2--New Equity Listings in Named and Designated Markets, 2008-2016
----------------------------------------------------------------------------------------------------------------
                                       NYSE           Nasdaq       NYSE American     NYSE ARCA         BATS
----------------------------------------------------------------------------------------------------------------
2008............................              68             142              53              68               0
2009............................              76             115              33              20               0
2010............................             141             156              31              12               0
2011............................             130             132              34              14               0
2012............................             148             135              19               9              17
2013............................             178             201              26              13               6
2014............................             178             278              23              12               5
2015............................             101             220              15              13              31
2016............................              81             163               5              12              85
----------------------------------------------------------------------------------------------------------------

    As shown in Table 2, two listing exchanges--NYSE and Nasdaq--
captured 71% of all new equity listings on Named and Designated Markets 
in 2016, which is evidence of a highly concentrated listing market.\54\ 
In addition, when BATS entered the market in 2012, it gained only 17 
new listings, which was 5.2% of all new equity listings of 2012, which 
suggests that the number of issuers that remain unlisted but would list 
with an entrant is likely to be small.\55\
---------------------------------------------------------------------------

    \54\ The Herfindahl-Hirschman Index (HHI) measure for listing 
exchanges is 0.321, calculated as the sum of squared market shares, 
or (2,552/7,217)[caret]2 + (2,863/7,217)[caret]2 + (1,377/
7,217)[caret]2 + (339/7,217)[caret]2 + (86/7,217)[caret]2 = 0.321. 
See Campbell McConnell, Stanley Brue & Sean Flynn, Microeconomics: 
Principles, Problems, & Policies 218, 219, 225, 226 (2014). An HHI 
close to 0 indicates low concentration while an HHI of 1 indicates 
total concentration or monopoly.
    \55\ See infra SectionVI.B.2, for further discussion about how 
this may affect currently unlisted issuers.
---------------------------------------------------------------------------

    A highly concentrated market may be the result of barriers to 
entry, which limit competition, and can include economies of scale, 
reputation, legal barriers to entry, and network externalities. Listing 
exchanges may exhibit economies of scale because an exchange with a 
large number of listings can spread the fixed costs of listing equities 
over a greater number of issuers. The larger these fixed costs are, the 
greater will be the scale economies of larger listing exchanges. 
Entrant exchanges can also face barriers to entry related to 
reputation. Exchanges that enter the market may not be able to quickly 
establish a strong reputation for high quality listings, which may 
adversely affect their ability to compete with incumbent exchanges. 
This lack of reputation may discourage both investors and issuers from 
transacting or listing on an entrant exchange, which may reinforce an 
entrant exchange's lack of reputation.
    Legal barriers to entry could also apply because exchanges are 
self-regulatory organizations overseen by the Commission. The governing 
statute and regulations establish legal barriers of entry for an entity 
becoming an exchange as well as for an exchange becoming a Designated 
Market. As discussed, the fact that an exchange must be designated by 
the Commission to become a Designated Market, which enables such an 
exchange to effectively compete for the listing business of Covered 
Securities, imposes legal barriers to entry.
    In addition, the market for listing exhibits positive network 
externalities: Issuers may prefer to be listed on exchanges where other 
similar issuers

[[Page 33846]]

are listed because of increased visibility. This indicates that, all 
else being equal, large exchanges (in terms of listings) may tend to be 
favored over smaller ones.
    Issuers also may face switching costs associated with moving their 
listing from one exchange to another. These switching costs would not 
only include the fixed costs associated with a listing on an new 
exchange such as the exchange's application fee, and the legal and 
accounting expenses associated with ensuring that the issuer satisfies 
the listing standards of the new exchange, but would also include the 
costs associated with communicating with investors, including about the 
move to the new exchange. Thus, an issuer that is considering moving 
from one exchange would compare the relatively lower annual listing fee 
of their current exchange with the relatively high costs of moving its 
listing to a new exchange, which places the new exchange at a 
disadvantage and creates a barrier to entry for a potential entrant. 
Even if an entrant exchange prices its listing fees and services 
competitively compared to the incumbent exchanges for new issuers, the 
switching costs for issuers that are already listed may prevent the 
entrant from gaining market share.
    Table 3 shows estimates of the probability that an issuer would 
change its listing market in a given year, based on issuer switching 
behavior for equities over the period 2008 to 2016. As an example, 
during this period, if an equity security was listed on NYSE, there was 
a 99.33% chance that it would still be listed on NYSE the following 
year and a 0.04% chance it would be listed on AMEX the following year, 
a 0.34% chance it would be listed on Nasdaq the following year, and a 
0.08% chance it would be listed on ARCA the following year. More 
generally, equities listed on NYSE and Nasdaq had a greater than 99% 
chance of remaining listed on that exchange the following year, which 
suggests that issuers were unlikely to switch their listings away from 
the two exchanges with the highest market shares.

                                       Table 3--Conditional Probability of Transition for Listings, 2008-2016 \56\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                           NYSE American                                                    Not trading
                    Original exchange                        NYSE (%)           (%)         Nasdaq (%)     NYSE ARCA (%)     BATS (%)        \57\ (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              Status in the Following Year
--------------------------------------------------------------------------------------------------------------------------------------------------------
NYSE....................................................           99.33            0.04            0.34            0.08            0.00            0.20
NYSE Amer...............................................            1.80           93.47            2.80            1.39            0.00            0.54
Nasdaq..................................................            0.38            0.07           99.11            0.01            0.00            0.42
NYSE ARCA...............................................            1.50            0.47            1.13           90.81            0.00            6.10
BATS....................................................            0.00            0.00            0.00            0.00           94.40            5.60
--------------------------------------------------------------------------------------------------------------------------------------------------------

(b) Competition for Trading Services
---------------------------------------------------------------------------

    \56\ The listings data for NYSE, Nasdaq, NYSE American, and NYSE 
Arca were taken from CRSP. BATS listings are from TAQ Data. See 
supra note 52.
    \57\ For the exchanges in the CRSP data (NYSE, NYSE American, 
Nasdaq, and NYSE Arca), this category (Not Trading) includes 
listings that were halted, suspended, not trading, or whose listing 
status was not known in the following year. For the exchange from 
the TAQ data (BATS), this column includes listings that were not in 
the TAQ master file in the following year.
---------------------------------------------------------------------------

    Trading in Covered Securities is segmented from trading in 
securities that are not covered (``OTC trading''). In addition to 
trading on Named or Designated Markets, Covered Securities can also 
trade on 12 other registered national securities exchanges or off-
exchange either on 35 alternative trading systems (``ATSs'') or by 
broker-dealers who internalize orders. The market to trade Covered 
Securities on Named and Designated Markets as well as other trading 
platforms is more liquid than OTC trading of securities that are not 
Covered Securities due to, among other things, the search costs 
associated with finding buyers and sellers in OTC markets.\58\
---------------------------------------------------------------------------

    \58\ See, e.g., Ulff Br[uuml]ggemann, Aditya Kaul, Christian 
Leuz & Ingrid M. Werner, The Twilight Zone: OTC Regulatory Regimes 
and Market Quality, (Nat'l Bureau of Econ. Research, Working Paper 
No. 19358, 2013), available at https://ideas.repec.org/p/nbr/nberwo/19358.html.
---------------------------------------------------------------------------

    Covered Securities can trade on exchanges and other markets that do 
not ``list'' the security. This flexibility allows trading platforms to 
compete with each other by offering better trading services or 
innovative trading mechanisms to attract order flow for securities, 
even if they do not list such securities. The order flow from these 
securities, through the application of transaction fees, can generate 
revenue for an exchange. Exchanges also receive revenue from the sale 
of SIP data, determined, in part, from an exchange's share of 
transaction volume.\59\ Listing exchanges currently enjoy a larger 
trading market share in their listed securities.\60\
---------------------------------------------------------------------------

    \59\ See Securities Exchange Act Release No. 61358 (January 14, 
2010), 75 FR 3594, 3600-01 (January 21, 2010) (Concept Release on 
Equity Market Structure) (Commission concept release discussing the 
revenues and expenses from data fees at that point in time).
    \60\ For the purposes of this rulemaking, staff examined TAQ 
Data for the time period of November through December 2014. Staff 
observed that exchanges tend to enjoy more than 15% higher market 
share in the securities they list compared to the securities they do 
not list, on average, and they tend to enjoy about 20% higher market 
share in the securities they list compared to the market share of 
others' trading in those securities, on average.
---------------------------------------------------------------------------

    Despite the historical advantages listing exchanges enjoy in the 
market for trading services, the success of listing exchanges when 
competing for equity issue listings by offering better trading services 
or innovative trading mechanisms has declined over the past decade.\61\ 
During this time, the increase in fragmentation in the market for 
trading services resulted in a significant shift in the market share of 
trading volume in Covered Securities across trading venues. For 
example, the two exchanges historically with the highest trading 
volume, NYSE and Nasdaq, have each experienced a sharp decline in 
market share of trading volume in securities they list. The market 
share of the NYSE in NYSE-listed stocks fell from approximately 80% in 
2005 to 20% in 2013; for Nasdaq-listed stocks, Nasdaq's market share of 
Nasdaq-listed stocks fell by approximately half, from 50% in 2005 to 
25% in 2013.\62\
---------------------------------------------------------------------------

    \61\ See James Angel, Lawrence Harris & Chester Spatt, Equity 
Trading in the 21st Century: An Update (2013), available at http://www.q-group.org/wp-content/uploads/2014/01/Equity-Trading-in-the-21st-Century-An-Update-FINAL1.pdf.
    \62\ See id. at 20-21.
---------------------------------------------------------------------------

    The competition for trading services is not limited to exchanges. 
Over the past decade, greater trading volume has been executed on other 
venues, including ATSs. Since the third quarter of 2009, the number of 
ATSs that trade NMS stocks has increased from 32 to 34, while the share 
of trading volume of Covered Securities that trade on ATSs

[[Page 33847]]

has increased from 7.9% to 13.0%.\63\ This suggests that the importance 
of ATSs for trading services has increased relative to Named and 
Designated Markets, and that the listing exchange of a security may be 
less important in determining the location of trading activity.
---------------------------------------------------------------------------

    \63\ See 17 CFR 242.600(b)(47) (definition of NMS Stock) (``NMS 
stock means any NMS security other than an option.'') and 17 CFR 
242.600(46) (definition of NMS security) (``NMS security means any 
security or class of securities for which transaction reports are 
collected, processed, and made available pursuant to an effective 
transaction reporting plan, or an effective national market system 
plan for reporting transactions in listed options.''). The estimates 
of ATSs that trade NMS stocks and ATS trade volume share was 
developed using weekly summaries of trade volume collected from ATSs 
pursuant to FINRA Rule 4552. See also Securities Exchange Act 
Release No. 76474 (November 18, 2015), 80 FR 80998, 81109 (December 
28, 2015) (Regulation of NMS Stock Alternative Trading Systems). The 
estimates in this release were done in the same manner as in the 
cited release. See also OTC (ATS & Non-ATS) Transparency, FINRA, 
http://www.finra.org/Industry/Compliance/MarketTransparency/ATS/.
---------------------------------------------------------------------------

B. Impact on Efficiency, Competition, and Capital Formation

    Securities Act Section 2(b) \64\ requires the Commission, when 
engaging in rulemaking that requires it to consider or determine 
whether an action is necessary or appropriate in the public interest, 
to consider, in addition to the protection of investors, whether the 
action will promote efficiency, competition, and capital formation.
---------------------------------------------------------------------------

    \64\ See 15 U.S.C. 77b(b).
---------------------------------------------------------------------------

1. Efficiency
    By listing on IEX, security issuers that otherwise would have not 
listed their securities on a Named or Designated Market would be able 
to avoid the duplicative costs of securities registration in multiple 
jurisdictions and thus reduce the impediments to listing on exchanges, 
which in turn can improve market efficiency. To the extent that the 
proposed amendment results in increased listing activity, then it may 
improve the allocative efficiency of securities markets by allowing 
investors to better diversify financial risks by investing in newly-
listed securities.
    However, these two impacts may be mitigated by the extent to which 
issuers' abilities to list on a Named or Designated Market are 
constrained by other factors, such as their ability to satisfy listing 
standards and the attendant costs from doing so. For example, issuers 
may face increased disclosure costs associated with becoming an SEC 
reporting company if they are not already an SEC reporting company 
because issuers must be an SEC reporting company to list on a national 
securities exchange.\65\ Moreover, issuers that are able to meet the 
listing standards of IEX are likely to be able to meet the listing 
standards of other Named or Designated Markets, so the entry of IEX 
would not necessarily increase the pool of securities eligible for 
listing. As a result, the Commission preliminarily believes that the 
number of issuers that would list on IEX, where, in the absence of the 
proposed amendment, would not have listed at all, is likely to be 
small.\66\
---------------------------------------------------------------------------

    \65\ See 15 U.S.C. 78(l)(b).
    \66\ See supra SectionVI.A.3.a, for further discussion.
---------------------------------------------------------------------------

2. Capital Formation
    As noted in Section VI.A, a reason issuers list on a Named or 
Designated Market is improved access to capital. Listing on a Named or 
Designated Market may improve access to capital, which can promote 
capital formation, in several ways. First, listing on a Named or 
Designated Market may credibly signal to investors that a firm is of 
higher quality because firms that list on these exchanges must meet 
certain minimum standards for governance and disclosure set by listing 
on these exchanges. Like listed issuers on the Named and Designated 
Markets, IEX's listed issuers might benefit from the signal of quality 
that comes from listing on a Named or Designated Market compared to 
issuers that do not list. The reputational benefits that come from 
listing on a Named or Designated Market may make investors more willing 
to invest in such issuers, which may improve the issuers' access to 
capital, and promote capital formation.
    Second, listing on a Named or Designated Market may provide 
additional liquidity for equities relative to OTC trading, due in part 
to potential frictions to liquidity imposed by OTC search costs.\67\ If 
investors demand a liquidity risk premium,\68\ the enhanced liquidity 
could facilitate capital formation by reducing the size of the premium 
that issuers would otherwise incur when issuing new securities. 
Additionally, listing on a Named or Designated Market may promote 
access to capital by reducing the costs associated with broker-dealers 
ensuring their compliance with state securities laws in multiple 
jurisdictions, which would be borne by broker-dealers and potentially 
shared with investors, thus attracting broker-dealers and investors to 
transact in securities that list on a Named or Designated Market.\69\ 
Investors in securities that list on IEX as a result of the proposed 
amendment would have easier access to invest in those securities and to 
further diversify their investment portfolios, which may promote 
capital formation by improving allocative efficiency.\70\
---------------------------------------------------------------------------

    \67\ See Darrell Duffie, Nicolae Garleanu & Lasse Heje Pedersen, 
Over-the-Counter Markets, 73 Econometrica 1815 (2005).
    \68\ Liquidity risk premia are the extra returns that investors 
demand because of the risks associated with investing in illiquid 
assets.
    \69\ See supra Section VI.A.1.
    \70\ See, e.g., John Heaton & Deborah J. Lucas, Evaluating the 
Effects of Incomplete Markets on Risk Sharing and Asset Pricing, 104 
J. Pol. Econ. 443 (1996).
---------------------------------------------------------------------------

    Whether IEX entering the listing market promotes capital formation 
depends on the extent to which issuers previously unable or unwilling 
to list on a Named or Designated Market subsequently do so. Some 
issuers may, as a result of improved services and/or decreased fees 
stemming from the increased competition between listing exchanges, be 
induced to list on an exchange where, in the absence of the proposed 
amendment, they would not have. If so, then the entrance of IEX could 
provide issuers with lower cost access to capital.
3. Competition
    The proposed amendment to Rule 146(b) would likely increase 
competition among the Named and Designated Markets that compete to list 
securities. By determining that IEX has ``substantially similar'' 
listing standards to the Named and other Designated Markets, the 
proposed amendment permits IEX to compete with other Named and 
Designated Markets to list securities that are exempt from state 
registration requirements. This would reduce the costs associated with 
complying with state securities laws in multiple jurisdictions that are 
borne by broker-dealers and such a reduction would potentially be 
shared with customers. As mentioned earlier, the Named and Designated 
Markets compete with each other on many dimensions, including listing 
standards, listing fees, and listing services. Besides permitting IEX 
to compete to list securities as a Designated Market, IEX's entry as a 
listing market might also provide incumbent listing markets with 
incentives to change how they compete with each other.\71\
---------------------------------------------------------------------------

    \71\ See, e.g., Thierry Foucault & Christine A. Parlour, 
Competition for Listing, 35 Rand J. Econ. 329 (2004) (describing 
how, in equilibrium, competing exchanges obtain positive expected 
profits by offering different execution costs and different listing 
fees). See also supra note 61 and accompanying text.
---------------------------------------------------------------------------

    Generally, there are two ways that increased competition can affect 
how listing markets compete with each other. The first involves how the 
Named or

[[Page 33848]]

Designated Markets compete to provide better services and value for 
listing issuers. For example, listing markets could reduce fees, 
improve services, or reduce compliance burdens associated with their 
listing standards.\72\ If an additional entrant competes by providing 
better listing and monitoring services or lower costs for issuers, 
incumbent listing exchanges may decide to follow suit.
---------------------------------------------------------------------------

    \72\ See infra note 74 (discussing the Exchange Act filing 
requirements necessary for any revision to exchange listing 
standards and noting that such listing standards and changes to such 
listing standards are subject to the requirements of the Exchange 
Act and the rules and regulations thereunder).
---------------------------------------------------------------------------

    The Named and Designated Markets also may compete to provide better 
services by increasing their level of specialization with respect to 
securities listings. As noted below, as in the case of BATS, some Named 
and Designated Markets may develop reputations for specializing in 
specific types of issues by catering to specific types of issuers. An 
increase in competitive pressures may cause the Named and Designated 
Markets to more closely cater to specific types of issuers. 
Specialization may reduce the cost of providing listing services or may 
promote innovation in the provision of listing services. To the extent 
that specialization improves the services provided to issuers or 
reduces the costs of these services, this competitive response may 
improve the efficiency of the market for listing services.
    The second way that increased competition can affect how the Named 
and Designated Markets compete with each other is through their role as 
intermediaries. The Named and Designated Markets serve as information 
and reputation intermediaries partly through their listing standards. 
Because issuers cannot perfectly signal their quality, the reputation 
of a Named or Designated Market for strict listing standards may be 
informative to an investor and serve as a signal of the quality of an 
issuer.\73\ Issuers that are able to meet the listing standards of a 
Named or Designated Market can signal their ability to do so by listing 
on them. However, because complying with these listing standards may be 
costly for issuers, issuers weigh the benefits of higher quality 
signaling through stronger listing standards against the costs of 
compliance with these standards. The Named and Designated Markets thus 
balance the competitive incentives to cater to two different groups of 
market participants--issuers and investors.
---------------------------------------------------------------------------

    \73\ See Stewart C. Myers & Nicholas S. Majluf, Corporate 
Financing and Investment Decisions When Firms Have Information That 
Investors Do Not Have, 13 J. Fin. Econ. 187 (1984), available at 
http://www.sciencedirect.com/science/article/pii/0304405X84900230, 
for a discussion of the role of asymmetric information in corporate 
finance. See also Nathalie Dierkens, Information Asymmetry and 
Equity Issues, 26 J. Fin. & Quantitative Analysis 181 (1991), 
available at www.jstor.org/stable/2331264, for empirical evidence of 
asymmetric information in the equity issue process.
---------------------------------------------------------------------------

    Because the Named and Designated Markets serve as information and 
reputation intermediaries between issuers and investors, the impact of 
increased competition on listing standards is ambiguous. The Named and 
Designated Markets may respond to increased competition by increasing 
listing standards to provide additional signaling and attract 
investors. Alternatively, the Named and Designated Markets could 
instead respond to increased competition by decreasing listing 
standards to attract additional listings. The intermediaries' opposing 
incentives to cater to these two groups of market participants make 
predicting the impact of competition on listing standards difficult.
    The Named and Designated Markets' ability to lower standards would 
be constrained by the fact that 1. any proposed listing standards or 
proposed changes to existing listing standards must be filed with the 
Commission pursuant to Section 19(b) of the Exchange Act and must meet 
statutory and rule requirements to become effective,\74\ and 2. an 
exchange with lower listing standards that are not substantially 
similar to those of a Named Market may lose its status as a Designated 
Market.\75\ The requirement that the listing standards of a Designated 
Market be substantially similar to those of a Named Market means that 
the listing standards of the Named Markets serve as a lower bound for 
the extent to which competition may drive down listing standards for 
the other exchanges.
---------------------------------------------------------------------------

    \74\ Any revision to exchange listing standards must be filed in 
accordance with Section 19(b) of the Exchange Act and Rule 19b-4 
thereunder and is subject to the requirements of the Exchange Act 
and the rules and regulations thereunder. See 15 U.S.C. 78s(b) and 
17 CFR 240.19b-4.
    \75\ See 17 CFR 230.146(b)(2).
---------------------------------------------------------------------------

    Despite the potential for increased competition, some of the 
features of the market for listings that inhibit competition, as 
discussed above, may also mitigate the effects of IEX's entry on 
competition. Specifically, some of the barriers to entry discussed in 
the baseline--economies of scale and network externalities--may make it 
difficult for IEX to effectively compete with incumbent exchanges for 
listings.\76\ For example, if a new entrant does not attract enough 
initial listings, the fixed cost of operations may make it difficult to 
keep its listing fees competitive. In addition, new entrants may not 
have established a sufficient reputation as a listing exchange to 
credibly certify the quality of its new issues. Thus, the structure of 
the market for listings may mitigate some of the potential effects of 
increased competition between Named and Designated Markets.
---------------------------------------------------------------------------

    \76\ See supra Section VI.A.
---------------------------------------------------------------------------

    The latest example of an entrant into the market for listings is 
BATS BZX, which became a Designated Market in 2012.\77\ Table 2 in 
Section VI.A.3.a shows that the number of new listings on BATS 
decreased each year until 2015, but has increased more recently. While 
the growth in new listings by BATS may be indicative of the barriers to 
entry that entrants such as IEX face, circumstances specific to BATS 
may have impacted its ability during that period to attract 
listings.\78\
---------------------------------------------------------------------------

    \77\ See Securities Act Release No. 9295 (January 20, 2012), 77 
FR 3590 (January 25, 2012).
    \78\ As BATS noted in its registration statement filed with the 
Commission on December 15, 2015, ``[O]n March 23, 2012, we 
experienced a serious technical failure on BZX, forcing us to cancel 
our planned IPO. . . . These technical failures damaged our 
reputation and resulted in increased regulatory scrutiny of the 
event by the SEC and other governmental authorities.''
---------------------------------------------------------------------------

    Table 3 in Section VI.A.3.a shows that almost none of the new 
listings on BATS arrived as transfers from another exchange, but were 
instead the first listing for each issuer that listed on BATS. This 
evidence is consistent with the argument that switching costs may also 
have had an impact on BATS' ability to gain market share, and may be a 
factor that also shapes IEX's entry. Moreover, the vast majority of 
BATS-listed securities are exchange-traded products. This is consistent 
with the idea that despite barriers to entry, BATS was able to enter by 
competing for one segment of the market and specializing in listing 
exchange-traded products.

C. Analysis of Benefits and Costs

    If the Commission amends Rule 146(b) to include IEX, then 
securities listed, or authorized for listing, on IEX would be eligible 
to be designated as Covered Securities under Rule 146(b)(1) under the 
Securities Act, which, as described above, are exempt from state law 
registration requirements.\79\ In this

[[Page 33849]]

section, we discuss the benefits and costs of the proposed amendment, 
which stem from its two major effects: (1) The exemption from Blue Sky 
laws provided to any issuers that would not list in the absence of the 
proposed amendment; and (2) the entry of IEX into the market for 
listings as a Designated Market.
---------------------------------------------------------------------------

    \79\ Rule 146 and Section 18 have no effect on Federal 
registration requirements, which are addressed by Section 5 of the 
Exchange Act. See 15 U.S.C. 78e. Section 18 of the Securities Act 
states that no law, rule, regulation, or order, or other 
administrative action of any State or any political subdivision 
thereof requiring, or with respect to, registration or qualification 
of securities, or registration or qualification of securities 
transactions, shall directly or indirectly apply to a covered 
security. See 15 U.S.C. 77r(a)(1)(A).
---------------------------------------------------------------------------

    As noted above, the Commission is unable to quantify all of the 
economic effects of the proposed amendment because it lacks the 
information necessary to provide reasonable estimates. The Commission 
seeks comment on any information on these factors or information that 
would help it directly quantify the economic effects of the rule.
1. Benefits of the Proposed Amendment
    The proposed amendment could provide benefits, flowing from the 
exemption from Blue Sky laws, to currently unlisted issuers that do not 
currently list on an existing Named or Designated Market but would 
choose to list on IEX.\80\ Specifically, the proposed amendment permits 
these issuers of Covered Securities that list on IEX to avoid the 
potentially duplicative costs of complying with multiple state 
securities regulations. As mentioned previously, these duplicative 
costs could include both a fixed cost of registration and ongoing 
compliance costs. An unlisted issuer needs to register in each of the 
jurisdictions it wants to transact in, so if the proposed amendments 
increase the number of issuers that list, such issuers save these 
costs. To the extent that IEX attracts previously unlisted issuers, IEX 
may benefit as a result of revenue from listing fees, trading fees, and 
data fees associated with the new issuers. In addition, absent the 
proposed amendment, the heterogeneity in state securities regulations 
generates ongoing costs for broker-dealers and investors transacting in 
multiple jurisdictions.\81\ However, the overall magnitude of these 
benefits depends on the number of currently unlisted issuers that 
choose to list on IEX as a result of the proposed amendment, and the 
Commission preliminarily believes this number is likely to be small 
because any unlisted issuer able to meet the listing standards of IEX 
is likely to be able to meet the listing standards of the other Named 
and Designated Markets.\82\
---------------------------------------------------------------------------

    \80\ Data to estimate the number of such issuers does not exist, 
but the Commission preliminarily believes that the numbers of such 
issuers is likely to be small, as any issuers that can meet the 
listing standards of IEX are likely to be able to meet the listing 
standards of the incumbent Named or Designated Markets.
    \81\ See supra Sections VI.A.1 and VI.B.1.
    \82\ See Table 2, supra Section VI.A.3.a, and accompanying text.
---------------------------------------------------------------------------

    More generally, by making IEX a Designated Market, the proposed 
amendment would benefit IEX by allowing it to compete in the listing 
market for Covered Securities on a more level playing field with 
similarly situated national securities exchanges.\83\ Specifically, 
being able to list Covered Securities would allow IEX to more 
effectively compete with the incumbent Named and Designated Markets 
that also are able to offer Covered Securities status. This would also 
benefit issuers that choose to list securities on a Named or Designated 
Market by providing them with another alternative venue on which to 
list. Furthermore, adding IEX as an entrant into this market would 
increase the number of competitors in the market for listings. To the 
extent that the existing Named and Designated Markets respond to this 
increased competition by reducing listing fees or improving listing 
services, as discussed above, currently listed issuers and their 
investors may benefit from the improved quality of listing services, 
reduced listing fees or reduced compliance costs. In addition, to the 
extent that the entry of IEX increases the specialization of incumbent 
Named and Designated Markets, issuers may benefit from listing services 
that are more tailored to their needs.
---------------------------------------------------------------------------

    \83\ The Commission acknowledges that this benefit to IEX may 
come at the expense of the existing Named and Designated Markets, 
who may lose a portion of their current share to a new entrant. See 
infra Section VI.D.
---------------------------------------------------------------------------

    Although the direct effect of the proposed amendment may reduce the 
costs associated with registering in multiple jurisdictions, the 
Commission notes that issuers already have other Named and Designated 
Markets as options to list, and are likely to be able to meet the 
listing standards of these other markets if they would be able to list 
on IEX. IEX's entry into the market for listings may have a larger 
impact on issuers by increasing the amount of competition between Named 
and Designated Markets, rather than through the direct provision of 
Covered Securities status provided to securities that list on IEX. An 
increased amount of competition between Named and Designated Markets 
may improve listing services, reduce listing fees, and issuer 
specialization, which may benefit issuers.\84\
---------------------------------------------------------------------------

    \84\ See supra Section VI.B.3.
---------------------------------------------------------------------------

    Last, issuers that choose to list on a Named or Designated Market 
because of IEX's entry may impact the trading of those issuers' 
securities on markets that are not Named or Designated Markets. As 
noted in the baseline, securities that list on a Named or Designated 
Market may also trade on exchanges that are not Named or Designated 
Markets, which may bring them additional revenue from trades.\85\ 
Exchanges that are not Named or Designated Markets may thus benefit 
from the entry of IEX into the market for listings, even if these 
exchanges do not directly compete with IEX or the Named or Designated 
Markets for listings business.
---------------------------------------------------------------------------

    \85\ See supra Section VI.A.1.
---------------------------------------------------------------------------

2. Costs of the Proposed Amendment
    The Commission notes that the overall magnitude of costs associated 
with the loss of state oversight depends on the number of unlisted 
issuers that choose to list as a result of the proposed amendment, and 
the Commission preliminarily believes this number is likely to be 
small, if any, for the reasons noted above.\86\ For unlisted issuers 
that choose to list on IEX as a result of the proposed amendment, 
listing on IEX may entail costs from a loss of state oversight and 
compliance costs arising from new reporting obligations from IEX's 
listing standards. However, we note that these issuers would only 
choose to list on IEX and bear these costs if they decided that the 
benefits of listing on IEX justified the costs.
---------------------------------------------------------------------------

    \86\ See Table 2, supra Section VI.A.3.a, and accompanying text.
---------------------------------------------------------------------------

    The Commission preliminarily believes that any costs to investors 
from a loss of state oversight for such issuers would be mitigated by 
federal regulations and oversight of IEX and the other Named and 
Designated Markets and the requirement to meet their respective listing 
standards. Indeed, Congress, in Section 18, has already determined that 
federal regulation is sufficient for those issuers that meet the high 
listing standards of a Named/Designated Market. Furthermore, the 
Commission preliminarily believes that other regulatory protections 
(e.g., market surveillance, investigation and enforcement) already 
imposed on previously unlisted issuers who choose to list on IEX will 
mitigate these potential costs.
    Issuers who currently list on an existing Named or Designated 
Market that would switch to IEX would not experience potential costs 
from a loss of state oversight or compliance costs arising from new 
reporting obligations. However, any previously listed issuers that 
decide to change their listing from a Named or Designated Market to IEX

[[Page 33850]]

would incur costs to switch their listing.\87\ Still, the issuers could 
choose whether or not to incur this cost and likely would do so only if 
the benefits of switching their listing exceed their switching costs.
---------------------------------------------------------------------------

    \87\ See supra Section VI.A.3.a, for a discussion of the sources 
of switching costs.
---------------------------------------------------------------------------

D. Other Effects of the Proposed Amendment

    Some of the effects of the proposed amendments to IEX, incumbent 
Named and Designated Markets, and issuers involve transfers from one 
party to another. For example, the listing fees collected by IEX from 
previously-listed issuers may accompany a related loss of the listing 
fees collected by other Named or Designated Markets. Issuers that list 
on Named and Designated Markets may also enjoy savings from listing fee 
reductions as a result of increased listing exchange competition, which 
would also accompany a loss of listing fees collected by Named or 
Designated Markets.
    Additionally, as a result of changes to competition in the market 
for listings, the volume of trade in trading venues may shift, to the 
advantage of some venues and to the detriment of others. Changes to the 
Named or Designated Markets' shares of the market for listings may 
affect the distribution of trading volumes across Named and Designated 
Markets, as well as other trading venues. Commission staff estimates 
that an exchange captures an average of about 20% higher share of 
volume in the securities listed by that exchange compared to the market 
share of other exchanges trading the same securities.\88\ This result 
suggests that changes to listings driven by increased competition may 
alter the market share of trades distributed across each venue, even if 
the number of listed securities does not change, by about 20% of the 
volume in such securities. Any shifts in the market share of trading 
could result in gains and losses in transaction fees collected and the 
share of data fees split between exchanges. Although these gains and 
losses are relevant potential economic effects of the proposed 
amendment, the Commission preliminarily does not consider these 
transfers to be a benefit or cost of the proposed amendment, but rather 
a consequence of increased competition between listings.\89\
---------------------------------------------------------------------------

    \88\ See supra note 60. Using TAQ data, Commission staff 
estimates that listing exchanges have around 28.8% of the dollar 
volume in the securities they list compared to other exchanges' 
average of about 3.3% of the dollar volume. Staff observed that each 
listing exchange enjoys a higher market share of dollar volume in 
its listed securities than any other exchange trading the listing 
exchange's listed securities. Staff also observed that these 
differences were not only economically large, but that they were 
also statistically significant.
    \89\ In light of the relevant statutory language and in the 
context of this particular proposed rulemaking, we do not believe 
there are reasonable alternatives to this proposal to designate 
securities listed on IEX as covered securities.
---------------------------------------------------------------------------

E. Request for Comment

    The Commission seeks comment and supporting information as to the 
costs and benefits associated with this rule amendment, including 
identification and assessments of any costs and benefits not discussed 
in this analysis, and the effects on efficiency, capital formation and 
competition. We solicit comments on the usefulness of the rule 
amendment to investors, reporting persons, registrants, and the 
marketplace at large. We encourage commentators to identify, discuss, 
analyze, and supply relevant data, information, or statistics regarding 
any such costs or benefits, as well as any costs and benefits not 
already defined. We also request qualitative feedback on the nature of 
the benefits and costs described above. Additionally, we request 
comment on the extent of any costs that may be attributable to any loss 
of protections that currently are afforded by the state registration 
process, such as any merit-based requirements imposed by states on 
issuers. In particular, the Commission seeks comment on the following:
    1. Has the Commission accurately described the baseline for the 
economic analysis? What are the typical costs of registering securities 
in multiple states? In how many states do issuers that qualify or are 
close to qualifying to list register? What are the typical attorney 
fees and other costs for registering securities in multiple states?
    2. Has the Commission accurately described the competitive 
landscape for the market for listing Covered Securities? Has the 
Commission accurately described the competitive landscape for the 
market for trading services?
    3. Does the proposing release discuss all relevant markets and 
forms of competition? If not, which additional markets or forms of 
competition could the proposal impact and what is the current 
competitive landscape in those markets?
    4. Has the Commission accurately identified all market participants 
that would be affected by the proposed amendments to Rule 146? Which 
market participants do commenters believe would be affected by the 
proposed amendments but have not been included in the analysis?
    5. Has the Commission accurately identified the potential impacts 
on efficiency, competition, and capital formation?
    6. Has the Commission accurately identified and explained the costs 
and benefits of the proposed amendments to Rule 146?
    a. Has the Commission accurately described the benefits to issuers 
and investors that would choose to list on IEX should IEX become a 
Designated Market?
    b. Has the Commission accurately described the benefits to 
investors, IEX and other Designated Markets as a result of IEX becoming 
a Designated Market?
    c. Has the Commission accurately described the costs to investors 
in securities of issuers that will choose to list on IEX should IEX 
become a Designated Market?
    d. Has the Commission accurately described the costs to issuers of 
securities that will choose to list on IEX should IEX become a 
Designated Market?
    e. Has the Commission accurately described the costs to IEX and 
other Designated Markets as a result of IEX becoming a Designated 
Market?
    7. Are there benefits or costs that could be quantified or 
otherwise monetized? The Commission encourages commenters to provide 
specific estimates or data.
    8. In light of the relevant statutory language and in the context 
of this particular proposed rulemaking, are there reasonable 
alternatives to this proposal to designate securities listed on IEX as 
covered securities?

VII. Regulatory Flexibility Act Certification

    Section 603(a) of the Regulatory Flexibility Act \90\ requires the 
Commission to undertake an initial regulatory flexibility analysis of 
the proposed amendment to Rule 146 on small entities, unless the 
Commission certifies that the proposed amendment, if adopted, would not 
have a significant economic impact on a substantial number of small 
entities.\91\ For purposes of Commission rulemaking in connection with 
the Regulatory Flexibility Act, an issuer is a small business if its 
``total assets on the last day of its most recent fiscal year were $5 
million or less.'' \92\ In addition, an exchange is a small entity if 
it is an exchange that is exempt from the reporting requirements of 
Rule 601 under Regulation NMS, and is not

[[Page 33851]]

affiliated with any person (other than a natural person) that is not a 
small business or small organization.\93\
---------------------------------------------------------------------------

    \90\ 5 U.S.C. 603(a).
    \91\ 5 U.S.C. 605(b).
    \92\ 17 CFR 230.157. See also 17 CFR 240.0-10(a).
    \93\ 17 CFR 240.0-10(e).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the proposal to amend 
Rule 146(b) would not affect a substantial number of small entities 
because IEX is not a small entity. Further, to list its securities on 
IEX, an issuer's aggregate market value of publicly held shares would 
be required to be at least $5 million. If an entity's market value of 
publicly held shares were at least $5 million, it is reasonable to 
believe that its assets generally would be worth more than $5 million. 
Therefore, an entity seeking to list securities on IEX pursuant to 
IEX's listing standards generally would have assets with a market value 
of more than $5 million and thus would not be a small entity.
    Accordingly, the Commission hereby certifies, pursuant to Section 
605(b) of the Regulatory Flexibility Act,\94\ that amending Rule 146(b) 
as proposed would not have a significant economic impact on a 
substantial number of small entities. The Commission encourages written 
comments regarding this certification. The Commission solicits comment 
as to whether the proposed amendment to Rule 146(b) could have an 
effect that has not been considered. The Commission requests that 
commenters describe the nature of any impact on small entities and 
provide empirical data to support the extent of such impact.
---------------------------------------------------------------------------

    \94\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

VIII. Small Business Regulatory Enforcement Fairness Act of 1996

    For purposes of the Small Business Enforcement Fairness Act of 
1996, a rule is ``major'' if it results or is likely to result in:
    1. An annual effect on the economy of $100 million or more;
    2. a major increase in costs or prices for consumers or individual 
industries; or
    3. significant adverse effects on competition, investment, or 
innovation. \95\
---------------------------------------------------------------------------

    \95\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C., and as a note 
to 5 U.S.C. 601).

    The Commission requests comment regarding the potential impact of 
the proposed amendment on the economy on an annual basis. Commenters 
should provide empirical data to support their views to the extent 
possible.

IX. Statutory Authority and Text of the Proposed Rule

    The Commission is proposing an amendment to Rule 146 pursuant to 
the Securities Act of 1933,\96\ particularly Sections 18(b)(1)(B) and 
19(a).\97\
---------------------------------------------------------------------------

    \96\ 15 U.S.C. 77a et seq.
    \97\ 15 U.S.C. 77r(b)(1)(B) and 77s(a).
---------------------------------------------------------------------------

List of Subjects in 17 CFR Part 230

    Securities.

    For the reasons set forth in the preamble, the Commission proposes 
to amend Title 17, Chapter II of the Code of Federal Regulations as 
follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

0
1. The authority citation for part 230 continues to read, in part, as 
follows:

    Authority:  15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h, 
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L. 112-106, sec. 201(a), sec. 401, 126 
Stat. 313 (2012), unless otherwise noted.
* * * * *
0
2. Amend Sec.  230.146 by revising paragraphs (b)(1) and (b)(2) to read 
as follows:


Sec.  230.146  Rules under section 18 of the Act.

* * * * *
    (b) * * *
    (1) For purposes of Section 18(b) of the Act (15 U.S.C. 77r), the 
Commission finds that the following national securities exchanges, or 
segments or tiers thereof, have listing standards that are 
substantially similar to those of the New York Stock Exchange 
(``NYSE''), the NYSE American LLC (``NYSE American''), or the National 
Market System of the Nasdaq Stock Market (``Nasdaq/NGM''), and that 
securities listed, or authorized for listing, on such exchanges shall 
be deemed covered securities:
    (i) Tier I of the NYSE Arca, Inc.;
    (ii) Tier I of the NASDAQ PHLX LLC;
    (iii) The Chicago Board Options Exchange, Incorporated;
    (iv) Options listed on Nasdaq ISE, LLC;
    (v) The Nasdaq Capital Market;
    (vi) Tier I and Tier II of Bats BZX Exchange, Inc.; and
    (vii) Investors Exchange LLC.
    (2) The designation of securities in paragraphs (b)(1)(i) through 
(vii) of this section as covered securities is conditioned on such 
exchanges' listing standards (or segments or tiers thereof) continuing 
to be substantially similar to those of the NYSE, NYSE American, or 
Nasdaq/NGM.

    By the Commission.

    Dated: July 14, 2017.
Brent J. Fields,
Secretary.
[FR Doc. 2017-15216 Filed 7-20-17; 8:45 am]
 BILLING CODE 8011-01-P