[Federal Register Volume 84, Number 144 (Friday, July 26, 2019)]
[Notices]
[Pages 36139-36149]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15871]
[[Page 36139]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86425; File No. SR-BX-2019-022]
Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Delete the
Exchange's Existing Membership Rules and To Incorporate by Reference
the Membership Rules of The Nasdaq Stock Exchange, LLC
July 22, 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 July 10, 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, II, and III 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 incorporate by reference into the
Exchange's rules the membership rules of The Nasdaq Stock Exchange,
LLC.
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
The Exchange's Rule 1000 Series prescribes the qualifications and
the procedures for applying for membership on the Exchange. The
Exchange now proposes to delete and replace these rules, as described
below.\3\
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\3\ The Exchange proposes to separately request an exemption
from the rule filing requirements of Section 19(b) of the Act for
changes to the Rule 1000 Series to the extent such rules are
effected solely by virtue of a change to the Nasdaq Rule 1000
Series. The Exchange's proposed rule change will not become
effective unless and until the Commission approves this exemption
request.
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The Exchange proposes to delete most of its existing Rule 1000
Series rules (with certain exceptions identified below) and replace
them with the membership rules of The Nasdaq Stock Market, LLC
(``Nasdaq''), which exist in the Rule 1000 Series of the Nasdaq
Rulebook (the ``Nasdaq Rule 1000 Series'' or the ``Nasdaq Membership
Rules''). The Exchange proposes to incorporate the Nasdaq Membership
Rules by reference into its own Rule 1000 Series.\4\ In a recent
filing,\5\ Nasdaq amended its own Rule 1000 Series; immediately prior
to Nasdaq's rule filing, the Nasdaq Rule 1000 Series was the same, in
all material respects, as the Exchange's Rule 1000 Series. By
incorporating by reference the revised Nasdaq Rule 1000 Series, the
Exchange seeks to incorporate the changes that Nasdaq made to the
Nasdaq Rule 1000 Series into the BX Rule 1000 Series.
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\4\ The Exchange notes that Nasdaq ISE, LLC, Nasdaq GEMX, LLC,
Nasdaq MRX, LLC, and Nasdaq PHLX, LLC (together with Nasdaq and
Nasdaq BX, the ``Affiliated Exchanges'') each plan to propose
similar changes to their respective membership processes and
associated rules that will also render them the same or
substantially similar to those of Nasdaq.
\5\ See Securities Exchange Act Release No. 34-85513 (Apr. 4,
2019), 84 FR 14429 (Apr. 10, 2019) (SR-NASDAQ-2019-022).
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As compared to the Exchange's existing Rule 1000 Series, by virtue
of incorporating by reference the Nasdaq Rule 1000 Series into
Exchange's Rulebook, the Exchange's revised membership rules (the
``Proposed Rule 1000 Series'' or the ``Proposed Rules'') will be
organized in a more logical order. The Proposed Rule 1000 Series will
eliminate duplicative provisions that exist in the existing Rule 1000
Series, eliminate unnecessary complexity in the membership process, and
otherwise streamline the existing membership rules and their associated
procedures. The Proposed Rule 1000 Series will relax needlessly rigid
deadlines that the rules prescribe for taking certain actions with
respect to membership applications.\6\
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\6\ The Exchange does not believe that any of the proposed
changes will adversely impact the existing rights of prospective or
existing Members or Associated Persons. Likewise, the Exchange does
not believe that the proposed changes will compromise the ability of
the Exchange or its Membership Department to scrutinize prospective
or existing Members or Associated Persons.
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Summary of Proposed Changes
A comparison between the Exchange's existing Rule 1000 Series and
the Proposed Rule 1000 Series, is summarized below. For ease of
comparison, this summary refers to the deletion of the existing Rule
1000 Series and its replacement with the Proposed Rule 1000 Series, as
incorporated by reference, as ``amendments'' to, ``restatements'' of,
or ``moves'' of the existing rules. Exhibit 3A to this proposal
compares the Exchange's existing Rule 1000 Series to the Nasdaq Rule
1000 Series and shows the changes described below.
Rule 1001
Existing Exchange Rule 1000 includes a reference to the fact that
FINRA is in the process of consolidating certain NASD rules into a new
FINRA rulebook, and that if a NASD rule that is incorporated by
reference into a BX rule is transferred to the FINRA rulebook, then the
BX rule will be construed to require Exchange members to comply with
the FINRA rule, as it may be renumbered or amended. This same reference
exists, not only in existing Rule 1000, but also IM-1002-4, 1012(j),
and 1017(g). The Proposed Rule 1000 Series deletes these references in
all of these Rules because they will no longer be necessary going
forward. The Proposed Rule 1000 Series rules does not cite specific
FINRA (or NASD) Rules.
Rule 1002
Proposed Rule 1002 differs from the existing Exchange Rule 1000 in
several respects. First, Proposed Rule 1002 deletes existing paragraph
(c), which pertains to the payment by Members and Associated Persons of
dues, fees, assessments and other charges, because the requirement of
Members and Associated Persons to make such payments is set forth
elsewhere in the Rules, such that existing paragraph (c) is
unnecessary.\7\ The Proposed Rule 1000 Series also moves existing
paragraph 1002(d), which governs the reinstatement of membership and
registration, to a new Proposed Rule 1018 that will consolidate all
provisions
[[Page 36140]]
of the Rules relating to transfer, resignation, termination, and
reinstatement of membership. Additionally, the Proposed Rule 1000
Series consolidates and moves to Proposed Rule 1002, as newly-
renumbered paragraph (d), largely duplicative provisions relating to
the registration of branch offices and the designation of offices of
supervisory jurisdiction, which presently reside in Rule 1012(j) and
IM-1002-4, respectively.\8\ Within the new paragraph (d), the Proposed
Rule deletes language from existing Rule 1012(j)(1) that requires a
Member to pay dues, fees, and charges associated with a branch office--
as that provision is superfluous for reasons discussed above. Under
paragraph (d)(3)(A) of the Proposed Rule, the Exchange also simplifies
the existing rules for determining compliance with branch office
registration and supervisory office designation requirements. Whereas
the existing processes--as set forth in existing Rule 1012(j) and IM-
1002-4--provide that Exchange Members that are also FINRA members are
deemed to comply with the branch office and designated supervisory
office requirements to the extent that they comply with NASD-1000-4 and
Article IV, Section 8 of the NASD's By-Laws, the Proposed Rule 1000
Series states that such Exchange Members are deemed to comply to the
extent that they keep current Form BR, which contains the requisite
information and which is accessible electronically to the Exchange.
Members that are not FINRA members shall continue to submit to the
Exchange a Branch Office Disclosure Form, as they have done
previously.\9\
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\7\ See Rule 9553.
\8\ In subparagraph (d)(3)(B) of the Proposed Rule, the Exchange
clarifies the existing rule text in Rule 1012(j) and IM-1002-4,
which provide that Members that are not FINRA members shall
designate offices of supervisory jurisdiction and branch offices by
submitting to the Exchange a ``written filing'' to the Exchange ``in
such form as the Exchange may prescribe.'' The Proposed Rule
clarifies that this written filing is the ``Branch Office Disclosure
Form.'' The Branch Office Disclosure Form is presently in use for
this purpose and it is not a new form. Nevertheless, the Exchange
believes that it will be helpful in the Rule to identify the
specific form that must be filed rather than refer vaguely to a
filing in such form as the Exchange may prescribe.
\9\ The existing Rule states that Members that are not FINRA
members shall designate offices of supervisory jurisdiction and
branch offices by submitting to the Exchange ``a written filing in
such form as the Exchange may prescribe.'' The form that the
Exchange presently prescribes for this purpose is the Branch Office
Disclosure Form. To improve clarity, the Proposed Rule identifies
this form by name in the Rule. The Exchange proposes no substantive
changes to this Form.
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Existing Rule 1002(f) provides for broker-dealers who were approved
as member organizations and associated persons of the Boston Stock
Exchange prior to its acquisition by the Nasdaq OMX Group (now, Nasdaq,
Inc.) (and its subsequent re-launching as Nasdaq BX) to have their
status grandfathered into Nasdaq BX. The Proposed Rule 1000 Series does
not have this provision; it is no longeris necessary given that Nasdaq
acquired the Boston Stock Exchange and launched Nasdaq BX more than ten
years ago. All grandfathered Boston Stock Exchange members and
associated persons are duly accounted for in the Exchange's membership
rolls.
Lastly, the Proposed Rule 1000 Series moves IM-1002-1, which
prohibits a Member or an Associated Person from filing with the
Exchange misleading information in connection with membership or
registration, and requires misleading information to be corrected, to
Proposed Rule 1012 (General Application Provisions), where the Exchange
believes it more logically fits.\10\
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\10\ The Proposed Rule also amends the definition of a
``Proprietary Trading Firm'' in paragraph (o) to make clear that
such entities may be both Applicants and Members of the Exchange for
purposes of the Rules.
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Rule 1011
Proposed Rule 1011, which includes definitions for the Proposed
Rule 1000 Series, defines the term ``Investment banking or securities
business'' differently from existing Rule 1011 in that the Proposed
Rule eliminates the reference to ``investment banking.'' The Exchange
does not accept applications from firms that are engaged in the
investment banking business but are not otherwise brokers or dealers in
securities. The Exchange believes that references to the investment
banking business in the existing Rule and elsewhere in the Exchange's
membership rules are unintended errors.
Whereas existing Rule 1011(g) includes the defined term ``material
change in business operations,'' the Proposed Rule 1000 Series omits
this definition and instead incorporates its substance into Proposed
Rule 1017(a)(5), which is the only context in which it actually
applies.
Rule 1012
Existing Rule 1012, which is presently entitled ``General
Provisions,'' differs from the proposed version of the Rule in several
ways. Principally, the Proposed Rule limits its scope to include only
general provisions relating to applications, and the title of the Rule
reflects that narrowed scope (``General Application Provisions''). It
also omits several existing provisions that are outside of this scope,
including existing paragraphs (b) (lapses in applications), (c) (ex
parte communications), (d) (recusals and disqualifications from
membership appeal proceedings), (g) (resignation of Exchange Members),
(i) (transfer and termination of Exchange membership), and (j)
(registration of branch offices). As is discussed in further detail
below, the Proposed Rule 1000 Series locates these provisions in other
Rules to which they more logically relate. The Exchange does not
believe that relocating these provisions as described will have any
substantive effect.
Rule 1012(a) is presently entitled ``Filing by Applicant or Service
by the Exchange.'' Proposed Rule 1012(a) retitles the paragraph for
clarity purposes as ``Instructions for Filing Application Materials
with the Exchange and Requirements for Service of Documents by the
Exchange.'' Whereas existing subparagraph (a)(1) presently permits an
Applicant to file an application only by first-class mail, overnight
courier, or hand delivery, the Proposed Rule modernizes this provision
by allowing for electronic filing as well. In a new subparagraph
(a)(3)(E) of the Proposed Rule, the Exchange states that service by
electronic filing shall be deemed complete on the day of transmission,
except that service or filing will not be deemed to have occurred if,
subsequent to transmission, the serving or filing party receives notice
that its attempted transmission was unsuccessful.
Furthermore, Proposed Rule 1012 eliminates existing paragraph (f)
(similarity of membership names) because the Exchange believes that it
is unnecessary for it to monitor for similarities in the names of
prospective Members given that FINRA, through WebCRD, and the SEC
monitor this.
Finally, the Proposed Rule 1000 Series relocates and restates IM-
1002-1 (regarding misleading information as to membership or
registration) and the last paragraph of Rule 1013(a)(1) (requiring
Members and Applicants to keep application materials current) to
Proposed Rule 1012(c). Rather than state, as does IM-1002-1, that
Applicants, Members, and Associated Persons shall not file false or
misleading membership information with the Exchange, the Proposed Rule
states in paragraph (c)(1) that they shall have an affirmative duty to
ensure that their membership information is accurate, complete, and
current at the time of filing. The Exchange believes that the proposed
formulation is more
[[Page 36141]]
comprehensive than the existing one.\11\ Likewise, rather than merely
require, as does existing Rule 1013(a)(1), that Applicants shall keep
current their application materials after filing them, the Proposed
Rule, in paragraph (c)(2), more broadly requires Applicants, Members,
and Associated Persons to ensure that their membership applications and
supporting materials remain accurate, complete, and current at all
times, by filing supplementary amendments with the Department, as is
necessary. (The Proposed Rule omits the language in existing Rule
1013(a)(1) that specifies that supplementary amendments shall be filed
by electronic means insofar as Proposed Rule 1012(a) specifies the
acceptable methods by which membership materials shall be filed with
the Department.) \12\
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\11\ The reformatted text of the Proposed Rule also omits the
references in IM-1002-1 to registration decisions (which are now
covered elsewhere in the Exchange's Rules).
\12\ The language of existing Rule 1013(a)(1)(V), which provides
that amendments to a membership application must be filed with the
Exchange not later than 15 business days after a Member ``knew or
should have known'' of the facts or circumstances giving rise to the
need for the amendment, differs from the corresponding Proposed Rule
1012(c), which provides that the amendment must be filed not later
than 15 business days after a Member ``learns of'' the facts or
circumstances giving rise to the amendment, The Exchange believes
that this difference between the two provisions is immaterial.
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Rule 1013
Proposed Rule 1013 is a substantial restatement of existing Rule
1013, which sets forth procedures for filing applications for new
membership on the Exchange.
In paragraph (a) of Proposed Rule 1013, which describes the
contents of new membership applications and procedures for filing, the
Proposed Rule amends subparagraphs (a)(1)(A) and (B), which presently
require an Applicant to file a copy of its current Form BD as well as
an Exchange-approved fingerprint card for each Associated Person who
will be subject to SEC Rule 17f-2.\13\ The corresponding subparagraphs
in the Proposed Rule provide that the Applicant must provide copies of
this Form and card only if the Exchange is not able to access them
through the Central Registration Depository (``CRD'' or ``WebCRD'') or
a similar source. The language in the Proposed Rule relieves Applicants
of the burden of filing a Form or fingerprint cards that the Exchange
can readily retrieve itself.
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\13\ The existing provision exempts Applicants from filing
fingerprint cards if it has already filed them with another self-
regulatory organization.
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Whereas subparagraph (a)(1)(C) of the existing Rule requires an
Applicant to provide a ``check'' for such fees as it may be required to
pay under the Exchange's Rules, the corresponding provision of the
Proposed Rule deletes the word ``check'' and replaces it with a more
general term, ``payment,'' so as to afford an Applicant flexibility to
pay the fee through additional means, such as wire transfer.
Subparagraph (a)(1)(G) of the existing Rule requires disclosure of
the Applicant's principal place of business and ``all other offices, if
any, whether or not such offices would be required to be registered
under the Equity Rules.'' The corresponding Proposed Rule clarifies
this provision by specifying that it applies to ``branch'' offices. The
Proposed Rule also omits the phrase ``whether or not such offices would
be required to be registered under the Equity Rules,'' as the Exchange
deems it unnecessary for the Applicant to list offices other than those
that must be registered. Finally, the Proposed Rule states that an
Applicant need not separately provide this branch office information to
the Exchange to the extent that the information is otherwise available
to the Exchange electronically through WebCRD or a similar source.
Next, Proposed Rule 1013 consolidates subparagraphs (a)(1)(J) and
(a)(1)(K) of the existing Rule. Whereas existing subparagraph (a)(1)(J)
presently requires the Applicant to state whether it is currently or
has been in the prior ten years the subject of certain investigations
or disciplinary proceedings that have not been reported to the CRD, the
corresponding provision in the Proposed Rule adds language--in
subparagraph (a)(1)(K) of the existing Rule--which states that the
obligation to disclose the Applicant's disciplinary history pertains,
not only to the Applicant itself, but also ``any person listed on
Schedule A of the Applicant's Form BD.'' \14\ Proposed Rule 1013 omits
subparagraph (a)(1)(K), as it is duplicative of Proposed Rule
1013(a)(1)(J).
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\14\ Such persons listed on Form BD include the Applicant's
direct owners (as that term is defined on Form BD), and certain
partners, trusts and trustees, and limited liability company
members, and executive officers of the Applicant.
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Compared to subparagraph (a)(1)(N) of the existing Rule, which
requires an Applicant to disclose how it complies with Rule 3011, the
corresponding Proposed Rule clarifies that Rule 3011 requires Members
to have anti-money laundering compliance programs.
In subparagraph (a)(1)(P) of the Proposed Rule, the Exchange omits
language that presently permits an Applicant to submit a Form U-4 for
each person conducting and supervising the conduct of the Applicant's
market making and other trading activities. The Proposed Rule omits the
existing requirement that an Applicant submit a Form U-4 because the
information that the Form contains is otherwise accessible to the
Exchange through WebCRD, such that submission of the Form itself is
unnecessary.
In subparagraph (a)(1)(Q) of the Proposed Rule, the Exchange omits
the requirement in the corresponding provision of the existing Rule
that the Applicant provide to the Exchange a FINRA Entitlement Program
agreement and Terms of Use and an Account Administration Entitlement
Form, if not previously provided to FINRA. The Proposed Rule omits this
requirement because the Exchange has determined that the requirement is
unnecessary. Any Applicant for membership will have already completed
and submitted this agreement and form prior to applying to the
Exchange. The completion and submission of the agreement and form will
be evident to the Exchange from the fact that FINRA has granted the
Applicant access to WebCRD. The Exchange understands that completion of
the Account Administration Entitlement Form is a prerequisite to the
creation of a registered BD and receiving WebCRD access.
The Proposed Rule amends subparagraphs (a)(1)(T), (U), and (V) of
the existing Rule, which presently require an Applicant to submit to
the Exchange an agreement to comply with the federal securities laws,
the rules and regulations thereunder, the Exchange's Rules, and all
rulings, orders, directions, decisions, and sanctions thereunder, as
well as an agreement to pay such dues, assessments, and other charges
in the manner and in the amount as the Exchange prescribes. The
Proposed Rule prefaces these requirements with a more general
requirement that an Applicant submit a duly executed copy of the
Exchange's Membership Agreement. The Membership Agreement comprises the
foregoing commitments, among others, and Applicants presently submit an
executed copy of the Membership Agreement to satisfy existing
subparagraphs (a)(1)(T) and (U). The Proposed Rule inserts the new
language in subparagraph (a)(1)(T) and moves the language in existing
subparagraphs (a)(1)(T) and (U) to new subparagraphs (a)(1)(T)(1) and
(2). The Proposed Rule renumbers existing subparagraph (a)(1)(V) as
subparagraph (a)(1)(U).
The Proposed Rule omits existing subparagraph (a)(2) of the
existing Rule, which presently requires an Applicant to submit uniform
registration forms,
[[Page 36142]]
due to the fact that the information that these forms contain is
readily accessible to the Exchange through WebCRD.
Next, the Proposed Rule restates the Exchange's requirements and
procedures for deeming applications to be filed, for dealing with
incomplete applications, and for requesting additional information from
an Applicant or a third party in connection with a pending application.
The Proposed Rule restates these requirements and procedures to improve
their clarity, to relax certain procedural deadlines that are
needlessly rigid, and to provide additional due process to Applicants.
First, in lieu of the omitted text in subparagraph (a)(2) of the
existing Rule, the Proposed Rule includes a new provision, entitled
``When an Application is Deemed to be Filed,'' which states expressly
what is now only implied in existing Rule 1013--that the Department
will deem an application to be filed on the date when it is
``substantially complete,'' meaning the date on which the Department
receives from the Applicant all material documentation and information
required under Rule 1013. The Exchange believes that Applicants will
benefit from this clarification, particularly because it affords the
Department discretion to deem an application to be filed when it
obtains sufficient information or documentation from the Applicant to
enable the Department to commence processing the application. The new
provision in the Proposed Rule also requires the Department to inform
the Applicant in writing when the Exchange deems an application to be
substantially complete so that there will be no ambiguity as to when
the Department will begin to process the application.
Second, the Proposed Rule omits existing subparagraph (a)(3), which
presently governs the rejection of applications that are not
substantially complete. In lieu of the omitted text, the Proposed Rule
contains two new provisions that deal with lapses in applications that
are not substantially complete, and the rejection of filed applications
that remain or become incomplete after filing.
Subparagraph (a)(3)(A) of the Proposed Rule, which governs lapses
of applications, also replaces existing Rule 1012(b). This provision of
the Proposed Rule states that if the Department does not deem an
application to be substantially complete (and thereby filed, in
accordance with proposed subparagraph (a)(2)) within 90 calendar days
after an Applicant initiates it, then absent a showing of good cause by
the Applicant, the Department may, at its discretion, deem the
application to have lapsed without filing, such the Department will
take no action in furtherance of the application. The Proposed Rule is
conceptually different from existing Rule 1012(b). The Proposed Rule
conceives of a lapsed application as one that an Applicant initiates
but does not substantially complete even after a prolonged period of
time, such that the Department treats it as having been abandoned prior
to filing. Under existing Rule 1012(b), by contrast, the Exchange
treats lapses more broadly as any unexcused failure of an Applicant to
complete an application, to respond to the Department's requests for
information or documents, to participate in a membership interview, or
to file with the Exchange an executed membership agreement. As is
discussed below, the Proposed Rule treats an Applicant's post-filing
non-responsiveness to the Department's requirements as a basis for
rejection of an application, not a lapse of an application, because
once an application is deemed filed, the Department will begin to take
action in furtherance of the application. Also unlike the existing
Rule, the Proposed Rule provides that the Department merely has
discretion to, but need not deem an application to have lapsed once it
meets the requirements of the subparagraph. Moreover, the Proposed Rule
requires that once the Department deems an application to have lapsed,
then the Department must serve a written notice of that determination
on the Applicant and refund any application fees that the Applicant
paid to the Exchange (provided that the Exchange did not, in fact, take
action in furtherance of the lapsed application). Finally, the Proposed
Rule states that an Applicant that still wishes to apply for membership
on the Exchange after receiving notice of a lapse in its application
must submit a new application pursuant to these Rules and pay a new
application fee for doing so, if applicable.
Subparagraph (a)(3)(B) of the Proposed Rule governs the
circumstances in which the Department may reject an application that it
already has deemed to be ``substantially complete'' and thus filed.
Specifically, the Proposed Rule states that if a pending application
remains incomplete after filing, or becomes incomplete after filing due
to the fact that the Applicant has not timely responded to the
Department's request for supplemental information or documents, then
the Department will serve notice on the Applicant of the nature of the
incompleteness and afford the Applicant a reasonable time period in
which to address it. If the Applicant fails to address the
incompleteness within the time period that the Department prescribes in
the notice, then, absent a showing of good cause by the Applicant, the
Department may--but again it is not required to--deem the application
to be rejected and it must serve written notice of any such
determination upon the Applicant. The Proposed Rule states, moreover,
that if the Department deems an application to be rejected, then the
Applicant shall not be entitled to a refund of any fees that the
Applicant may have paid in connection with its application so that the
Exchange can recover its costs associated with processing the filed
application prior to rejecting it. Finally, the Proposed Rule states
that if an Applicant chooses to continue to pursue membership following
a rejection of its application, then it must submit a new application
and pay any associated fees that are required under the Rule.
Third, the Proposed Rule restates subparagraph (a)(4) of the
existing Rule, which governs requests made by the Department for
additional information or documents during its consideration of an
application. The Proposed Rule also restates and consolidates into
subparagraph (a)(4) the provision of existing Rule 1013 that governs
membership interviews and information pertinent to the application that
the Department gathers from third party sources other than the
Applicant (existing paragraph (b)). The Exchange believes that rules
governing supplemental information and document requests, membership
interviews, and third party information are related and should be
consolidated into a single provision. Moreover, the Exchange notes that
it does not, as a practical matter, opt to conduct formal membership
interviews because it is more efficient and less onerous for all
parties to instead engage in informal discussions when questions and
concerns arise. Because the Exchange does not exercise its discretion
to conduct formal interviews the Exchange believes that it is
reasonable to eliminate the concept and the procedures that govern such
interviews in the new subparagraph.
In particular, the subparagraph, as restated in the Proposed Rule,
provides that at any time before the Department serves its decision on
a membership application,\15\ it may issue a request for
[[Page 36143]]
additional information or documents--either from the Applicant or from
a third party--if the Department deems such information or
documentation to be necessary to clarify, verify, or supplement the
application materials. The Proposed Rule states that the Department may
request that the information or documentation be provided in writing or
through an in-person or telephonic interview. The Proposed Rule
furthermore states that the Department shall serve its request in
writing. The Proposed Rule states that the Department must afford the
recipient a reasonable amount of time within which to respond to the
request \16\ and that the failure of an Applicant to respond within the
allotted time may serve as a basis for the Department to reject an
application under subparagraph (a)(3)(B), described above. Finally, the
Proposed Rule for the first time affords the Applicant due process in
the event that the Department obtains information or documentation
about the Applicant from a third party that the Department reasonably
believes could adversely impact its decision on an application.\17\ In
such a circumstance, the Proposed Rule requires the Department to
promptly inform the Applicant in writing and describe the third party
information or documentation that the Department obtained. The
Department must also afford the Applicant a reasonable opportunity to
discuss with it or object to the Department's use of the third party
information or documentation in its application decision prior to the
Department rendering the decision.
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\15\ The restated provision of the Proposed Rule eliminates the
requirement in the existing Rule that the Department must serve an
initial supplemental request for information or documents within 15
business days after an application is deemed to be filed. The
Exchange finds no good reason to distinguish in the rule between an
``initial'' and a subsequent supplemental Departmental request or to
impose a specific deadline for the Department to issue any such
requests; the Department has a shared interest with the Applicant in
issuing supplemental requests expeditiously such that no artificial
deadline is necessary.
\16\ Rather than impose a minimum time period for a response,
the Proposed Rule requires only that the Department prescribe a
reasonable deadline for a response. The Exchange believes that the
appropriate response period will vary depending upon the nature of
the information or documentation requested. Moreover, the Exchange
again believes that the Department and the Applicant have a shared
interest in ensuring that the Applicant has adequate time to respond
to a request.
\17\ The Department may consult third parties, such as other
SROs of which an Applicant is or was a member previously, to obtain
additional information about or to confirm aspects of an application
or the Applicant's character or history. The Department might also
consult third party services to investigate or verify the
Applicant's financial condition or history.
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Fourth, the Proposed Rule 1000 Series includes a new Rule 1013(b),
entitled ``Special Application Procedures,'' which restates and expands
upon the special application procedures set forth in subparagraph
(a)(5) of the existing Rule 1013. Presently, subparagraph (a)(5)(A)
states that when an Applicant is applying for FINRA membership and
Exchange membership at the same time, then the Exchange will wait to
process the application until the applicant becomes a FINRA member.\18\
Presently, subparagraph (a)(5)(C) states that expedited application
procedures will apply to Applicants that are already members of FINRA
and Nasdaq, or Nasdaq PHLX LLC. The Proposed Rule omits subparagraph
(a)(5)(A) and (B) because the Exchange believes that these provision
add little value, especially in light of other changes that the
Exchange adopted in the Proposed Rules. Likewise, the Proposed Rule
omits subparagraph (a)(5)(C) because it has become outdated in that it
does not provide expedited application procedures for Applicants that
are members of the Exchange's other affiliates; this provision also
does not explain what an ``expedited'' application process entails.
---------------------------------------------------------------------------
\18\ Existing subparagraph (a)(5)(B) also specifies that
Applicants that are already members of another registered securities
association or exchange must submit a regular application form.
---------------------------------------------------------------------------
In lieu of the existing subparagraph (a)(5), the Proposed Rule
includes two types of special applications in Rule 1013(b). First,
Proposed Rule 1013(b)(1) prescribes a special application process for
Applicants that are already FINRA members. Specifically, the Proposed
Rule states that such an Applicant will have the option to ``waive-in''
to become an Exchange Member and to register with the Exchange all
persons associated with it whose registrations FINRA has approved (in
categories recognized by the Exchange's rules). The Proposed Rule
defines the term ``waive-in'' to mean that the Department will rely
substantially upon FINRA's prior determination to approve the Applicant
for FINRA membership when the Department evaluates the Applicant for
Exchange membership. That is, the Department will normally permit a
FINRA member to waive-into Exchange membership without conducting an
independent examination of the Applicant's qualifications for
membership on the Exchange, provided that the Department is not
otherwise aware of any basis set forth in Rule 1014 to deny or
condition approval of the application.
Procedurally, the Proposed Rule states that a FINRA member that
wishes to waive-into Exchange membership must do so by submitting to
the Department an application form (the standard application form
contains an option to select waive-in membership) and an executed
Exchange Membership Agreement. The Department, in turn, will act upon a
duly submitted waive-in application within a reasonable time frame not
to exceed 20 days from submission of the application, unless the
Department and the Applicant agree to a longer time frame for issuing a
decision.\19\ If the Department fails to issue a decision on a waive-in
application within the prescribed time frame, then the Applicant may
petition the Exchange's Board of Directors to force the Department to
act, as set forth in Rule 1014(c)(3). Finally, the Proposed Rule states
that a decision issued under this provision shall have the same
effectiveness as set forth in Rule 1014 and shall be subject to review
as set forth in Rules 1015 and 1016.
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\19\ The Proposed Rule prescribes this time frame to accommodate
FINRA, which will review waive-in applications on behalf of the
Exchange to verify that the Applicants are FINRA members in good
standing. As a practical matter, the Exchange expects to act on
waive-in applications prior to the 20 day deadline.
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The second special application process, which is set forth in
Proposed Rule 1013(b)(2), permits Applicants for Exchange membership
that are already approved members of one or more of the Affiliated
Exchanges to waive-into the Exchange membership. In this context,
``waive-in'' means that the Department will rely substantially upon an
Affiliated Exchange's prior determination to approve the Applicant for
membership on the Affiliated Exchange when the Department evaluates the
Applicant for Exchange membership. The procedures in the Proposed Rule
for an Applicant to submit a waive-in application under this provision
and for the Department to issue a decision based upon such an
application are identical to the procedures described above for FINRA
members that seek to waive-into Exchange membership. The Exchange
amends its application form to reflect the fact that Applicants may
waive-into membership on the Exchange based upon their membership on
any of the other five Affiliated Exchanges.
Rule 1014
In several respects, Proposed Rule 1014 differs from the existing
Rule, which governs the issuance of membership application decisions by
the Department.
First, to improve clarity, the Proposed Rule is reorganized
relative to the existing Rule. Rather than begin the
[[Page 36144]]
Rule with a paragraph that describes the bases for the Department to
issue a decision on an application, as is the case presently, the
Proposed Rule begins with a paragraph (a) entitled ``Authority of
Department to Approve, Approve with Restrictions, or Deny an
Application.'' This new paragraph sets forth the general authority of
the Department to act on an application by approving it, denying it, or
approving it subject to restrictions: (1) That are reasonably designed
to address a specific (financial, operational, supervisory,
disciplinary, investigatory, or other regulatory) concern; or (2) that
mirror a restriction placed upon the Applicant by FINRA or an
Affiliated Exchange. It incorporates elements of what is now Rule
1014(b) (which the Exchange proposes to delete going forward).
Second, the Proposed Rule renumbers existing paragraph (a) as new
paragraph (b). This paragraph is retitled ``Bases for Approval,
Conditional Approval, or Denial'' but otherwise is the same.
Third, as noted above, existing paragraph (b) is omitted from the
Proposed Rule.
Fourth, the Proposed Rule amends paragraph (c), which prescribes
the time period within which the Department must issue and serve a
written decision on a membership application. Presently, the provision
requires the Department to serve a written decision within 15 business
days after the Applicant concludes its membership interview (if any) or
files all of its required information or documents, whichever is later.
The Proposed Rule relaxes this requirement by stating that the
Department must respond in a reasonable time period, not to exceed 45
(calendar) days after the Applicant files and provides to the Exchange
all required and requested information or documents in connection with
the application, unless the Department and the Applicant agree to
further extend the decision deadline.\20\ The Proposed Rule includes
these amendments because the Exchange adjudges the existing timeframe
to be needlessly short and inflexible. In certain instances where the
Department has outstanding questions or concerns associated with an
application, the existing Rule may force the parties to rush to address
outstanding questions and resolve outstanding issues. The Proposed Rule
allows for such questions and issues to be addressed with less time
pressure involved. The Exchange notes that it does not intend for the
Proposed Rule to routinely lengthen the Department's timeframe for
serving application decisions. Under the existing Rule, the Exchange
typically issues decisions far in advance of the 15 business day
deadline and the Exchange expects that it will continue to do so in
most instances. Indeed, the Exchange has a self-interest in issuing
decisions as soon as is possible. The 45 day decision period in the
Proposed Rule is merely intended to allow for the parties to have
flexibility in unusual circumstances.
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\20\ The Proposed Rule also contains conforming amendments to
Rule 1014(c)(3), which addresses failures of the Department to serve
a decision within the prescribed time frame.
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Fifth, the Proposed Rule omits existing paragraph (d), which states
that a decision by the Department to approve an application is
contingent upon the Applicant filing with the Department an executed
written membership agreement that contains the Applicant's agreement to
abide by any restriction specified in the Department's decision and to
obtain the Department's approval prior to undertaking a change in
ownership, control, or business operations, or prior to modifying or
removing a membership restriction. The Proposed Rule omits this
provision because, as explained above, the Exchange expressly requires,
in Proposed Rule 1013, that an Applicant must file a duly executed copy
of the Membership Agreement as part of its application. The existing
Membership Agreement contains the undertakings described in existing
paragraph (d). Accordingly, existing paragraph (d) is superfluous.
Rule 1015
The Proposed Rule 1000 Series amends existing Rule 1015, which
states that the Department's membership decisions are subject to review
by the Exchange Review Council. Specifically, the Proposed Rule 1000
Series moves from existing Rule 1012(c) to Proposed Rule 1015(k) a
provision that prohibits ex parte communications involving membership
decisions subject to review among certain Exchange staff, members of
the Exchange Review Council, members of a Subcommittee of the Council,
and the Board of Directors. Similarly, the Proposed Rule 1000 Series
moves from existing Rule 1012(d) to Proposed Rule 1015(l) a provision
that governs the recusal and disqualification of a member of the
Exchange Review Council, a Subcommittee thereof, or the Board of
Directors from participating in a review of a membership decision. The
Proposed Rule 1000 Series moves these provisions because the Exchange
believes that they fit logically within the section of the membership
rules that govern appeals of membership decisions. The Proposed Rules
contain no substantive changes to these provisions \21\ and the
Exchange does not believe that moving them will have any substantive
effect.
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\21\ The Proposed Rule omits the requirement in existing Rule
1015(a) that an applicant file a request for review ``by first-class
mail.'' Proposed Rule 1012(a) now provides for a more modern array
of filing options that includes electronic submission.
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Rule 1017
The Proposed Rule 1000 Series contains substantial changes to
existing Rule 1017, which requires Members to obtain approval prior to
effecting a change in ownership, control, or business operations. These
changes are generally intended to streamline and simplify the existing
Rule, which the Exchange believes are unnecessary onerous and complex.
As much as possible, the Proposed Rule applies the same procedures to
these applications for approval as it does to its applications for
membership under Proposed Rules 1013 and 1014.
The first difference between the existing and Proposed Rule 1017
concerns Rule 1017(a), which presently defines the events that require
Members to file applications. The existing paragraph states that a
Member shall file an application for approval prior to effecting the
following changes: (1) A merger of the Member with another Member
(unless both are members or the surviving member will continue to be a
member of the New York Stock Exchange (``NYSE'')); (2) a direct or
indirect acquisition by the Member of another Member (unless the
acquiring Member is a member of the NYSE); (3) direct or indirect
acquisitions or transfers of 25% or more in the aggregate of the
Member's assets or any asset, business line or line of operations that
generates revenues comprising 25% or more in the aggregate of the
Member's earnings measured on a rolling 36 month basis (unless both the
seller and acquirer are members of the NYSE); (4) a change in the
equity ownership or partnership capital of the Member that results in
one person or entity directly or indirectly owning or controlling 25
percent or more of the equity or partnership capital; or (5) a
``material change in business operations.'' Existing Rule 1011(g), in
turn, defines a ``material change in business operations'' to mean,
among other things: (1) Removing or modifying a membership restriction;
(2) acting as a dealer for the first time; (3) market making for the
first time on the Exchange (except when the member's market making has
been approved
[[Page 36145]]
previously by FINRA or Nasdaq); (4) adding business activities that
require higher minimum net capital under SEC Rule 15c3-1; and (5)
adding business activities that would cause a proprietary trading firm
no longer to meet the definition of that term contained in the rule.
For ease of reference, the Proposed Rule 1000 Series incorporates
into Proposed Rule 1017(a)(5) the definition of a ``material change in
business operations'' rather than define it separately in Rule 1011(g).
The Proposed Rule 1000 Series also takes the existing exclusion from
that definition--excluding first time market makers on the Exchange
whose market making activities have been approved previously by FINRA
or Nasdaq--and applies it more broadly to all of Rule 1017(a). That is,
none of the changes enumerated in Proposed Rule 1017(a) require prior
Departmental approval to the extent that the Member's Designated
Examining Authority (``DEA''), or an Affiliated Exchange, has approved
the change previously in accordance with their respective rules and
provided that the Member provides written evidence to the Department of
such prior approval. The Exchange believes that this is prudent because
in all instances in which a Member's DEA or any Affiliated Exchange
\22\ have already approved a change, the Exchange can be reasonably
confident that such prior approval would be consistent with its own
judgment on the matter, such that no purpose would be served in
requiring the Department to independently approve the same change.\23\
The Proposed Rule 1000 Series also eases burdens on Members that wish
to make changes to their businesses and which presently require
multiple approvals to do so. The Exchange notes that in the Proposed
Rules, it retains authority to require approval of a proposed change
where the nature, terms, or conditions of the change have altered since
the Member's DEA or an Affiliated Exchange approved it.
---------------------------------------------------------------------------
\22\ Exchange notes that the existing Rule is under-inclusive in
that it does not account for prior approvals granted by all of the
Affiliated Exchanges. The Exchange believes that there is no
reasonable basis for it to defer to a prior approval granted by
Nasdaq and to not do the same with respect to prior approvals
granted by the other Affiliated Exchanges.
\23\ Proposed Rule 1017(a) eliminates exceptions relating to
NYSE membership. The Exchange believes that this proposal is
reasonable insofar as the NYSE's rules may, at times, diverge with
those of the Exchange. Going forward, the Exchange feels more
confident deferring to the prior judgment of a Member's DEA or of an
Affiliated Exchange as to the specific change event at issue than it
does to the mere fact that a Member or its counterparty in a
business transaction are NYSE members.
---------------------------------------------------------------------------
Next, the Proposed Rule 1000 Series makes several organizational
and clarifying amendments to existing Rule 1017(b), which governs the
filing and content of applications filed under Rule 1017. to the
Proposed Rule prefaces subparagraph (b)(2)--which presently states
vaguely that the ``application'' shall contain certain items--with
language clarifying that the provision pertains to applications for
approval of a change in ownership or control or a material change in
the business operations of a member. It also breaks out the last
sentence of (b)(2) into new subparagraphs (2)(A) and (2)(B).
Furthermore, the Proposed Rule contains clarifying changes in (2)(A)
(specifying that a description of a ``change in ownership, control, or
business operations'' means a ``proposed'' change in ownership,
control, or ``material'' business operations) and (2)(B) (specifying
that the Member must ``attach'' rather than ``include'' a business
plan, pro forma financials, an organizational chart, and written
supervisory procedures relating to the ``proposed'' change). Finally,
the Proposed Rule renumbers the remainder of the existing Rule.
Proposed Rule 1017(c) is more limited in its scope than is existing
Rule 1017(c). Specifically, the proposed Rule omits from subparagraph
(c)(1) the ability of a Member to effect a change in ownership or
control prior to receiving approval from the Department and the ability
of the Department to impose interim restrictions on the Member pending
final Department approval. The Exchange believes that the concepts of
interim changes and restrictions are overly complex, potentially
disruptive, and ultimately unnecessary given the short time frames that
the Rules prescribe for the Department to act on applications.\24\
Additionally, the Exchange notes that in its experience reviewing
applications under Rule 1017, these provisions never have been invoked.
Finally, the Proposed Rule changes the title of this provision to
reflect the omission of the foregoing. Whereas now, the title is
``Effecting Change and Imposition of Interim Restrictions,'' the
Proposed Rule is entitled ``When Applications Shall or May Be Filed.''
---------------------------------------------------------------------------
\24\ The Exchange also notes that FINRA is also publicly
contemplating eliminating the concept of allowing its members to
effect business changes on an interim basis. See FINRA, Regulatory
Notice 18-23: Membership Application Proceedings (Request for Public
Comment), Attachment B (July 26, 2018), available at http://www.finra.org/sites/default/files/Attachment-B_Regulatory-Notice-18-23.pdf.
---------------------------------------------------------------------------
Existing paragraphs (d), (e), and (f) of Rule 1017, prescribe
standards for rejecting applications that are not substantially
complete, authorize the Department to serve a request for additional
documents and information, and permit the Department to conduct
interviews of Applicants, respectively. Proposed Rule 1017 omits these
provisions and replaces them with provisions that are more consistent
with Proposed Rule 1013(a)(2), (3), and (4). That is, Proposed Rule
1017(d) states that the Department will deem an application to be filed
on the date when it is substantially complete, meaning the date on
which the Department receives from the Applicant all material
documentation and information required under the Rule. It also requires
the Department to inform the Applicant in writing when the Department
deems an application to be substantially complete. Proposed Rule
1017(d) states that the Department may treat an application filed under
this Rule as having lapsed, and the Department may reject an
application filed under this Rule, in accordance with Proposed Rule
1013(a)(3), except that the Department may treat an application as
having lapsed if it is not substantially complete for 30 days or more
after the applicant initiates it.\25\ Finally, Proposed Rule 1017(f)
states that at any time before the Department serves its decision on an
application filed under Rule 1017, the Department may request
additional information or documentation from the Applicant or from a
third party in accordance with Rule 1013(a)(4).\26\
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\25\ The Exchange notes that this 30 day time period for deeming
an application to have lapsed derives from existing Rule 1017(d).
\26\ As stated previously, circumstances where the Department
may consult a third party include to seek additional information
about or to verify aspects of an application. For example, the
Department may consult another SRO to verify the financial status or
prior disciplinary history of a Member's prospective new ownership.
---------------------------------------------------------------------------
Existing Rule 1017(g) prescribes a complex system for the
Department to issue decisions in response to applications filed under
Rule 1017. For example, it differentiates between decisions issued with
respect to Members that are and are not FINRA members (or required to
be FINRA members). With respect to Members that are FINRA members, the
Rule requires the Department to consider whether the Applicant and its
Associated Persons meet the standards set forth in NASD (FINRA) Rule
1014(a). It also prescribes specific criteria for issuing decisions
where the Applicant seeks a
[[Page 36146]]
modification or removal of a membership restriction. The Exchange
believes that this complex system is unnecessary and can be simplified
considerably, particularly in light of the proposal described above to
exempt a Member from obtaining the Exchange's approval to effect a
change in ownership or control or a material change in its business
operations when FINRA has already approved the change previously. That
is, there is no reason for the Exchange to make an independent
assessment of whether the proposed change complies with FINRA rules if
FINRA has already made that determination.
In lieu of the existing provisions, Proposed Rule 1017 states that
the Department will render a decision on an application filed under
Rule 1017 in accordance with the standards set forth in Rule 1014,
except with respect to applications to modify or remove a membership
restriction, in which case the Department will consider the factors
presently set forth in existing Rule 1017(g)(1)(D) (Proposed Rule 1017
renumbers this provision as subparagraph (g)(1)).
Additionally, in lieu of existing Rule 1017(g)(2), which requires
the Department to serve a written decision on an application filed
under Rule 1017 within 30 (calendar days) after conclusion of a
membership interview or the filing of additional information or
documents (whichever is later), Proposed Rule 1017 states that the
Department will serve a written decision in accordance with Rule
1013(c).\27\ The Proposed Rule 1000 Series makes this change to
1017(g)(2) for the same reasons that it discussed above with respect to
Rule 1013(c).
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\27\ The Exchange notes that the cross-reference to Rule 1013(c)
in the Proposed Rules also addresses the Applicant's rights in the
event that the Department does not serve it with a timely written
decision. Accordingly, the Proposed Rule omits existing subparagraph
(g)(3), which covers the same topic.
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Finally, the Proposed Rule 1000 Series omits existing Rule 1017(k).
This provision presently states that if an application for approval of
a change in ownership lapses or is denied and all appeals are exhausted
or waived, the Member must, within 60 days, submit a new application,
unwind the transaction, or file a Form BDW. It also provides for the
Department to shorten or lengthen the 60 day period under certain
circumstances. Due to the fact that the Exchange--as explained
previously--will eliminate the ability of a Member to effect a change
in ownership while its application for Departmental approval is
pending, this provision is no longer be necessary. That is, there will
be no interim change in ownership that will need to be unwound or
otherwise addressed if the Department denies an application or it
lapses.
Rule 1018
The Proposed Rule 1000 Series consolidates within Proposed Rule
1018, which is reserved under the existing Rules, existing provisions
of the Rules pertaining to the resignation of members (existing Rule
1012(g), transfer of membership (existing Rule 1012(i)(1)), termination
of membership (existing Rule 1012(i)(2)), and reinstatement of
membership (existing Rule 1002(d)). The Exchange believes that these
provisions are logically related and belong together in a single Rule.
Proposed Rule 1018 maintains the substance of these consolidated
provisions unchanged from their existing state, except that
resignations no longer require a 30 day time period to become
effective. Also, the provision on reinstatement applies to membership
only and not to registration, which is covered separately in the
Exchange's Rules.
Other Miscellaneous Changes
The Proposed Rule 1000 Series contains other non-substantive
differences from the existing Rule 1000 Series, as follows. Where the
existing Rules refer specifically to ``Nasdaq BX'' or ``BX,'' the
Proposed Rules replace such references with more general term
``Exchange.'' This difference makes it easier in the future to
harmonize the Exchange's membership rules with those of the other
Affiliated Exchanges. The Proposed Rule 1000 Series also updates
obsolete references to the ``NASD'' to reflect the fact that the NASD
is now known as ``FINRA.'' Finally, where applicable, the Proposed Rule
1000 Series renumbers the Rules and updates or corrects cross-
references.
Proposed Introductory Paragraph to the BX Rule 1000 Series
The Exchange proposes to include an introductory paragraph to the
BX Rule 1000 Series which states that it incorporates by reference the
Nasdaq Rule 1000 Series (other than Nasdaq Rules 1031, 1050, 1090,
1130, 1150, 1160, and 1170),\28\ and that such Nasdaq Rules shall be
applicable to Exchange Members, Associated Persons, and other persons
subject to the Exchange's jurisdiction.
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\28\ The Exchange notes that these rules, both for BX and
Nasdaq, are separate from the membership rules. The proposal will
not supplant or amend BX Rules 1031, 1050, 1090, 1130, 1150, 1160,
or 1170.
---------------------------------------------------------------------------
These proposed introductory paragraphs also list instances in which
cross references in the Nasdaq Rule 1000 Series to other Nasdaq rules
should be read to refer instead to the Exchange rules, and references
to defined Nasdaq terms shall be read to refer to the Exchange-related
meanings of those terms. For example, references in the Nasdaq Rule
1000 Series to the following defined terms shall be read to refer to
the Exchange-specific meanings of those terms: ``Exchange'' or
``Nasdaq'' shall be read to refer to the Nasdaq BX Exchange; ``Rule''
or ``Exchange Rule'' shall be read to refer to the Exchange Rules; the
defined term ``Applicant'' in the Nasdaq Rule 1000 Series shall be read
to refer to an Applicant to the Nasdaq BX Exchange; the defined terms
``Board'' or ``Exchange Board'' in the Nasdaq Rule 1000 Series shall be
read to refer to the Nasdaq BX Board of Directors; the defined term
``Director'' in the Nasdaq Rule 1000 Series shall be read to refer to a
Director of the Board of the Nasdaq BX Exchange; the defined term
``Exchange Review Council'' in the Nasdaq Rule 1000 Series shall be
read to refer to the Nasdaq BX Exchange Review Council; the defined
term ``Subcommittee'' in the Nasdaq Rule 1000 Series shall be read to
refer to a Subcommittee of the Nasdaq BX Exchange Review Council; the
defined term ``Interested Staff'' in the Nasdaq Rule 1000 Series shall
be read to refer to Interested Staff of Nasdaq BX; the defined term
``Member'' in the Nasdaq Rule 1000 Series shall be read to refer to a
Nasdaq BX Member; the defined term ``Associated Person'' shall be read
to refer to a Nasdaq BX Associated Person; the defined terms ``Exchange
Membership Department'' or ``Membership Department'' shall be read to
refer to the Nasdaq BX Membership Department; and the defined term
``Exchange Regulation Department'' shall be read to refer to the Nasdaq
BX Regulation Department.
Additionally, the proposed introduction to the BX Rule 1000 Series
states that cross references in the Nasdaq Rule 1000 Series to ``Rule
0120'' shall refer to Nasdaq BX Rule 0120, cross references in the
Nasdaq Rule 1000 Series to Rule 3010 shall refer to Nasdaq BX Rule
3010; cross references in the Nasdaq Rule 1000 Series to Rule 3011
shall refer to Nasdaq BX Rule 3011; and cross references to ``General
4, Section 1.1200 Series'' shall be read to refer to the Nasdaq BX Rule
1200 Series.
[[Page 36147]]
Conclusion
The changes proposed herein will allow the Exchange to harmonize
its membership rules and processes with those of Nasdaq and,
ultimately, with the other Affiliated Exchanges,\29\ thus providing a
uniform criteria across the Affiliated Exchanges for membership
qualifications and a uniform process across the Affiliated Exchanges
for processing membership applications. The proposal will also provide
for full membership reciprocity between Nasdaq and the Exchange--and
hopefully, in time, across all of the Affiliated Exchanges--so that a
member of one Affiliated Exchange would receive expedited treatment in
applying for membership on any other Affiliated Exchange. Harmonizing
the membership rules and processes of the Affiliated Exchanges will
render administration of the Affiliated Exchanges' responsibilities
more efficient in that the Membership Department will only need to
administer a single set of criteria and processes, rather than six sets
thereof. Similarly, harmonized membership rules and processes will
benefit Exchange Applicants and Members by reducing the number of
requirements that must be met and the processes that must be followed
to apply for membership on the Affiliated Exchanges.
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\29\ See n.4, supra.
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Moreover, as to the Exchange itself, the proposed changes described
herein will render the Exchange's membership rules and processes
clearer, better organized, simpler, and easier to comply with. Again,
such changes will provide benefits both to the Exchange's Membership
Department and to Exchange Applicants.
The proposed membership rules and processes are substantially
similar to the existing rules and process, and where there are
differences between the new and old processes, the Exchange believes
that the new process does not disadvantage its Members or Associated
Persons. To the contrary, the Exchange believes that the new rules and
processes will benefit all parties as it again provides greater
clarity, simplicity, and efficiency than the retired rules and
processes.
Implementation
To facilitate an orderly transition from the existing Rule 1000
Series to the Proposed Rule 1000 Series, the Exchange is proposing to
apply the existing Rules to all applications which have been submitted
to the Exchange (including applications that are not yet complete) and
are pending approval prior to the operative date. The Exchange also
will apply the existing Rules to any appeal of an Exchange membership
decision or any request for the Board to direct action on an
application pending before the Exchange Review Council, the Board, or
the Commission, as applicable. As a consequence of this transition
process, the Exchange will retain the existing processes during the
transition period until such time that there are no longer any
applications or matters proceeding under the existing rules. To
facilitate this transition process, the Exchange will retain a
transitional Rulebook that will contain the Exchange's membership rules
as they are at the time that this proposal is filed with the
Commission. This transitional Rulebook will apply only to matters
initiated prior to the operational date of the changes proposed herein
and it will be posted to the Exchange's public rules website. When the
transition is complete, the Exchange will remove the transitional
Rulebook from its public rules website.
The Exchange will announce and explain this transition process in a
regulatory alert.
The Exchange notes that Nasdaq applied the same process described
above to govern its transition to its amended membership rules.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\30\ in general, and furthers the objectives of Section
6(b)(5) and of the Act,\31\ 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. It is also consistent with Section 6(b)(7) of the Act in that
it provides for a fair procedure for denying Exchange membership to any
person who seeks it, barring any person from becoming associated with
an Exchange Member, and prohibiting or limiting any person with respect
to access to services offered by the Exchange or a Member thereof.\32\
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\30\ 15 U.S.C. 78f(b).
\31\ 15 U.S.C. 78f(b)(5).
\32\ 15 U.S.C. 78f(b)(7).
---------------------------------------------------------------------------
As a general matter, the Exchange believes that its proposal to
delete its existing membership rules and incorporate by reference the
Nasdaq Membership Rules will promote a free and open market, and will
benefit investors, the public, and the markets, because the new rules
will be clearer, better organized, and simpler.
The proposal is just and equitable because it will render the
Exchange's membership rules easier for Applicants and Members to read
and understand, including by doing the following:
Establishing a ``roadmap'' paragraph in proposed Rule
1014(a) that sets forth the basic authority of the Department to
approve, approve with conditions, or deny applications for membership
before the Rule goes on to enumerate criteria for the Department to
apply when taking each of those actions;
Making the titles of the rules more accurate and
descriptive (e.g., Proposed Rule 1014(b) (amending the existing title
``Bases for Denial'' to also include bases for approval and conditional
approval to make it more accurate and complete));
Grouping logically-related provisions together in the
Rules (e.g., provisions governing resignation, termination, transfer,
and reinstatement of membership (moving them from Rule 1002(d) and
1012(g) and (i) to Proposed Rule 1018); provisions relating to ex parte
communications (existing Rule 1012(c)) and recusals and
disqualifications (existing Rule 1012(d) (moving them into Proposed
Rule 1015, which governs reviews of membership decisions));
Rationalizing and consolidating provisions that presently
govern lapses and rejections of applications, including by making
clearer conceptual distinctions between lapses (i.e., applications that
are not substantially complete and which the Department may deem to be
abandoned, such that the Department will refund any application fees
paid by the Applicant) and rejections (i.e., applications that the
Department deemed to be filed but which it refuses to act upon due to
lingering incompleteness, in which case the Department will not refund
application fees paid to it), and by consolidating Rules 1012(b) and
1013(a)(3) into Proposed Rule 1013(a)(3)(A) and (B);
Consolidating overlapping provisions that govern the
registration of branch offices and office of supervisory jurisdiction
into a single provision (consolidating Rule 1012(j) and IM-1002-4 into
Proposed Rule 1002(d));
Omitting from the Proposed Rule references in existing
Rule 1002(c), Rule 1012(j), and Rule 1013(a)(1)(U) to the obligation of
Members (and their branch offices) to pay fees, charges, dues, and
assessments to the Exchange insofar as those obligations are
duplicative of Rule 9553;
[[Page 36148]]
Converting IM-1002-1 and IM-1002-4 into rule text in the
Proposed Rule 1000 Series;
Clarifying when the Membership Department will deem an
application to be filed (when the application is ``substantially
complete,'' as set forth in Proposed Rule 1013(a)(2)) and by requiring
the Department to notify an Applicant in writing of the filing date;
Clarifying what the Exchange means when it states that an
Applicant may ``waive-in'' to Exchange membership (as set forth in
Proposed Rule 1013(b)); and
Updating obsolete cross-references throughout the Rules
from NASD to FINRA.
The proposal will also make compliance with the membership rules
simpler and less burdensome for Applicants and Members by doing the
following:
Eliminating obsolete requirements to submit paper copies
of Forms U-4 and BD or explain information listed on the forms (Rule
1013(a)(1)(A), (J), (K), and (P) and Rule 1013(a)(2)) where the
Department already has electronic access to the Forms and the
information contained therein;
Permitting electronic filing of applications (proposed
Rule 1012(a)(1);
Allowing payment of application fees by means other than
paper check (Proposed Rule 1013(a)(1)(C));
Relaxing deadlines that needlessly rush the process of
responding to the Department's questions and concerns about an
application \33\ or that force the Department to render a decision when
the Applicant is not ready for the Department to do so; \34\
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\33\ Rather than require an Applicant to file a response to a
supplemental request for documents or information within 15 business
days, Proposed Rule 1013(a)(3) states that the Applicant must
respond within a ``reasonable period of time'' to be prescribed by
the Department. Even then, Rule 1013(a)(3)(B) states that the
Department must serve upon the Applicant a notice of incompleteness
if it fails to respond to a supplemental request and then afford the
Applicant an additional reasonable time period to remedy the failure
before it may reject the Applicant's application.
\34\ Rather than require the Department to serve a written
decision within 15 business days, Proposed Rule 1014(c) states that
it must issue a decision within a reasonable period of time, not to
exceed 45 calendar days after the application is filed and complete,
unless the parties agree to a later date. The Exchange does not
intend for this change to result in the Department routinely issuing
decisions later than it does presently. The Exchange presently
issues decisions, in most instances, well in advance of the current
15 business day deadline and it has a self-interest in continuing to
do so whenever possible. However, the Exchange believes that it is
in the interest of Applicants for the Department to have discretion
to respond at a later time in the event that the Applicant needs to
address or resolve outstanding questions or concerns associated with
its application.
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Eliminating formal membership interviews and procedures
related thereto, which the Exchange has not utilized historically (Rule
1013(b)); \35\
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\35\ The elimination of the formal membership interview process
will have no practical effect on the membership process insofar as
the Department otherwise has authority to request additional
information from the Applicant. Under Proposed Rule 1014(a)(4), this
authority may include a request for the Applicant to provide
information or documents in-person or by telephone. In other words,
the Department will retain authority to conduct an informal
interview of the Applicant.
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Harmonizing disparate procedures under Rules 1013 and 1017
for filing, evaluating, and responding to initial membership
applications and applications for approval of business changes,
including by streamlining the Rule 1017 procedures;
Broadening the circumstances in which an Applicant may
waive-into Exchange membership to include the Applicant's membership in
any of the Affiliated Exchanges \36\ and defining procedures for
processing and responding to waive-in applications (Proposed Rule
1013(b));
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\36\ As noted above, the Exchange believes that it is reasonable
to permit reciprocity in membership among all of the Affiliated
Exchanges. The Exchange believes that there is no reasonable basis
for it to defer to a prior approval granted by Nasdaq and to not do
the same with respect to prior approvals granted by the other
Affiliated Exchanges.
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Narrowing the circumstances in which a Member must obtain
prior Department approval before effecting a change in ownership,
control, or material business operations by excluding changes for which
a Member has obtained prior approval from the Member's DEA, or an
Affiliated Exchange (Proposed Rule 1017(a)); \37\
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\37\ As is discussed above, the Exchange believes that deference
to prior approvals of a proposed business change made by an
Affiliated Exchange or the Exchange's DEA is reasonable because the
judgment of these entities on such matters is likely to be the same
as that which the Exchange would itself employ. The Exchange
assesses that any marginal benefit that might be gained from it
applying its own independent judgment outweighs the burden to
Applicants of obtaining multiple approvals for the same proposed
change. The Exchange notes that it will require a Member to obtain
approval for such a change if the nature, terms, or conditions of
the proposed change have altered since its DEA or an Affiliated
Exchange approved it.
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Eliminating the unused, unnecessary, and potentially
disruptive ability of Members, pursuant to Rule 1017(c), to effect
ownership changes on an interim basis while an application for
Department approval is pending; and
Eliminating the 30 day waiting period for Members that
seek to resign their memberships under proposed Rule 1018(a).
In sum, the foregoing changes will update, rationalize, and
streamline the Exchange's membership rules and processes, all to the
benefit of Applicants and Members. Moreover, these changes will not
adversely impact the rights of Applicants or Members to appeal adverse
Departmental decisions under these Rules or to request Board action to
compel the Department to render decisions on applications.
Last, the Exchange believes that its proposal to phase-in the
implementation of the new membership rules and processes is consistent
with Section 6(b)(7) of the Act \38\ because both the current and
proposed processes provide fair procedures for granting and denying
applications for becoming an Exchange Member, becoming an Associated
Person, and making material changes to the business operations of a
Member. The Exchange is proposing to provide advanced notice of the
implementation date of the new processes, and will apply the new
processes to new applications, appeals, and requests for Board action
that are initiated on or after that implementation date. Any
application, appeal, or request for Board action initiated prior to the
implementation date will be completed using the current processes. As a
consequence, the Exchange will maintain a transitional Rulebook on the
Exchange's public rules website which will contain the Exchange Rules
as they are at the time of filing this rule change. These transitional
rules will apply exclusively to applications, appeals, and requests for
Board action initiated prior to the implementation date. Upon
conclusion of the last decision on a matter to which the transitional
rules apply, the Exchange will remove the defunct transitional rules
from its public rules website. Thus, the transition will be conducted
in a fair, orderly, and transparent manner. Lastly, the proposed
transition process is the same process that Nasdaq implemented during
its transition to new membership rules.
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\38\ 15 U.S.C. 78f(b)(7).
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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 Exchange does not expect
that its proposed changes to the membership rules will have any
competitive impact on its existing or prospective membership. The
proposed changes will apply equally to all similarly situated
Applicants and Members and they will confer no relative advantage or
[[Page 36149]]
disadvantage upon any category of Exchange Applicant or Member.
Moreover, the Exchange does not expect that its proposal will have an
adverse impact on competition among exchanges for members; to the
contrary, the Exchange hopes that by clarifying, reorganizing, and
streamlining its membership rules, and by making the Exchange's
membership process less burdensome for Applicants and Members, the
Exchange will improve its competitive standing relative to other
exchanges.
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
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \39\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\40\
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\39\ 15 U.S.C. 78s(b)(3)(A)(iii).
\40\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or 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-2019-022 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-2019-022. 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-2019-022, and should be submitted on
or before August 16, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\41\
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\41\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-15871 Filed 7-25-19; 8:45 am]
BILLING CODE 8011-01-P