[Federal Register Volume 84, Number 79 (Wednesday, April 24, 2019)]
[Notices]
[Pages 17219-17222]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-08209]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85691; File No. SR-BX-2019-002]
Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing
of Proposed Rule Change To Reassign Certain Investigation and
Enforcement Functions Under the Exchange's Authority and Supervision
April 18, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 5, 2019, Nasdaq BX, Inc. (``BX'' or ``Exchange'') filed with
the Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to assume operational responsibility for
certain investigation and enforcement functions currently performed by
the Financial Industry Regulatory Authority (``FINRA'') under the
Exchange's authority and supervision. BX Rule 0150 requires Commission
approval for this transfer of operational responsibility to BX. BX
anticipates a phased transition, whereby BX would assume increasing
responsibility throughout 2019 and into 2020 for investigation and
enforcement activities
[[Page 17220]]
for certain conduct occurring on the BX market.
The text of the proposed rule change is available on the Exchange's
website at http://nasdaqbx.cchwallstreet.com/, at the principal office
of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Section 6 of the Act requires that national securities exchanges
enforce their members' compliance with federal securities laws and
rules as well as the exchanges' own rules.\3\ As a self-regulatory
organization (``SRO''), BX must have a comprehensive regulatory program
that includes investigation and prosecution of suspicious activity.
Since its acquisition by The NASDAQ OMX Group, Inc., BX has contracted
with FINRA through various regulatory services agreements (``RSAs'') to
perform certain of these regulatory functions on its behalf. However,
as the Commission has made clear with respect to BX's affiliate, The
Nasdaq Stock Market LLC (``Nasdaq''), ``the Nasdaq Exchange bears the
responsibility for self-regulatory conduct and primary liability for
self-regulatory failures, not the SRO retained to perform regulatory
functions on the Exchange's behalf.'' \4\
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\3\ 15 U.S.C. 78(f).
\4\ Securities Exchange Act Release No. 53128 (January 13,
2006), 71 FR 3550, 3556 (January 23, 2006).
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Notwithstanding its use of FINRA, the Exchange has also retained
operational responsibility for a number of regulatory functions,
including real-time surveillance, qualification of companies listed on
Nasdaq and most surveillance related to its affiliated options markets.
Historically, BX retained operational responsibility in areas where
BX's expertise regarding its own markets, technology and listed
companies enhanced regulation. In recognition of this, on September 30,
2013, the Commission approved BX's proposal to reallocate operational
responsibility from FINRA to BX for certain equities surveillance
patterns and related review functions, focused on: (1) Manipulation
patterns that monitor solely BX activity; and (2) monitoring of
compliance by member firms with elements of the Commission's Regulation
M and Nasdaq Rule 4619 compliance.\5\
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\5\ Securities Exchange Act Release No. 70568 (September 30,
2013), 78 FR 62884 (October 22, 2013) (SR-BX-2013-047).
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Building on BX's experience and expertise, this proposal reflects a
natural evolution of BX's proven model to assume and retain operational
responsibility in areas where its in-depth knowledge of its markets and
members enhances market regulation. For the reasons outlined below, BX
now seeks Commission approval to reallocate operational responsibility
from FINRA to the Exchange's Regulation Department \6\ for certain
investigation and enforcement activity, namely:
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\6\ Under BX Rule 9120(t), the Exchange's Regulation Department
includes the Exchange's Enforcement Department. The Exchange notes
that the Staff that comprises the Exchange's Regulation Department
is the same that comprises the Nasdaq Regulation Department.
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Investigation and enforcement responsibilities for conduct
occurring on The BX Options Market,\7\ and
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\7\ As appropriate, the Exchange's Regulation Department will
coordinate with other SROs to the extent it is investigating
activity occurring on Non-Nasdaq options markets to ensure no
regulatory duplication occurs.
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Investigation and enforcement responsibilities for conduct
occurring on BX's equity market only, i.e., not also on non-Nasdaq
equities markets.\8\
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\8\ With respect to the operational responsibilities described
in both bullet points, Nasdaq Regulation Staff currently performs
these functions for the Nasdaq PHLX LLC (``Phlx''), Nasdaq ISE, LLC
(``ISE''), Nasdaq GEMX, LLC (``GEMX''), and Nasdaq MRX, LLC
(``MRX'') because there is no comparable rule to Rule 0150 on those
markets.
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Currently, under RSAs, FINRA is responsible for, among other
things, the investigation of matters referred from Nasdaq MarketWatch
and the Phlx Market Surveillance department.\9\ FINRA is also
responsible for providing services related to BX's formal disciplinary
process, including the issuance of Wells Notices, Cautionary Action
Letters, Complaints, and settlement documents.
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\9\ The Phlx Market Surveillance department performs
surveillance work for all of Nasdaq's options markets (i.e., Nasdaq
Options, BX Options, Phlx Options, ISE, GEMX, and MRX).
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BX now proposes to perform the functions described in the bullet
points above and is seeking Commission approval to do so. BX believes
that its expertise in its own market structure coupled with its
expertise in surveillance activities will enable it to conduct
investigation and enforcement responsibilities for the Exchange
effectively, efficiently and with immediacy. In addition, this proposal
represents an incremental reallocation of operational responsibility
because Nasdaq Regulation Staff currently performs investigative and
enforcement work on behalf of Phlx, ISE, GEMX, and MRX, providing it
with relevant experience to perform these functions for the Exchange as
well.\10\ Most recently, Phlx filed for immediate effectiveness
amendments to the Phlx's rules that set forth an investigatory and
disciplinary process identical in all material respects to the
investigatory and disciplinary processes of Nasdaq and BX.\11\ The
amendments also had the effect of granting Phlx's Regulation Department
investigation and enforcement authority.\12\ BX now seeks Commission
approval to exercise this same authority for conduct on the Exchange
that its Staff already exercises for Phlx, ISE, GEMX, and MRX.\13\
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\10\ As noted above, because BX is an affiliate of Nasdaq, the
Staff that comprises the Exchange's Regulation Department is the
same that comprises the Nasdaq Regulation Department.
\11\ See Securities Exchange Act Release No. 82143 (November 22,
2017), 82 FR 56672 (November 29, 2017) (SR-Phlx-2017-92) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Adopt
Investigatory and Disciplinary Processes Substantially Similar to
Nasdaq BX, Inc. and The Nasdaq Stock Market LLC for Phlx, which,
among other things, similarly enabled Phlx's Regulation Department
to perform these functions).
\12\ See Securities Exchange Act Release No. 82143 (November 22,
2017), 82 FR 56672 (November 29, 2017) (SR-Phlx-2017-92) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Adopt
Investigatory and Disciplinary Processes Substantially Similar to
Nasdaq BX, Inc. and The Nasdaq Stock Market LLC for Phlx, which,
among other things, similarly enabled Phlx's Regulation Department
to perform these functions).
\13\ In a separate filing Nasdaq also proposed to reallocate
operational responsibility from FINRA to Nasdaq Regulation for
investigation and enforcement responsibilities for conduct occurring
on The Nasdaq Options Market and investigation and enforcement
responsibilities for conduct occurring on the Nasdaq equity market
only, i.e., not also on non-Nasdaq equities markets. See SR-Nasdaq-
2019-007. The Commission approved that rule filing on April 3, 2019.
See Securities and Exchange Act Release No. 34-85505 (Order Granting
Accelerated Approval of a Proposed Rule Change, as Modified by
Amendment No. 2, to Reassign Certain Investigation and Enforcement
Functions Under the Exchange's Authority and Supervision.)
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Notwithstanding this proposal, FINRA will continue to perform
certain functions, including, among other things: (1) The investigation
and enforcement of conduct occurring on the BX equity market that also
relates to
[[Page 17221]]
cross market activity on non-Nasdaq exchanges; (2) the handling of
contested disciplinary proceedings arising out of BX Regulation-led
investigation and enforcement activities; \14\ and (3) matters covered
by agreements to allocate regulatory responsibility under Rule 17d-2 of
the Act. As with all investigation and enforcement work, all tasks
delegated to FINRA are subject to BX's supervision and ultimate
responsibility.
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\14\ For example, pursuant to Rule 9216, if at the conclusion of
a BX Regulation-led investigation, BX Regulation has reason to
believe that a violation occurred but the Respondent disputes the
violation and therefore does not execute an Acceptance, Waiver, and
Consent (``AWC'') letter, or if the Respondent executes the AWC
letter but the Exchange Review Council, Review Subcommittee or
FINRA's Office of Disciplinary Affairs does not accept the executed
letter, the Exchange may decide to pursue formal disciplinary
proceedings. In such a case, the Exchange would refer the matter to
FINRA to handle the formal disciplinary proceedings on its behalf.
FINRA's Office of Hearing Officers will continue to be responsible
for the administration of the hearing process.
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BX Regulation has instituted the requisite infrastructure to
accommodate the internalization of investigative and enforcement work
on behalf of the Exchange. Specifically, BX created a new investigation
and enforcement group to perform the functions covered by this
proposal, which included hiring additional staff. BX is also leveraging
its existing staff of experienced analysts, lawyers, programmers, and
market structure experts to assist, where necessary, with performing
the new functions covered by this proposal. In addition, BX Regulation
has developed comprehensive plans covering the transition and has met
regularly for more than one year to ensure a smooth transition of the
work and prevent any gaps in regulatory coverage. Finally, BX filed for
immediate effectiveness amendments to its rules that aligned its
existing investigatory and disciplinary processes with the
investigatory and disciplinary processes of Phlx. The amendments also
granted the Exchange's Enforcement Department with the investigative
and enforcement authority that it now seeks approval to exercise.\15\
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\15\ Securities Exchange Act Release No. 84354 (October 3,
2018), 83 FR 50723 (October 9, 2018) (SR-BX-2018-042).
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BX anticipates a phased transition of investigative and enforcement
responsibility, whereby BX would assume increasing investigation and
enforcement responsibility throughout 2019 and into 2020 for the
conduct occurring on the Exchange.\16\ BX also anticipates
transitioning certain matters currently pending with FINRA to the
Exchange's Enforcement Department if the Exchange's Regulation
Department believes doing so is consistent with ensuring prompt
resolution of regulatory matters.
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\16\ The Exchange notes that the investigatory and disciplinary
processes and related rules applicable to its Members that FINRA
currently follows on the Exchange's behalf (i.e., the Series 8000
and 9000 Rules) will remain the same.
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BX Rule 0150 requires that BX obtain Commission approval if
regulatory functions subject to RSAs in effect at the time BX executed
the agreement in 2008 are no longer performed by FINRA or an affiliate
thereof, or by another independent self-regulatory organization. For
the reasons stated above, BX believes that the reassignment of the
specified investigation and enforcement responsibility will further its
regulatory program and benefit investors and the markets. Commission
approval of the proposal would allow BX to better leverage its
surveillance, investigation, and enforcement teams; to deliver
increased efficiencies in the regulation of its market; and to act
promptly and provide more effective regulation.
In addition, BX notes that its proposal is consistent with, but
more limited than, investigation and enforcement work performed by
other national securities exchanges. For example, in 2015, the SEC
approved the New York Stock Exchange's (``NYSE'') application whereby
NYSE amended certain of its disciplinary rules to facilitate the
reintegration of certain market surveillance, investigation and
enforcement functions performed on behalf of NYSE by FINRA.\17\ Unlike
NYSE, however, BX will also continue to rely on FINRA to prosecute
contested matters before a Hearing Panel.\18\
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\17\ See Securities Exchange Act Release No. 75721 (August 18,
2015), 80 FR 51334 (August 24, 2015) and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1,
3 and 5, Amending Exchange Disciplinary Rules to Facilitate the
Reintegration of Certain Regulatory Functions from Financial
Industry Regulatory Authority, Inc., Securities Exchange Act Release
No. 76436 (November 13, 2015), 80 FR 72460 (November 19, 2015) (SR-
NYSE-2015-35).
\18\ See BX Rule 9120(q) (``The term ``Hearing Panel'' means an
Adjudicator that is constituted under Rule 9231 to conduct a
disciplinary proceeding governed by the Rule 9200 Series, that is
constituted under the Rule 9520 Series or the Rule 9550 Series to
conduct a proceeding, or that is constituted under the Rule 9800
Series to conduct a temporary cease and desist proceeding.''). See
also supra note 14.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\19\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\20\ in particular in that it is 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.
In addition, the Exchange believes that the proposal furthers the
objectives of Section 6(b)(7) of the Act,\21\ in particular, in that
these changes will continue to provide for fair procedures for the
disciplining of members and persons associated with members, the denial
of membership to any person seeking membership therein, the barring of
any person from becoming associated with a member thereof, and the
prohibition or limitation by the Exchange of any person with respect to
access to services offered by the Exchange or a member thereof.
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\19\ 15 U.S.C. 78f(b).
\20\ 15 U.S.C. 78f(b)(5).
\21\ 15 U.S.C. 78f(b)(7).
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The Exchange believes that this proposal is in keeping with those
principles because it leverages BX's extensive operational experience
and expertise in regulating its markets and marries BX's surveillance
capabilities with its surveillance, investigation and enforcement
staff, thereby increasing effectiveness and enabling prompt action. BX
believes that it can achieve these important objectives because it is
uniquely positioned to understand conduct on its own markets and take
timely action when appropriate to investigate potential violations and
enforce the rules to punish and deter misconduct, hold bad actors
accountable, and protect investors and market integrity. In this
regard, the Exchange's surveillance, investigative and enforcement
teams work together to identify and review potentially violative
conduct. This results in more effective regulation because it
facilitates timely and more efficient action. Indeed, the underlying
driving force for the current proposal is BX's belief that it can
conduct this regulatory work more effectively and efficiently given its
technology, structure and in-depth knowledge of its markets and
members. For these reasons, BX believes it can conduct investigative
and enforcement functions specified above in a thorough and timely
manner, thereby promoting the fair and orderly operation of the markets
and serving the interests of market participants and investors. In so
doing, BX will fulfill the Commission's mandate that BX's affiliate,
Nasdaq, bear responsibility for self-regulatory conduct.\22\
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\22\ See supra note 4.
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BX will continue to refer certain potentially violative conduct to
FINRA
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for further review, including matters covered by agreements to allocate
regulatory responsibility under Rule 17d-2 of the Act. Moreover, FINRA
will continue to have responsibility for, among other things, the
investigation and enforcement of conduct occurring on the BX equity
market that also occurs on non-Nasdaq exchanges, as well as the
handling of contested disciplinary proceedings arising out of BX
Regulation-led investigation and enforcement activities.\23\ All
referrals to FINRA remain subject to BX's supervision and ultimate
responsibility.
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\23\ See supra note 14.
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BX also believes that the proposal is consistent with the Act
because, as the Commission has made clear, BX's affiliate, Nasdaq,
bears the ultimate responsibility for self-regulatory conduct and
primary liability for self-regulatory failures.\24\ In addition, BX
notes that its proposal is consistent with, but more limited than,
investigation and enforcement work performed by NYSE. As noted above,
the SEC approved NYSE's application to amend certain of its
disciplinary rules to facilitate the reintegration of certain market
surveillance, investigation and enforcement functions performed on
behalf of NYSE by FINRA.\25\ BX believes it would therefore be
consistent with the Act for BX to perform more limited investigation
and enforcement work than NYSE.
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\24\ See supra note 4.
\25\ See supra note 17.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The proposed rule change is not
intended to address competitive issues but rather to enable the
Exchange to directly investigate and initiate disciplinary actions for
the specified conduct discussed above following the integration of
certain regulatory functions from FINRA.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-BX-2019-002 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-BX-2019-002. 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-BX-2019-002 and should be submitted on
or before May 15, 2019.
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\26\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-08209 Filed 4-23-19; 8:45 am]
BILLING CODE 8011-01-P