[Federal Register Volume 83, Number 100 (Wednesday, May 23, 2018)]
[Notices]
[Pages 23968-23978]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-10986]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83289; File No. SR-NYSENAT-2018-02]


Self-Regulatory Organizations; NYSE National, Inc.; Notice of 
Filing of Amendment No. 1 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Amended by Amendment No. 1, To Support the Re-
Launch of NYSE National, Inc. on the Pillar Trading Platform

May 17, 2018.

I. Introduction

    On February 21, 2018, NYSE National, Inc. (``NYSE National'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change in connection with the re-launch of the Exchange 
on the Pillar trading platform. The proposed rule change was published 
for comment in the Federal Register on March 13, 2018.\3\ The 
Commission received no comments on the proposed rule change. On April 
25, 2018, pursuant to Section 19(b)(2) of the Act,\4\ the Commission 
designated a longer period within which to approve the proposed rule 
change, disapprove the proposed rule change, or institute proceedings 
to determine whether to approve or disapprove the proposed rule 
change.\5\ On May 16, 2018, the Exchange filed Amendment No. 1 to the 
proposed rule change, which supersedes and replaces the original filing 
in its entirety.\6\ The Commission is approving the proposed rule 
change, as modified by Amendment No. 1, on an accelerated basis, and is 
soliciting comments on Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 82819 (March 7, 
2018), 83 FR 11098 (March 13, 2018) (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No.83100 (April 25, 
2018), 83 FR 19127 (May 1, 2018).
    \6\ In Amendment No. 1, the Exchange proposes, among other 
things, to: (i) Delete proposed Rule 8 and modify proposed Rule 5 to 
include only those rules that would support the trading on an 
unlisted trading privileges (``UTP'') basis of all NMS Stocks and 
the trading on a UTP basis of UTP Exchange Traded Products; (ii) 
revise the proposed definition of the term ``UTP Exchange Traded 
Product''; (iii) propose a grace period of 30 calendar days for ETP 
Holders that are eligible for the expedited process for 
reinstatement under the proposal to register their Associated 
Persons with the Exchange; (iv) commit to working with Commission 
staff to update its membership rules and to file a separate filing 
relating to its membership rules within 90 days of any approval of 
the instant proposal; (v) identify which of the proposed Rules are 
based on the rules of NYSE American, as opposed to those based on 
the rules of NYSE Arca; (vi) add provisions, based on rules of other 
self-regulatory organizations (``SROs''), that were not included in 
the original filing; (vii) add a rule relating to the requirements 
for listed securities issued by Intercontinental Exchange, Inc. 
(``ICE'') or its affiliates; (viii) specifically incorporate by 
reference certain rules of the Financial Industry Regulatory 
Authority, Inc. (``FINRA'') that were only cited in the original 
version of the filing; (ix) add clarifying language to proposed rule 
text and the narrative describing the proposal; and (x) correct 
various technical errors. The proposed revisions of the proposal 
made in Amendment No. 1 are incorporated in the Description of the 
Proposal herein. Amendment No. 1 is available at: https://www.sec.gov/comments/sr-nysenat-2018-02/nysenat201802-3653908-162416.pdf.
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II. Description of the Proposal

    On February 1, 2017, the Exchange ceased trading operations.\7\ The 
Exchange proposes to re-launch trading operations on Pillar, which is 
an integrated trading technology platform designed to use a single 
specification for connecting to the equities and options markets 
operated by the Exchange and its affiliates, NYSE Arca, Inc. (``NYSE 
Arca''), NYSE American LLC (``NYSE American''), and New York Stock 
Exchange LLC (``NYSE'').
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    \7\ See Securities Exchange Act Release No. 80018 (February 10, 
2017), 82 FR 10947 (February 16, 2017) (SR-NSX-2017-04) 
(``Termination Filing''). On January 31, 2017, ICE, through its 
wholly-owned subsidiary, NYSE Group, acquired all of the outstanding 
capital stock of the Exchange (the ``Acquisition''). See Securities 
Exchange Act Release No. 79902 (January 30, 2017), 82 FR 9258 
(February 3, 2017) (SR-NSX-2016-16). Prior to the Acquisition, the 
Exchange was named ``National Stock Exchange, Inc.'' and was 
referred to as ``NSX.''
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    Currently, NYSE Arca's cash equities market,\8\ NYSE American's 
cash equities market,\9\ and NYSE securities that trade on an unlisted 
trading privileges basis \10\ trade on Pillar. NYSE Arca, NYSE 
American, and NYSE have trading rules that are substantially similar 
and that are based on the rule numbering framework of NYSE Arca.\11\
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    \8\ For a history of the implementation of Pillar on NYSE Arca, 
see Notice, supra note 3, at footnote 6.
    \9\ For a history of the implementation of Pillar on NYSE 
American, see Notice, supra note 3, at footnote 7.
    \10\ For a history of the implementation of Pillar on NYSE, see 
Notice, supra note 3, at footnote 8.
    \11\ According to the Exchange, NYSE American and NYSE proposed 
specific differences to certain trading rules with respect to NYSE 
Arca to differentiate their respective trading models, noting, for 
example, that NYSE American has a delay mechanism and does not offer 
specified order types. See id. The Exchange states that it does not 
propose to offer a trading model that is differentiated from NYSE 
Arca. It does propose, however, certain differences in some of the 
details of its rules, as further discussed below. In addition, in 
preparation for the re-launch of trading, the Exchange adopted the 
rule numbering framework of the NYSE Arca rules, which at that time 
were organized in 14 Rules. See Securities Exchange Act Release No. 
81782 (September 29, 2017), 82 FR 81782 (October 5, 2017) (SR-
NYSENat-2017-04) (Notice of Filing and Immediate Effectiveness).

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[[Page 23969]]

    The Exchange proposes to re-launch trading on Pillar in all Tape A, 
Tape B, and Tape C securities on a UTP basis on a fully automated 
price-time priority allocation model. Unlike its affiliated exchanges, 
the Exchange does not propose to be a listing venue. Because the 
Exchange would trade securities on a UTP basis only, the Exchange 
proposes to operate in the same manner as its affiliated exchanges, 
NYSE Arca, NYSE American, and NYSE, with respect to securities that 
trade on a UTP basis on those exchanges. For example, the Exchange does 
not propose to operate any auctions and therefore does not propose 
rules to provide for auction functionality on the Exchange.\12\ In 
addition, because the Exchange would not be a listing venue, the 
Exchange would not provide for either ``lead'' or ``designated'' market 
makers, which are available on NYSE Arca, NYSE, and NYSE American, 
respectively, for securities listed on those exchanges. As with NYSE 
Arca and NYSE American, the Exchange proposes rules that would provide 
that ETP Holders may register as market makers in securities that trade 
on a UTP basis on the Exchange. And, as with NYSE Arca and NYSE 
American, the Exchange proposes not to require that there be a market 
maker in a particular security on the Exchange for that security to 
trade on a UTP basis on the Exchange. Similar to NYSE American and to 
how NYSE trades securities on an unlisted trading privileges basis on 
Pillar, the Exchange also does not propose to operate a retail 
liquidity program.
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    \12\ However, the Exchange would make available certain order 
types that currently exist on NYSE Arca, NYSE American, and NYSE for 
securities that trade on a UTP basis, which provide for routing 
directly to the primary listing market. In addition, similar to NYSE 
Rule 7.31(c), the Exchange would offer ``Auction-only Orders,'' 
which are orders designated to participate in an auction on the 
primary listing market. The Exchange would route all such orders to 
the primary listing market. The proposed rules governing such order 
types on the Exchange are based on the recently-approved rules 
governing trading on Pillar on the NYSE. See Securities Exchange Act 
Release No. 82945 (March 26, 2018), 83 FR 13553 (March 29, 2018) 
(SR-NYSE-2017-36).
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    While the Exchange proposes trading rules for the re-launch based 
on the rules of its affiliated exchanges, it also proposes to retain 
and renumber certain of its existing rules relating to membership and 
ETP Holder conduct. In certain cases, the Exchange proposes to replace 
an existing rule with a rule harmonized with conduct rules of other 
SROs.
    Because the Exchange is not proposing new or different rules to 
qualify as a member of the Exchange for the re-launch, the Exchange 
proposes to reinstate ETP Holder status \13\ using the existing process 
described in Interpretation and Policies .01 to current Rule 2.5, which 
sets forth an expedited process for reinstatement as an ETP Holder and 
to register Associated Persons established when the Exchange re-
launched operations in 2015.\14\ In Amendment No. 1, the Exchange 
proposes new Commentary .01 to proposed Rule 2.5, which would provide 
those ETP Holders reinstated pursuant to the expedited process 30 
calendar days in which to register their Associated Persons with the 
Exchange.\15\ Further, in Amendment No. 1, the Exchange represents that 
it understands that the rules set forth in Chapter II of the current 
rule book may not reflect certain harmonized standards for membership 
rules of other SROs. While the Exchange proposes to retain its existing 
membership rules, subject to the changes discussed below, for purposes 
of the re-launch, the Exchange represents that it commits to working 
with Commission staff to update its membership rules and will file a 
separate filing relating to its membership rules within 90 days of any 
approval of its proposed rule change.\16\
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    \13\ When the Exchange ceased operations, the Exchange 
terminated the ETP status of all ETP Holders as of the close of 
business on February 1, 2017. See Termination Filing, supra note 7.
    \14\ See Securities Exchange Act Release No. 75098 (June 3, 
2015), 80 FR 32644 (June 9, 2015) (Notice of filing and immediate 
effectiveness of proposed rule change to establish expedited process 
to reinstate ETP Holder status). Pursuant to that rule, approved ETP 
Holders that were in good standing as of the close of business on 
May 30, 2014, when the Exchange previously ceased trading 
operations, had their ETP Holder status reinstated and Associated 
Persons registered pursuant to an expedited process.
    \15\ See Amendment No. 1, supra note 6.
    \16\ Id.
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    In addition, the Exchange proposes to amend Article V, Sections 5.1 
and 5.8 of the Exchange's Bylaws by revising references to ``Appeals 
Committee'' to ``Committee for Review.'' Because the existing NYSE 
National rulebook would be replaced with both new and renumbered rules 
under the new framework, the Exchange also proposes to delete Chapters 
I-XVI of the current rulebook and the rules contained therein.
    The following is a brief overview of each rule section \17\ that 
would be included in the Exchange's rulebook, as proposed to be 
revised, and that would incorporate proposed changes to individual 
sections, as reflected in Amendment No. 1.\18\
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    \17\ Rules 4, 8, and 9 are proposed to be ``Reserved.''
    \18\ See Amendment No. 1, supra note 6.
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Rule 0--Regulation of the Exchange and ETP Holders

    Proposed Rule 0 would establish the framework for the regulation of 
the Exchange and its ETP Holders. Proposed Rule 0 acknowledges that the 
Exchange and FINRA are parties to a regulatory services agreement in 
which FINRA will perform certain functions on behalf of the Exchange, 
with the Exchange retaining ultimate legal responsibility for, and 
control of, such functions.

Rule 1--Definitions

    Proposed Rule 1 would contain definitions applicable to trading on 
the Exchange's Pillar platform.\19\ In Amendment No. 1, the Exchange 
proposes to modify Rule 1.1(m) from the initial filing to define the 
term ``UTP Exchange Traded Product'' to mean one of a list of specified 
classes of Exchange Traded Products that the Exchange intends to trade 
pursuant to unlisted trading privileges. The enumerated Exchange Traded 
Products that would be eligible to trade on the Exchange pursuant to 
unlisted trading privileges would include the following: Equity Linked 
Notes, Investment Company Units, Index-Linked Exchangeable Notes, 
Equity Gold Shares, Equity Index-Linked Securities, Commodity-Linked 
Securities, Currency-Linked Securities, Fixed-Income Index-Linked 
Securities, Futures-Linked Securities, Multifactor-Index-Linked 
Securities, Trust Certificates, Currency and Index Warrants, Portfolio 
Depository Receipts, Trust Issued Receipts, Commodity-Based Trust 
Shares, Currency Trust Shares, Commodity Index Trust Shares, Commodity 
Futures Trust Shares, Partnership Units, Paired Trust Shares, Trust 
Units, Managed Fund Shares and Managed Trust Shares.
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    \19\ The proposed definitions are based on the rules of NYSE 
Arca, NYSE American, and NSX.
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Rule 2--Trading Permits

    Proposed Rule 2 would set forth the membership rules for the 
Exchange, including the eligibility requirements,\20\

[[Page 23970]]

continuing education requirements,\21\ and application requirements 
\22\ to become an ETP Holder. It also would set forth rules relating to 
revocation,\23\ voluntary termination,\24\ and transfer and sale \25\ 
of an ETP.\26\ Proposed Rule 2 would provide jurisdiction \27\ to the 
Exchange to discipline ETP Holders \28\ and Persons Associated with ETP 
Holders for violations of, among other things, the Act and the rules 
thereunder.\29\ It also would provide the Exchange the ability to 
prescribe reasonable dues, assessments, and charges \30\ and would 
include rules concerning the mandatory testing of the Exchange's 
business continuity and disaster recovery plans.\31\ In Amendment No. 
1, the Exchange represents that there are no categories of persons on 
the Exchange that would fall outside of the membership categories and 
requirements set forth in proposed Rule 2.\32\
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    \20\ See proposed Rules 2.2, 2.3, and 2.4.
    \21\ See proposed Rule 2.2.
    \22\ See proposed Rule 2.5.
    \23\ See proposed Rule 2.6.
    \24\ See proposed Rule 2.7.
    \25\ See proposed Rule 2.8.
    \26\ See proposed Rule 1.1(h) (defining ``ETP'').
    \27\ See proposed Rule 2.2(a).
    \28\ See proposed Rule 1.1(i) (defining ``ETP Holder'').
    \29\ Rules 2.10, 2.11, and 2.12 are marked ``Reserved.''
    \30\ See proposed Rule 2.9.
    \31\ See proposed Rule 2.13.
    \32\ See Amendment No. 1, supra note 6.
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    The proposed rules are based on the Exchange's existing membership 
rules with the following substantive differences: (1) The Exchange 
proposes to delete Rule 2.10, as proposed Rule 3.9 would cover the 
relationship between ETP Holders and Exchange affiliates; (2) 
Archipelago Securities LLC would replace NSX Securities LLC as the 
routing broker for the Exchange, so the Exchange proposes to delete 
current Rules 2.11 and 2.12,\33\ and instead adopt proposed Rule 
7.45,\34\ which is based on NYSE Arca Rule 7.45-E, to cover the 
Exchange's routing function.
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    \33\ By its terms, NSX Rule 2.12 expired on September 30, 2008. 
See current Rule 2.12.
    \34\ See proposed Rule 7.45.
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    NYSE National also proposes an expedited process for reinstating 
ETP Holders. The ETP Holder would be able to submit a short form 
application to reinstate its status as an ETP Holder and to register 
Persons Associated with the ETP Holder if the ETP Holder was in good 
standing at the close of business on February 1, 2017, is a member of 
another SRO, and each proposed Person Associated with such ETP Holder 
holds an active and recognized securities industry registration and 
meets the requirements of proposed Rule 2.2(b).\35\
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    \35\ See Commentary .01 to proposed Rule 2.5.
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    In Amendment No. 1, the Exchange proposes a grace period of 30 
calendar days from the effective date of proposed Rule 2.5 for ETP 
Holders that are eligible for the expedited process for reinstatement 
to register Persons Associated with the ETP Holder with the 
Exchange.\36\ According to the Exchange, to be eligible for the 
expedited process and the temporary grace period, the ETP Holder 
already must have Persons Associated with the ETP Holder registered in 
the FINRA Central Registration Depository System (``CRD'').\37\ ETP 
Holders that take advantage of the proposed grace period would be able 
to begin trading on the Exchange before they complete registering their 
Persons Associated with the Exchange.
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    \36\ See id.; see also Amendment No. 1, supra note 6.
    \37\ See Commentary .01 to proposed Rule 2.5; see also Amendment 
No. 1, supra note 6.
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    As noted above, the Exchange proposes to retain its existing rules 
relating to membership, which may not reflect certain harmonized 
standards for membership rules of other SROs. However, in Amendment No. 
1, the Exchange commits to working with Commission staff to update its 
membership rules and to file a separate filing relating to its 
membership rules within 90 days of any approval of the Exchange's 
proposed rule change.\38\
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    \38\ See Amendment No. 1, supra note 6.
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    Proposed Rule 2.3, as a prerequisite to membership, would require 
an ETP Holder to be a member of a registered national securities 
association or of a registered national securities exchange. As a 
member of two or more SROs, an ETP Holder would be required to comply 
with whichever rules impose a higher standard.

Rule 3--Organization and Administration

    Proposed Rule 3 would include rules relating to: (1) The potential 
actions the Exchange may take for ETP Holder's failure to pay any 
assessments, dues or other changes to the Exchange within 45 days after 
they become payable; (2) a prohibition on an ETP Holder being 
affiliated with NYSE Group, Inc.; (3) prompt written notification to 
the Exchange whenever an ETP Holder is expelled or suspended from any 
SRO, encounters financial difficulty or operating inadequacies, fails 
to perform contracts or becomes insolvent; and (4) requirements for 
fingerprint-based background checks of Exchange employees and others. 
In Amendment No. 1, the Exchange proposes to add a rule relating to 
additional requirements to be undertaken by the Exchange if securities 
issued by ICE or its affiliates are traded on the Exchange.\39\
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    \39\ Id.
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Rule 5--Trading on an Unlisted Trading Privileges Basis

    Proposed Rule 5 would provide for rules to trade all Tape A, Tape 
B, and Tape C securities, including Exchange Traded Products (also 
referred to herein as ``ETPs''), on a UTP basis.\40\ In Amendment No. 
1, the Exchange states that it does not believe that it is necessary 
for an exchange that trades securities only on a UTP basis to have 
listing rules for ETPs.\41\ The Exchange further states that, as a non-
listing venue, the Exchange would not have a relationship with any ETP 
issuers; thus, to the extent ETP listing rules include initial and 
continued listing standards, the Exchange would not be in a position to 
evaluate issuer compliance with such rules.\42\ Similarly, the Exchange 
states its belief that it should not be necessary for a non-listing 
venue to file with the Commission a Form 19b-4(e) if it begins trading 
an ETP on a UTP basis, because Rule 19b-4(e)(1) under the Act refers to 
the ``listing and trading'' of a ``new derivative securities product.'' 
\43\ The Exchange therefore believes that the requirements of that rule 
refer to when an exchange lists and trades an ETP, and not when an 
exchange seeks only to trade such product on a UTP basis pursuant to 
Rule 12f-2 under the Act.\44\ Accordingly, the proposal, as amended by 
Amendment No. 1, contains only those rules that would support the 
trading on a UTP basis of all NMS Stocks, and the trading on a UTP 
basis for UTP Exchange Trading Products, which are set forth in 
proposed Rule 5.1. Further, the Exchange does not propose rules other 
than Rule 5.1 or any of the provisions it previously had

[[Page 23971]]

proposed in Rule 8, which would be designated as Reserved.\45\
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    \40\ In the Notice, the Exchange proposed both Rules 5 and 8 to 
establish listing rules for Exchange Traded Products that are based 
on NYSE American Rules 5E and 8E and NYSE Rules 5P and 8P. See 
Notice, supra note 3. Because the Exchange would not be a listing 
venue, in Amendment No. 1, the Exchange proposes to modify its 
proposal to eliminate the listing rules contained in Rules 5 and 8. 
See Amendment No. 1, supra note 6. In particular, in Amendment No. 
1, the Exchange proposes to delete proposed Rule 8 and modify 
proposed Rule 5 to include only those rules that would support the 
trading on a UTP basis of all NMS Stocks, and the trading on a UTP 
basis of UTP Exchange Traded Products.
    \41\ See Amendment No. 1, supra note 6.
    \42\ Id.
    \43\ 17 CFR 240.19b-4(e). See Amendment No. 1, supra note 6.
    \44\ 17 CFR 240.12f-2. See Amendment No. 1, supra note 6.
    \45\ See note 41, supra. In Amendment No. 1, the Exchange states 
its belief that its proposed rule text in Rule 5, together with the 
proposed definition of UTP Exchange Traded Products in proposed Rule 
1.1, which would enumerate the classes of Exchange Traded Products 
that the Exchange proposes to trade on a UTP basis, would satisfy 
the requirements of Rule 12f-5 under the Act, 17 CFR 240.12f-5, for 
a national securities exchange to have a rule or rules providing for 
transactions in a class or type of security to which the Exchange 
extends unlisted trading privileges. See Amendment No. 1, supra note 
6.
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    Proposed Rule 5.1 would establish the Exchange's authority to trade 
securities on a UTP basis. Proposed Rule 5.1(a)(1) would provide that 
the Exchange may extend UTP to any security that is an NMS Stock that 
is listed on another national securities exchange or with respect to 
which UTP may otherwise be extended in accordance with Section 12(f) of 
the Exchange Act.\46\
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    \46\ 15 U.S.C. 78l(f). See also 17 CFR 242.600. The term ``NMS 
Stock'' is defined in proposed Rule 1.1(u).
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    Proposed Rule 5.1(a)(1) would further provide that any such 
security would be subject to all Exchange rules applicable to trading 
on the Exchange, unless otherwise noted. The Exchange notes that this 
proposed rule text is based in part on NYSE Arca Rule 5.1-E(a) and EDGA 
Rule 14.1, but with a proposed difference to refer generally to 
Exchange rules, and not limit such reference to Exchange trading rules. 
This would make clear that all Exchange rules would be applicable to 
the trading of securities on a UTP basis on the Exchange, including 
business conduct and sales practice rules set forth in proposed Rule 
11.
    Proposed Rule 5.1(a)(2) would establish additional rules for 
trading of UTP Exchange Traded Products, which are defined in Rule 1.1 
(described above).\47\ Specifically, the requirements in subparagraphs 
(A)-(E) of proposed Rule 5.1(a)(2) would apply to UTP Exchange Traded 
Products traded on the Exchange. Because the Exchange is not proposing 
that the Exchange would file with the Commission a Form 19b-4(e) with 
respect to each UTP Exchange Traded Product within five business days 
after commencement of trading, the Exchange does not propose rule text 
based on NYSE American Rule 5.1E(a)(2)(A) or NYSE Rule 5.1(a)(2)(A).
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    \47\ See Proposed Rule 1.1(m).
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    Proposed Rule 5.1(a)(2)(A) would provide that the Exchange would 
distribute an information circular prior to the commencement of trading 
in an Exchange Traded Product that generally would include the same 
information as the information circular provided by the listing 
exchange, including (a) the special risks of trading the Exchange 
Traded Product, (b) the Exchange's rules that will apply to the 
Exchange Traded Product and (c) information about the dissemination of 
value of the underlying assets or indices. Under proposed Rule 
5.1(a)(2)(C), the Exchange would halt trading in a UTP Exchange Traded 
Product as provided for in proposed Rule 7.18.
    Proposed Rule 5.1(a)(2)(E) would provide that the Exchange's 
surveillance procedures for Exchange Traded Products traded on the 
Exchange pursuant to UTP would be similar to the procedures used for 
equity securities traded on the Exchange and would incorporate and rely 
upon existing Exchange surveillance systems.
    Proposed Rules 5.1(a)(2)(B) and (D) would establish the following 
requirements for ETP Holders that have customers that trade UTP 
Exchange Traded Products:
     Prospectus Delivery Requirements. Proposed Rule 
5.1(a)(2)(B)(i) would remind ETP Holders that they are subject to the 
prospectus delivery requirements under the Securities Act of 1933, as 
amended (the ``Securities Act''), unless the Exchange Traded Product is 
the subject of an order by the Commission exempting the product from 
certain prospectus delivery requirements under Section 24(d) of the 
Investment Company Act of 1940, as amended (the ``1940 Act''), and the 
product is not otherwise subject to prospectus delivery requirements 
under the Securities Act. ETP Holders would also be required to provide 
a prospectus to a customer requesting a prospectus.\48\
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    \48\ Proposed Rule 5.1(a)(2)(B)(iii).
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     Written Description of Terms and Conditions. Proposed Rule 
5.1(a)(2)(B)(ii) would require ETP Holders to provide a written 
description of the terms and characteristics of UTP Exchange Traded 
Products to purchasers of such securities, not later than the time of 
confirmation of the first transaction, and with any sales materials 
relating to UTP Exchange Traded Products.
     Market Maker Restrictions. Proposed Rule 5.1(a)(2)(D) 
would establish certain restrictions for any ETP Holder registered as a 
market maker in an UTP Exchange Traded Product that derives its value 
from one or more currencies, commodities, or derivatives based on one 
or more currencies or commodities, or is based on a basket or index 
composed of currencies or commodities (collectively, ``Reference 
Assets''). Specifically, such an ETP Holder must file with the Exchange 
and keep current a list identifying all accounts for trading the 
underlying physical asset or commodity, related futures or options on 
futures, or any other related derivatives (collectively with Reference 
Assets, ``Related Instruments''), which the ETP Holder acting as 
registered market maker may have or over which it may exercise 
investment discretion.\49\ If an account in which an ETP Holder acting 
as a registered market maker, directly or indirectly, controls trading 
activities, or has a direct interest in the profits or losses thereof, 
has not been reported to the Exchange as required by this Rule, an ETP 
Holder acting as registered market maker in the UTP Exchange Traded 
Product would not be permitted to trade in the underlying physical 
asset or commodity, related futures or options on futures, or any other 
related derivatives. Finally, a market maker could not use any material 
nonpublic information in connection with trading a Related Instrument. 
According to the Exchange, proposed Rule 5.1(a)(2)(D) is based in part 
on BZX Rule 14.11(j)(5).\50\
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    \49\ The proposed rule would also, more specifically, require a 
market maker to file with the Exchange and keep current a list 
identifying any accounts (``Related Instrument Trading Accounts'') 
for which related instruments are traded (1) in which the market 
maker holds an interest, (2) over which it has investment 
discretion, or (3) in which it shares in the profits and/or losses. 
In addition, a market maker would not be permitted to have an 
interest in, exercise investment discretion over, or share in the 
profits and/or losses of a Related Instrument Trading Account that 
has not been reported to the Exchange as required by the proposed 
rule.
    \50\ See Amendment No. 1, supra note 6.
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Rule 6--Consolidated Audit Trail and Order Audit Trail System

    Proposed Rule 6 would incorporate the Exchange's existing rules 
relating to the Consolidated Audit Trail National Market System Plan 
(``CAT NMS Plan'') without any substantive changes. Proposed Rule 6 
would include 12 rules covering the following areas: (1) Definitions; 
(2) Clock Synchronization; (3) Industry Member Data Reporting; (4) 
Customer Information Reporting; (5) Industry Member Information 
Reporting; (6) Time Stamps; (7) Clock Synchronization Rule Violation; 
(8) Connectivity and Data Transmission; (9) Development and Testing; 
(10) Recordkeeping; (11) Timely, Accurate and Complete Data; and (12) 
Compliance Dates. Proposed Rule 6.6900 would establish procedures for 
resolving potential disputes related to CAT Fees charged to Industry 
Members.
    Proposed Rule 6.7400 would contain a series of rules that implement 
Order Audit Trail rules relating to definitions; applicability; 
synchronization of ETP Holder business clocks; recording of

[[Page 23972]]

order information; order data transmission requirements; violation of 
order audit trail system rules; and exemption to the order recording 
and data transmission requirements.\51\
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    \51\ The Exchange notes that at the time that it ceased 
operations, it did not require its ETP Holders to maintain order 
information pursuant to an order tracking system and, therefore, did 
not have the proposed OATS rules or similar rules in its rulebook. 
According to the Exchange, requiring ETP Holders to comply with the 
proposed OATS requirements in connection with its re-launch of 
trading would not impose an undue burden on such ETP Holders or 
their associated persons because nearly all ETP Holders are expected 
to be members of another SRO that requires compliance with OATS 
requirements and because order information pursuant to the OATS 
rules need only be submitted upon request.
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Rule 7--Equities Trading

    Rule 7 establishes the rules for trading on the Exchange. As noted 
above, the Exchange proposes to re-launch on the same trading platform 
as the cash equities trading platform of NYSE Arca. Thus, the 
provisions of proposed Rule 7 are, in large part, based on equivalent 
rules of NYSE Arca for this platform. In some instances, however, the 
proposed trading rules reflect a choice to adopt the version of a 
particular provision used by NYSE American and NYSE.\52\
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    \52\ The Exchange has identified which of its proposed rules are 
based on the rules of NYSE American, as opposed to those based on 
the rules of NYSE Arca. See Amendment No. 1, supra note 6. The 
Exchange also has identified certain trading rules of NYSE Arca and 
NYSE American that it is not proposing to adopt. For example, the 
Exchange states that, because it would not be a listing venue, it is 
not proposing to adopt rules relating to lead or designated market 
makers. The Exchange also states that it would not operate auctions, 
and therefore is not proposing rules pertaining to auction 
procedures.
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    Proposed Rule 7 is divided into six sections. Section 1, ``General 
Provisions,'' \53\ includes provisions relating to hours of business on 
the Exchange and holidays when it will not be open; responsibilities of 
ETP Holders and associated persons with respect to their roles in 
transactions and their charging of commissions; ex-dividend and ex-
rights dates; units of trading; trading differentials; anonymity of 
bids and offers; settlement terms; binding prices; clearly erroneous 
executions; Exchange compliance with the Limit Up-Limit Down National 
Market System Plan; trading halts and suspensions; clearance and 
settlement; stock option transactions of market makers; short sales; 
and firmness of quotes.
---------------------------------------------------------------------------

    \53\ Section 1 comprises proposed Rules 7.1 through 7.18.
---------------------------------------------------------------------------

    Section 2 of proposed Rule 7, ``Market Makers,'' \54\ includes 
provisions relating to registration of Market Makers. The section also 
includes proposed rules pertaining to access to quotations, private 
linkages, and compliance with Regulation NMS under the Act.
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    \54\ Section 2 comprises proposed Rules 7.19 through 7.28.
---------------------------------------------------------------------------

    Section 3 of proposed Rule 7, ``Exchange Trading,'' \55\ after 
setting forth provisions regarding authorized access to the Exchange, 
establishes rules relating to the kinds of order types available on the 
Exchange and how they are designed to trade. Section 3 of proposed Rule 
7 also would set forth the rules of the Exchange relating to order 
entry; the codes by which the ETP Holder submitting an order must 
indicate whether it is acting in a principal, agency, or riskless 
principal capacity; and the three trading sessions for which the 
Exchange will be open (early, core, and late), including the securities 
that may be traded in each and the disclosures that ETP Holders must 
make to non-ETP Holders that send orders to them for trading in the 
early or late session regarding, among other things, the risks that may 
apply to such orders.\56\
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    \55\ Section 3 comprises proposed Rules 7.29 through 7.41 (with 
Rules 7.42 through 7.44 reserved for future use).
    \56\ See proposed Rules 7.32 (Order Entry); 7.33 (Capacity 
Codes); and 7.34 (Trading Sessions).
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    Further, Section 3 of proposed Rule 7 would establish rules 
relating to the display and non-display of various order types, the 
ranking of orders in the Exchange book with respect to execution 
priority, and the role of price and time in determining such 
priority.\57\ The section also includes proposed rules that pertain to 
routing of orders to away markets; the prohibition of trading through 
protected quotations and exceptions thereto; and compliance with other 
aspects of Regulation NMS under the Act.\58\ It also lists the data 
feeds that the Exchange proposes to use for the handling, execution, 
and routing of orders, as well as regulatory compliance.\59\ Additional 
proposed rules in Section 3 relate to odd lot and mixed lot trading on 
the Exchange; trade execution and reporting; and clearance and 
settlement of trades.\60\
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    \57\ See proposed Rules 7.36 (Order Ranking and Display).
    \58\ See proposed Rules 7.37 (Order Execution and Routing).
    \59\ Id.
    \60\ See proposed Rules 7.38, 7.40, and 7.41, respectively. 
(Rule 7.39 is reserved for future use, as are Rules 7.42, 7.43, and 
7.44.)
---------------------------------------------------------------------------

    Section 4 of proposed Rule 7, ``Operation of Routing Broker,'' 
would define ``routing broker'' as ``the broker-dealer affiliate of the 
Exchange and/or any other non-affiliate third-party broker-dealer that 
acts as a facility of the Exchange for routing orders entered into 
Exchange systems to other market centers for execution whenever such 
routing is required by Exchange rules or the federal securities laws,'' 
and would set forth rules regarding the outbound routing function.\61\
---------------------------------------------------------------------------

    \61\ See proposed Rule 7.45, which comprises the whole of 
Section 4.
---------------------------------------------------------------------------

    Section 4 also would provide that, for so long as the Exchange is 
affiliated with NYSE American, NYSE Arca, and NYSE, and Archipelago 
Securities LLC (``Arca Securities) in its capacity as a facility of 
those exchanges is utilized by those affiliated exchanges for the 
routing of any approved types of orders from those exchanges to NYSE 
National, Arca Securities may provide inbound routing services to NYSE 
National from those affiliated exchanges.\62\ This provision is 
contingent on the Exchange maintaining an agreement pursuant to Rule 
17d-2 under the Act \63\ with a non-affiliated SRO and establishing 
controls and procedures to prevent Arca Securities from benefitting 
from or acting on non-public information obtained as a result of the 
affiliation.\64\
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    \62\ Proposed Rule 3.9 would provide that, unless approved by 
the Commission, neither NYSE Group, Inc., nor any of its affiliates 
(as such term is defined in Rule 12b-2 under the Act) shall hold, 
directly or indirectly, an ownership interest in any ETP Holder. 
Arca Securities would be covered by this provision.
    \63\ 17 CFR 240.17d-2.
    \64\ See id. Proposed Rule 7.45 also includes provisions 
regarding cancellation of orders and error accounts in connection 
with the arrangement of the Exchange with Arca Securities.
---------------------------------------------------------------------------

    Section 5 of proposed Rule 7, ``Plan to Implement a Tick Size Pilot 
Program'' \65\ would establish requirements relating to the Tick Size 
Pilot Program adopted as a joint industry plan under Regulation NMS 
under the Act, and is based on the similar rule of NYSE Arca.\66\
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    \65\ Section 5 is comprised solely of proposed Rule 7.46.
    \66\ See NYSE Arca 7.46-E.
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    Section 6 of proposed Rule 7, ``Contracts in Securities,'' \67\ 
would provide that contracts in municipal securities be compared, 
settled, and cleared in accordance with regulations of the Municipal 
Securities Rulemaking Board; set forth requirements relating to ETP 
contracts of an ETP Holder with another ETP Holder; and establish 
requirements relating to the book entry settlement of transactions.\68\
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    \67\ Section 6 would include proposed Rules 7.60 through 7.62.
    \68\ See proposed Rules 7.61, 7.62, and 7.63, respectively.
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Rule 10--Disciplinary Proceedings, Other Hearings, and Appeals

    Proposed Rule 10 consists of proposed Rule 10.8000, Investigations 
and Sanctions, and proposed Rule 10.9000, Code of Procedure, (``Rule

[[Page 23973]]

10.8000 and Rule 10.9000 Series''), which are based on NYSE American 
Rule 8000 and Rule 9000 Series of the Office Rules, with certain 
modifications.\69\ Together, the rules would be the Exchange's 
Disciplinary rules. Other than the differences specified in Amendment 
No. 1, the proposed Rule 10.8000 and 10.9000 Series are based on the 
individual counterpart NYSE American Rule 8000 and 9000 Series.\70\ 
Given the different membership structures, lack of a physical trading 
floor,\71\ and differences in terminology throughout the rules, the 
proposed Rule 10.8000 and Rule 10.9000 Series would differ from the 
NYSE American rules as follows:
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    \69\ NYSE American Rule 8000 and Rule 9000 Series are 
substantially the same as the Rule 8000 and Rule 9000 Series of NYSE 
and of FINRA. See Securities Exchange Act Release No. 77241 
(February 26, 2016), 81 FR 11311 (March 3, 2016) (SR-NYSEMKT-2016-
30). See also Securities Exchange Act Release No. 78959 (September 
28, 2016), 81 FR 68481 (October 4, 2016) (SR-NYSEMKT-2016-71). The 
NYSE American disciplinary rules were implemented on April 15, 2016. 
See NYSE American Information Memorandum 16-02 (March 14, 2016).
    \70\ See Amendment No. 1, supra note 6.
    \71\ Because the Exchange would not have a floor, it would not 
have Floor-Based Panelists. See NYSE American Rules 9120(q), 
9212(a)(2)(B), 9221(a)(3), 9231(b)(2) and (c)(2), and 9232(c).
---------------------------------------------------------------------------

     The term ``ETP Holder'' is used rather than ``member and 
member organization'' or ``member organization or ATP Holder'';
     the terms ``Associated Person'' and ``Person Associated 
with an ETP Holder,'' which are defined terms on the Exchange are used 
rather than the term ``covered person'';
     not adopt NYSE American Rules 8001 and 9001, which 
describe the effective date of the NYSE American rules;
     not retain the text of NYSE American's legacy minor rules;
     add the following sentence, from NYSE Arca Rule 10.2(a), 
to Rule 10.8210(a): ``No member of the Board of Directors or non-
Regulatory Staff may interfere with or attempt to influence the process 
or resolution of any pending investigation or disciplinary 
proceeding'';
     exclude the definition of the following terms in Rule 
10.9120: ``Board of Directors,'' ``covered person,'' ``Exchange,'' and 
``Floor-Based Panelist,'' because they are defined elsewhere in the 
rules or are not applicable to the Exchange, and would mark those 
paragraphs as ``Reserved'';
     add the following sentence to proposed Rule 10.9120(v)'s 
definition of ``Panelist'': ``Hearing Panel members will be drawn from 
the Exchange Business Conduct Committee (`BCC')'';
     merge the current Rule 8.15 and NYSE American Rule 9217 to 
create proposed Rule 10.9217, which sets forth the Exchange's Minor 
Rule Violation Plan; \72\
---------------------------------------------------------------------------

    \72\ See Amendment No. 1, supra note 6. The Minor Rule Violation 
Plan provides an alternative method for the Exchange to address a 
violation of its rules. The Exchange is always free to pursue formal 
disciplinary action against a member that violates its rules.
---------------------------------------------------------------------------

     replace the phrase ``an ETP Holder that is an affiliate'' 
from NYSE American Rule 9268(e)(2) with ``an affiliate of the Exchange 
as such term is defined in Rule 12b-2 under the Exchange Act,'' in 
proposed Rules 10.9268 and 10.9310(a)(1); and
     propose non-substantive grammatical differences in 
specified rules, as needed, and update internal cross references to the 
appropriate Exchange rule.

Rule 11--Business Conduct

    The Exchange proposes to maintain certain current NYSE National 
rules regarding rules of fair practice, books and records, 
supervisions, extensions of credit, and trading practices and relocate 
these rules to proposed Rule 11. The Exchange also proposes to adopt 
conduct rules that are based on FINRA rules and to incorporate certain 
FINRA rules by reference.\73\
---------------------------------------------------------------------------

    \73\ See Amendment No. 1, supra note 6. In Amendment No. 1, the 
Exchange proposes to revise or relocate certain rules in Rule 11 
that were included in the original proposed rule change.
---------------------------------------------------------------------------

    Section 1 of proposed Rule 11 would be designated as Rules of Fair 
Practice and the preamble thereto would state that ``References to the 
term ETP Holder in Section 1 to Rule 11 also mean Associated Persons of 
ETP Holders.'' The rules in Section 1 to proposed Rule 11 relate to 
Business Conduct of ETP Holders,\74\ Violations Prohibited,\75\ Use of 
Fraudulent Devices,\76\ False Statements,\77\ Advertising 
Practices,\78\ Fair Dealing with Customers,\79\ The Prompt Receipt and 
Delivery of Securities,\80\ Charges for Services Performed,\81\ Use of 
Information,\82\ Publication of Transactions and Quotations,\83\ Offers 
at Stated Prices,\84\ Payment Designed to Influence Market Prices, 
Other than Paid Advertising,\85\ Disclosure of Control,\86\ 
Discretionary Accounts,\87\ Customer's Securities or Funds,\88\ 
Prohibition Against Guarantees,\89\ Sharing in Accounts; Extent 
Permissible,\90\ and Telephone Solicitation.\91\
---------------------------------------------------------------------------

    \74\ Proposed Rule 11.3.1.
    \75\ Proposed Rule 11.3.2.
    \76\ Proposed Rule 11.3.3.
    \77\ Proposed Rule 11.3.4.
    \78\ Proposed Rule 11.3.5.
    \79\ Proposed Rule 11.3.6.
    \80\ Proposed Rule 11.3.8.
    \81\ Proposed Rule 11.3.9.
    \82\ Proposed Rule 11.3.10.
    \83\ Proposed Rule 11.3.11.
    \84\ Proposed Rule 11.13.12.
    \85\ Proposed Rule 11.13.13.
    \86\ Proposed Rule 11.13.15.
    \87\ Proposed Rule 11.13.16.
    \88\ Proposed Rule 11.13.17.
    \89\ Proposed Rule 11.13.18.
    \90\ Proposed Rule 11.13.19.
    \91\ Proposed Rule 11.13.21.
---------------------------------------------------------------------------

    Section 2 of proposed Rule 11 would be designated as Books and 
Records and the rules thereunder would relate to Requirements,\92\ 
Furnishing of Records,\93\ Record of Written Complaints,\94\ and 
Disclosure of Financial Condition.\95\
---------------------------------------------------------------------------

    \92\ Proposed Rule 11.4.1.
    \93\ Proposed Rule 11.4.2.
    \94\ Proposed Rule 11.4.3.
    \95\ Proposed Rule 11.4.4.
---------------------------------------------------------------------------

    Section 3 of proposed Rule 11 would be designated as Supervision 
and the rules thereunder would relate to Written Procedures,\96\ 
Responsibility of ETP Holders,\97\ Records,\98\ Review of Activities 
and Annual Inspection,\99\ Prevention of the Misuse of Material, 
Nonpublic Information,\100\ and Annual Certification of Compliance and 
Supervisory Processes.\101\
---------------------------------------------------------------------------

    \96\ Proposed Rule 11.5.1.
    \97\ Proposed Rule 11.5.2.
    \98\ Proposed Rule 11.5.3.
    \99\ Proposed Rule 11.5.4.
    \100\ Proposed Rule 11.5.5.
    \101\ Proposed Rule 11.5.7.
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    Section 4 of proposed Rule 11 would be designated as Extensions of 
Credit and the rules thereunder would relate to Extensions of Credit--
Prohibitions and Exemptions \102\ and Day Trading Margin.\103\
---------------------------------------------------------------------------

    \102\ Proposed Rule 11.6.1.
    \103\ Proposed Rule 11.6.2.
---------------------------------------------------------------------------

    Section 5 of proposed Rule 11 would be designated as Trading 
Practice Rules and the preamble thereto would state that ``References 
to the term ETP Holder in Section 5 to Rule 11 also mean Associated 
Persons of ETP Holders.'' The rules in Section 5 of proposed Rule 11 
relate to Market Manipulation,\104\ Fictitious Transactions,\105\ 
Excessive Sales by an ETP Holder,\106\ Manipulative Transactions,\107\ 
Dissemination of False Information,\108\ Joint Activity,\109\ 
Influencing the Consolidated Tape,\110\ Options,\111\ Best

[[Page 23974]]

Execution,\112\ and Prearranged Trades.\113\
---------------------------------------------------------------------------

    \104\ Proposed Rule 11.12.1.
    \105\ Proposed Rule 11.12.2.
    \106\ Proposed Rule 11.12.3.
    \107\ Proposed Rule 11.12.4.
    \108\ Proposed Rule 11.12.5.
    \109\ Proposed Rule 11.12.7.
    \110\ Proposed Rule 11.12.8.
    \111\ Proposed Rule 11.12.9.
    \112\ Proposed Rule 11.12.10.
    \113\ Proposed Rule 11.12.11.
---------------------------------------------------------------------------

    The Exchange proposes to adopt new conduct rules in Section 6 of 
proposed Rule 11 (Harmonized Conduct Rules). The rules in Section 6 of 
proposed Rule 11 relate to Suitability,\114\ Communications with the 
Public,\115\ Customer Confirmations,\116\ Anti-Money Laundering 
Compliance Program,\117\ Disruptive Quoting and Trading Activity 
Prohibited,\118\ and Prohibition Against Trading Ahead of Customer 
Orders.\119\ Other than proposed Rule 11.5220, relating to Disruptive 
Quoting and Trading Activity Prohibited, the Section 6 rules would 
incorporate by reference a specific FINRA rule or, in the case of 
proposed Rule 11.5320, would set forth the complete rule and also 
incorporate by reference the relevant FINRA rule.\120\
---------------------------------------------------------------------------

    \114\ Proposed Rule 11.2111.
    \115\ Proposed Rule 11.2210.
    \116\ Proposed Rule 11.2232.
    \117\ Proposed Rule 11.3310.
    \118\ Proposed Rule 11.5220.
    \119\ Proposed Rule 11.5320.
    \120\ In its proposed rule change, as amended, the Exchange 
states that it proposes to file a request that the Commission 
exercise its authority under Section 36 of the Act and Rule 0-12 
thereunder, and grant the Exchange an exemption from the rule filing 
requirements of Section 19(b) of the Act for changes to Exchange 
rules that will be effected by a cross-reference to a FINRA rule, 
including FINRA rules designated as NASD rules.
---------------------------------------------------------------------------

Rule 12--Arbitration

    The Exchange proposes new Rule 12 (Arbitration) to replace rules 
set forth in Chapter IX relating to arbitration. Proposed Rule 12 would 
incorporate by reference the Rule 12000 Series and the Rules 13000 
Series of the FINRA Manual (Code of Arbitration Procedures for Customer 
Disputes and Code of Arbitration for Industry Disputes) (the ``FINRA 
Code of Arbitration'').\121\ Proposed Rule 12 would govern jurisdiction 
and the circumstances under which disputes may be arbitrated; \122\ 
pre-dispute arbitration agreements between ETP Holders and their 
customers, which would incorporate by reference FINRA Rule 2268; \123\ 
arbitrators' referrals to the Exchange; \124\ any failures to honor an 
arbitrator's award; \125\ and the effect of arbitration on the 
Exchange's rights as an SRO.\126\
---------------------------------------------------------------------------

    \121\ See Amendment No. 1, supra note 6.
    \122\ Proposed Rule 12(b).
    \123\ Proposed Rule 12(c).
    \124\ Proposed Rule 12(d).
    \125\ Proposed Rule 12(e).
    \126\ Proposed Rule 12(f).
---------------------------------------------------------------------------

Rule 13--Liability of Directors and Exchange

    The Exchange proposes new Rule 13, which would set forth the rules 
governing the liability of its Directors and the Exchange. Proposed 
Rules 13.1 and 13.2 would set forth limitations on liability of the 
Directors and the Exchange, respectively.\127\ Proposed Rule 13.3 would 
limit legal proceedings against any Directors, officer, employee, agent 
or other official of the Exchange or any subsidiary of the 
Exchange.\128\ Proposed Rule 13.4 relates to responsibility for the 
Exchange's costs in defending a legal proceeding brought against the 
Exchange.\129\
---------------------------------------------------------------------------

    \127\ Proposed Rule 13.1 and 13.2.
    \128\ Proposed Rule 13.3.
    \129\ Proposed Rule 13.4.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to a national securities exchange.\130\ In particular, the Commission 
finds that the amended proposed rule change is consistent with Section 
6(b)(5) of the Act,\131\ which requires, among other things, that the 
rules of a national securities exchange be designed to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest, and are not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers. The Commission further finds that the amended 
proposed rule change is consistent with Section 6(b)(7) of the 
Act,\132\ which requires, among other things, that the rules of a 
national securities exchange provide a fair procedure for the 
disciplining of members and persons associated with members.
---------------------------------------------------------------------------

    \130\ In approving the proposed rule changes, the Commission has 
considered their impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \131\ 15 U.S.C. 78f(b)(5).
    \132\ 15 U.S.C. 78f(b)(7).
---------------------------------------------------------------------------

1. Re-Launch of the Exchange on the Pillar Trading Platform
    The Exchange's proposal would re-launch the Exchange on the Pillar 
platform as a fully-automated cash equities trading market with a 
price-time priority allocation model. As discussed at length in 
Amendment No. 1, the re-launched Exchange would neither list securities 
nor operate an auction and instead, would trade securities solely on a 
UTP basis.
    The Commission notes that the Exchange's amended proposal, in 
addition to retaining certain of the Exchange's existing rules, would 
establish new rules that are based on, and are substantially similar 
to, the rules of its affiliated exchanges and FINRA, which were filed 
and approved by the Commission (or which became immediately effective) 
pursuant to Section 19(b) of the Act.\133\ Several of its affiliated 
exchanges currently operate using the Pillar trading platform, and a 
number of other national securities exchanges operate fully electronic 
markets. Accordingly, the Commission finds that the amended proposal 
raises no novel regulatory issues, that it is reasonably designed to 
protect investors and the public interest, and that it is consistent 
with the requirements of the Act. The Commission highlights below its 
views on certain of the more significant aspects of the Exchange's 
proposal.
---------------------------------------------------------------------------

    \133\ See 78 U.S.C 78s(b).
---------------------------------------------------------------------------

Rule 2--Trading Permits

    As noted above, the Exchange proposes to retain its existing 
membership rules,\134\ which may not reflect certain harmonized 
standards in the membership rules of other SROs. The Commission notes 
that the Exchange commits to working with Commission staff to update 
its membership rules and to file a separate filing relating to its 
membership rules within 90 days of any approval of the Exchange's 
proposed rule change.\135\ Also, an ETP Holder, as a prerequisite to 
membership, would be required to be a member of a registered national 
securities association or of a registered national securities 
exchange.\136\ As a member of two or more SROs, an ETP Holder would be 
required to comply with whichever rules impose a higher standard.
---------------------------------------------------------------------------

    \134\ The Commission notes the Exchange represents that there 
are no categories of persons on the Exchange that would fall outside 
of the membership categories and requirements set forth in proposed 
Rule 2. See supra note 31.
    \135\ See supra note 37.
    \136\ See proposed Rule 2.3.
---------------------------------------------------------------------------

    In Amendment No. 1, the Exchange proposes a grace period of 30 
calendar days for ETP Holders eligible for the expedited reinstatement 
process \137\ to register Persons Associated with the ETP Holder with 
the Exchange. ETP Holders who take advantage of the grace period would 
be able to begin trading on the Exchange before completing the

[[Page 23975]]

registration of Persons Associated with the Exchange. The Commission 
notes that, based on the requirements of the expedited process for 
reinstatement, such ETP Holders would be required to already have 
Persons Associated with the ETP Holder registered on CRD. The 
Commission believes that the grace period would remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system by allowing ETP Holders to begin trading on the Exchange 
immediately, without completing the manual process of entering into CRD 
an additional registration for their Associated Persons, as of the 
Exchange's re-launch of trading.
---------------------------------------------------------------------------

    \137\ See Commentary .01 to proposed Rule 2.5.
---------------------------------------------------------------------------

    Based on the fact that ETP Holders are currently subject to the 
registration requirements of the other exchange or association of which 
they are members, as well as on the Commission's expectation that the 
Exchange will file a proposal within 90 days to conform its membership 
rules to the membership rules of other SROs, the Commission finds that 
the Exchange's proposed membership rules are consistent with the 
requirements of the Act.
    The Commission notes that proposed Rule 3.9 provides that, without 
prior Commission approval, no ETP Holder shall be affiliated with NYSE 
Group, Inc. or any of its affiliated entities.\138\ The Commission 
finds that it is consistent with the Act to permit Arca Securities to 
become affiliated with the Exchange for the purposes of providing 
routing services for the Exchange, subject to conditions described in 
proposed Rule 7.45.
---------------------------------------------------------------------------

    \138\ See proposed Rule 3.9(a). See also supra note 62.
---------------------------------------------------------------------------

Rule 5--Trading on an Unlisted Trading Privileges Basis

    As discussed above, in Amendment No. 1 the Exchange states that it 
does not believe that it is necessary for an exchange that trades 
securities only on a UTP basis to have listing rules for ETPs.\139\ 
Similarly, the Exchange states its belief that it should not be 
necessary for a non-listing venue to file a Form 19b-4(e) if it begins 
trading an ETP on a UTP basis, because Rule 19b-4(e)(1) under the Act 
refers to the ``listing and trading'' of a ``new derivative securities 
product.'' \140\ Accordingly, the Exchange proposes to adopt only those 
rules that would support the trading on a UTP basis of all NMS Stocks, 
and the trading on a UTP basis for UTP Exchange Trading Products.\141\
---------------------------------------------------------------------------

    \139\ See Amendment No. 1, supra note 6.
    \140\ 17 CFR 240.19b-4(e). See Amendment No. 1, supra note 6.
    \141\ See supra note 41.
---------------------------------------------------------------------------

    Proposed Rule 5.1 would establish the Exchange's authority to trade 
securities on a UTP basis. Proposed Rule 5.1(a)(1) would provide that 
the Exchange may extend UTP to any security that is an NMS Stock that 
is listed on another national securities exchange or with respect to 
which UTP may otherwise be extended in accordance with Section 12(f) of 
the Act.\142\ Proposed Rule 5.1(a)(1) further would provide that any 
such security would be subject to all Exchange rules applicable to 
trading on the Exchange, unless otherwise noted.
---------------------------------------------------------------------------

    \142\ 15 U.S.C. 781(f).
---------------------------------------------------------------------------

    Proposed Rule 5.1(a)(2) would establish additional rules for 
trading of UTP Exchange Traded Products, which are defined in Rule 1.1 
(described above). Proposed Rule 5.1(a)(2)(A) would provide that the 
Exchange would distribute an information circular prior to the 
commencement of trading in an Exchange Traded Product that generally 
would include the same information as the information circular provided 
by the listing exchange, including (a) the special risks of trading the 
Exchange Traded Product, (b) the Exchange's rules that would apply to 
the Exchange Traded Product and (c) information about the dissemination 
of value of the underlying assets or indices. Proposed Rule 
5.1(a)(2)(E) would provide that the Exchange's surveillance procedures 
for Exchange Traded Products traded on the Exchange pursuant to UTP 
would be similar to the procedures used for equity securities traded on 
the Exchange and would incorporate and rely upon existing Exchange 
surveillance systems. Proposed Rules 5.1(a)(2)(B) and (D) would 
establish certain requirements for ETP Holders that have customers that 
trade UTP Exchange Traded Products.\143\
---------------------------------------------------------------------------

    \143\ Proposed Rule 5.1(a)(2)(B)(i) would remind ETP Holders 
that they are subject to the prospectus delivery requirements under 
the Securities Act, unless the Exchange Traded Product is the 
subject of an order by the Commission exempting the product from 
certain prospectus delivery requirements under Section 24(d) of the 
1940 Act, and the product is not otherwise subject to prospectus 
delivery requirements under the Securities Act. ETP Holders also 
would be required to provide a prospectus to a customer requesting a 
prospectus. Proposed Rule 5.1(a)(2)(B)(ii) would require ETP Holders 
to provide a written description of the terms and characteristics of 
UTP Exchange Traded Products to purchasers of such securities, not 
later than the time of confirmation of the first transaction, and 
with any sales materials relating to UTP Exchange Traded Products. 
Proposed Rule 5.1(a)(2)(D) also would establish certain requirements 
for any ETP Holder registered as a market maker in an UTP Exchange 
Traded Product that derives its value from one or more currencies, 
commodities, or derivatives based on one or more currencies or 
commodities, or is based on a basket or index composed of currencies 
or commodities.
---------------------------------------------------------------------------

    The Commission finds that the Exchange's proposed approach to the 
trading of securities on a UTP basis, as set forth in proposed Rule 5, 
as amended by Amendment No. 1, is consistent with Section 6(b)(5) of 
the Act.\144\ The Commission notes that the provisions in proposed Rule 
5 are based upon existing rules of other exchanges.\145\ Proposed Rule 
5.1 includes a provision that any security traded UTP on the Exchange 
``shall be subject to all Exchange rules applicable to trading on the 
Exchange, unless otherwise noted.'' Importantly, the Exchange notes 
that this language is intended to make clear that all Exchange rules 
would be applicable to the trading of UTP on the Exchange, including 
business conduct and sales practice rules set forth in proposed Rule 
11.\146\ The Commission notes that, in Amendment No. 1, the Exchange 
would delete and reserve Rule 8, which it had previously proposed to 
include listing standards and related provisions for the trading of 
certain exchange derivatives on the Exchange.\147\ The Commission 
believes that Rule 8, as previously proposed, is not necessary insofar 
as proposed Rules 5 and 11 would cover all categories of securities 
traded on the Exchange on a UTP basis.
---------------------------------------------------------------------------

    \144\ 15 U.S.C. 78f(b)(5).
    \145\ See discussion of proposed Rule 5 in Section II., supra.
    \146\ See Amendment No. 1, supra note 6.
    \147\ Id.
---------------------------------------------------------------------------

    In sum, the Commission believes that the changes proposed by the 
Exchange in Amendment No. 1, including the proposed revisions to Rule 5 
and the addition of the definitions of ``Exchange Traded Product'' and 
``UTP Exchange Traded Product'' that enumerate the classes of Exchange 
Traded Products to be traded on a UTP basis,\148\ as well as the 
proposed requirement to distribute an information circular prior to the 
commencement of trading, the business conduct and sales practice rules 
set forth in Rule 11 (which apply to all securities traded UTP on the 
Exchange), and the proposed deletion of Rule 8, taken together, 
establish an appropriate framework for the trading of Exchange Traded 
Products on a UTP basis on the Exchange.\149\ Accordingly, for these 
reasons, the Commission finds that the

[[Page 23976]]

proposed rules governing trading on a UTP basis on the Exchange are 
consistent with Section 6(b)(5) of the Act.
---------------------------------------------------------------------------

    \148\ See Amendment No. 1, supra note 6. As noted in the 
description of Rule 1 above, the Exchange proposes a definition of 
UTP Exchange Traded Products, which would enumerate in proposed Rule 
1.1 the classes of Exchange Traded Products that the Exchange 
proposes to trade on a UTP basis. See Proposed Rule 1.1(m).
    \149\ In addition, the Commission believes that the filing of a 
Form 19b-4(e) is not required when an Exchange is trading a new 
derivative securities product on a UTP basis only.
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Rule 10--Disciplinary Proceedings, Other Hearings and Appeals

    The Exchange states that it is proposing to adopt the current 
disciplinary rules of NYSE American, which are substantially similar to 
those of NYSE and FINRA.\150\ The Exchange indicates in Amendment No. 
1, as discussed above, where proposed Rule 10 differs from the NYSE 
American disciplinary rules.\151\ The Exchange proposes disciplinary 
rules substantially similar to those of the NYSE American in order to 
harmonize the rules among the different NYSE Group exchanges and 
minimize any potential regulatory burden on members arising from 
differing processes. The Exchange represents that all but one of its 
ETP Holders are also members of FINRA, NYSE Arca, NYSE American, NYSE, 
or Nasdaq, and thus they would be familiar with the proposed 
rules.\152\ The Commission believes that the proposed Rule 10.8000 and 
Rule 10.9000 Series furthers the objectives of Section 6(b)(7) of the 
Act,\153\ in that it provides fair procedures for the disciplining of 
ETP Holders and persons associated with an ETP Holder, the denial of 
membership to any person seeking membership therein, and the barring of 
any person from becoming a person associated with an ETP Holder. For 
the reasons discussed above, the Commission finds that the proposed 
changes are consistent with Section 6(b)(7) of the Act.
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    \150\ See Amendment No. 1, supra note 6. See also Securities 
Exchange Act Release Nos. 68678 (January 16, 2013), 78 FR 5213 
(January 24, 2013) (SR-NYSE-2013-02) (NYSE disciplinary rule 
notice), 69045 (March 5, 2013), 78 FR 15394 (March 11, 2013) (NYSE-
2013-02) (NYSE disciplinary rule approval order), 69963 (July 10, 
2013), 78 FR 42573 (July 16, 2013) (SR-NYSE-2013-49), and 58643 
(September 25, 2008), 73 FR 57174 (October 1, 2008) (order approving 
NASD disciplinary rules).
    \151\ See Amendment No. 1, supra note 6.
    \152\ See Amendment No. 1, supra note 6, fn. 51. See also 
Securities Exchange Act Release No. 56204 (August 3, 2007), 72 FR 
45288 (August 13, 2007) (NASDAQ-2007-070) (``To ensure that FINRA 
members did not incur significant regulatory burdens as a result of 
Nasdaq separating from FINRA and registering as a national 
securities exchange, Nasdaq based its rules governing regulatory 
standards and disciplinary processes on FINRA rules, to a 
significant extent.'').
    \153\ See 15 U.S.C. 78f(b)(7).
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2. Section 11(a) of the Act
    Section 11(a)(1) of the Act \154\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises investment discretion 
(collectively, ``covered accounts'') unless an exception applies. Rule 
11a2-2(T) under the Act,\155\ known as the ``effect versus execute'' 
rule, provides exchange members with an exemption from the Section 
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member, 
subject to certain conditions, to effect transactions for covered 
accounts by arranging for an unaffiliated member to execute 
transactions on the exchange. To comply with Rule 11a2-2(T)'s 
conditions, a member: (i) Must transmit the order from off the exchange 
floor; (ii) may not participate in the execution of the transaction 
once the order has been transmitted to the member performing the 
execution; \156\ (iii) may not be affiliated with the executing member; 
and (iv) with respect to an account over which the member or an 
associated person has investment discretion, neither the member nor an 
associated person may retain any compensation in connection with 
effecting the transaction except as provided in the Rule. For the 
reasons set forth below, the Commission believes that ETP Holders 
entering orders into the Exchange's Pillar trading system would satisfy 
the requirements of Rule 11a2-2(T).
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    \154\ 15 U.S.C. 78k(a)(1).
    \155\ 17 CFR 240.11a2-2(T).
    \156\ This prohibition also applies to associated persons of the 
initiating member. The member may, however, participate in clearing 
and settling the transaction.
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    Rule 11a2-2(T)'s first requirement is that orders for covered 
accounts be transmitted from off the exchange floor. The Exchange 
represents that it will not have a physical trading floor when it re-
launches trading and the Exchange's Pillar trading system will receive 
orders from members electronically through remote terminals or 
computer-to-computer interfaces.\157\ In the context of other automated 
trading systems, the Commission has found that the off-floor 
transmission requirement is met if a covered account is transmitted 
from a remote location directly to an exchange's floor by electronic 
means.\158\ Because the Pillar trading system receives orders 
electronically through remote terminals or computer-to-computer 
interfaces, the Commission believes that the Pillar trading system 
would satisfy this off-floor transmission requirement.
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    \157\ See Amendment No. 1, supra note 6.
    \158\ In the context of other all-electronic systems, the 
Commission has similarly found that the off-floor transmission 
requirement is met if the system receives orders electronically 
through remote terminals or computer-to-computer interfaces. See, 
e.g., Securities Exchange Act Release Nos. 61419 (January 26, 2010), 
75 FR 5157 (February 1, 2010) (SR-BATS-2009-031) (approving BATS 
options trading); 59154 (December 23, 2008), 73 FR 80468 (December 
31, 2008) (SR-BSE-2008-48) (approving equity securities listing and 
trading on BSE); 57478 (March 12, 2008), 73 FR 14521 (March 18, 
2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-080) (approving NOM 
options trading); 53128 (January 13, 2006), 71 FR 3550 (January 23, 
2006) (File No. 10-131) (granting the application of The Nasdaq 
Stock Market LLC for registration as a national securities 
exchange); and 44983 (October 25, 2001), 66 FR 55225 (November 1, 
2001) (SR-PCX-00-25) (approving the establishment of the Archipelago 
Exchange as the equities trading facility of PCX Equities, Inc., a 
subsidiary of the Pacific Exchange, Inc.).
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    Second, Rule 11a2-2(T) requires that neither the initiating member 
nor an associated person of the initiating member participate in the 
execution of the transaction at any time after the order for the 
transaction has been transmitted. The Exchange represents that the 
Pillar trading system would at no time following the submission of an 
order allow an ETP Holder or an associated person of the ETP Holder to 
acquire control or influence over the result or timing of the order's 
execution.\159\ According to the Exchange, the execution of an ETP 
Holder's order would be determined solely by the quotes and orders that 
are present in the system at the time the member submits the order and 
by the order priority under the Exchange rules.\160\ Accordingly, the 
Commission believes that an Exchange member and its associated persons 
would not participate in the execution of an order submitted to the 
Pillar trading system.
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    \159\ See Amendment No. 1, supra note 6.
    \160\ See id. The Exchange notes that Rule 11a2-2(T) does not 
preclude a member from cancelling or modifying orders, or from 
modifying the instructions for executing orders, after they have 
been transmitted, provided that such cancellations or modifications 
are transmitted from off an exchange floor. See id. The Commission 
has stated that the non-participation requirement is satisfied under 
such circumstances so long as the modifications or cancellations are 
also transmitted from off the floor. See Securities Exchange Act 
Release No. 14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) 
(``1978 Release'') (stating that the ``non-participation requirement 
does not prevent initiating members from canceling or modifying 
orders (or the instructions pursuant to which the initiating member 
wishes orders to be executed) after the orders have been transmitted 
to the executing member, provided that any such instructions are 
also transmitted from off the floor'').
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    Third, Rule 11a2-2(T) requires that the order be executed by an 
exchange member that is not associated with the member initiating the 
order. The Commission has stated that this requirement is satisfied 
when automated exchange facilities are used, as long as the design of 
these systems ensures that members do not possess any special or unique 
trading advantages in handling their orders after

[[Page 23977]]

transmitting them to the exchange.\161\ The Exchange represents that 
the design of the Pillar trading system ensures that no ETP Holder has 
any special or unique trading advantage in the handling of its orders 
after transmitting its orders to the Exchange.\162\ Based on the 
Exchange's representation, the Commission believes that the Pillar 
trading system would satisfy this requirement.
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    \161\ In considering the operation of automated execution 
systems operated by an exchange, the Commission noted that, while 
there is not an independent executing exchange member, the execution 
of an order is automatic once it has been transmitted into the 
system. Because the design of these systems ensures that members do 
not possess any special or unique trading advantages in handling 
their orders after transmitting them to the exchange, the Commission 
has stated that executions obtained through these systems satisfy 
the independent execution requirement of Rule 11a2-2(T). See 
Securities Exchange Act Release No. 15533 (January 29, 1979), 44 FR 
6084 (January 31, 1979).
    \162\ See Amendment No. 1, supra note 6.
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    Fourth, in the case of a transaction effected for an account with 
respect to which the initiating member or an associated person thereof 
exercises investment discretion, neither the initiating member nor any 
associated person may retain any compensation in connection with 
effecting the transaction, unless the person authorized to transact 
business for the account has expressly provided otherwise by written 
contract referring to Section 11(a) of the Act and Rule 11a2-2(T) 
thereunder.\163\ ETP Holders trading for covered accounts over which 
they exercise investment discretion must comply with this condition in 
order to rely on the rule's exemption.\164\
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    \163\ In addition, Rule 11a2-2(T)(d) requires that, if a member 
or associated person is authorized by written contract to retain 
compensation in connection with effecting transactions for covered 
accounts over which the member or associated person thereof 
exercises investment discretion, the member or associated person 
must furnish at least annually to the person authorized to transact 
business for the account a statement setting forth the total amount 
of compensation retained by the member or any associated person 
thereof in connection with effecting transactions for the account 
during the period covered by the statement. See 17 CFR 240.11a2-
2(T)(d). See also 1978 Release, supra note 107 (``The contractual 
and disclosure requirements are designed to assure that accounts 
electing to permit transaction-related compensation do so only after 
deciding that such arrangements are suitable to their interests'').
    \164\ The Exchange represents that it will advise its membership 
through the issuance of a Regulatory Bulletin that those ETP Holders 
trading for covered accounts over which they exercise investment 
discretion must comply with this condition in order to rely on the 
exemption in Rule 11a2-2(T). See Amendment No. 1, supra note 6.
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IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
is consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NYSENAT-2018-02 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSENAT-2018-02. 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 website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSENAT-2018-02 and should be submitted 
on or before June 13, 2018.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after the date of publication of notice of the filing of Amendment No. 
1 in the Federal Register. As discussed above, in Amendment No. 1, the 
Exchange proposes, among other things, to: (i) Delete proposed Rule 8 
and modify proposed Rule 5 to include only those rules that would 
support the trading on a UTP basis of all NMS Stocks and the trading on 
a UTP basis of UTP Exchange Traded Products; (ii) revise the proposed 
definition of the term ``UTP Exchange Traded Product''; (iii) propose a 
grace period of thirty days for ETP Holders that are eligible for the 
expedited process for reinstatement under the proposal to register 
their Associated Persons with the Exchange; (iv) commit to working with 
Commission staff to update its membership rules and to file a separate 
filing relating to its membership rules within 90 days of any approval 
of the instant proposal; (v) identify which of the proposed Rules are 
based on the rules of NYSE American, as opposed to those based on the 
rules of NYSE Arca; (vi) add provisions, based on rules of other SROs, 
that were not included in the original filing; (vii) add a rule 
relating to the requirements for listed securities issued by ICE or its 
affiliates; (viii) specifically incorporate by reference certain FINRA 
rules that were only cited in the original version of the filing; (ix) 
add clarifying language to proposed rule text and the narrative 
describing the proposal; and (x) correct various technical errors.
    The Commission notes that the proposed changes in Amendment No. 1 
provide clarifying details, harmonize certain proposed rules with rules 
of other exchanges, incorporate certain other SRO rules by reference, 
and otherwise streamline the Exchange's proposed rulebook. The proposed 
changes do not introduce any rules that differ in any substantive 
manner from rules that previously have been approved by the Commission, 
or that have become immediately effective, pursuant to Section 19(b) of 
the Act. Accordingly, the Commission finds good cause, pursuant to 
Section 19(b)(2) of the Act,\165\ to approve the proposed rule change, 
as modified by Amendment No. 1, on an accelerated basis so that the

[[Page 23978]]

Exchange can re-commence operating without unnecessary delay.
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    \165\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\166\ that the proposed rule change (SR-NYSENAT-2018-02), as 
modified by Amendment No. 1, be and hereby is approved on an 
accelerated basis.
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    \166\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\167\
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    \167\ 17 CFR 200.30-3(a)(31).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-10986 Filed 5-22-18; 8:45 am]
 BILLING CODE 8011-01-P