[Federal Register Volume 85, Number 34 (Thursday, February 20, 2020)]
[Notices]
[Pages 9870-9872]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-03322]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88209; File No. SR-NASDAQ-2020-007]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Assume Operational 
Responsibility for Certain Enforcement Functions Currently Performed by 
FINRA Under the Exchanges Authority and Supervision

February 13, 2020.
    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 February 3, 2020, The Nasdaq Stock Market LLC (``Nasdaq'' 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 assume operational responsibility for 
certain enforcement functions currently performed by the Financial 
Industry Regulatory Authority (``FINRA'') under the Exchange's 
authority and supervision. Specifically, the Exchange proposes to 
assume operational responsibility for litigating contested disciplinary 
proceedings arising out of Nasdaq Regulation-led investigation and 
enforcement activities. In carrying out that responsibility, the 
Exchange plans to engage a third party, such as a law firm or another 
self-regulatory organization. Nasdaq Rule General 1, Section 7 \3\ 
requires Commission approval for this proposal.
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    \3\ Formally Nasdaq Rule 0150.
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    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaq.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.\4\ As a self-regulatory 
organization (``SRO''), Nasdaq must have a comprehensive regulatory 
program that includes investigation and prosecution of violative 
activity. Since it became a national securities exchange, Nasdaq 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, ``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.'' \5\
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    \4\ 15 U.S.C. 78(f).
    \5\ Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550, 3556 (January 23, 2006).
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    In April 2019, Nasdaq received Commission approval to reallocate 
operational responsibility from FINRA to Nasdaq Regulation \6\ for 
certain investigation and enforcement activity,\7\ namely:
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    \6\ Under Nasdaq Rule 9120(t), Nasdaq Regulation includes the 
Nasdaq Enforcement Department.
    \7\ Securities Exchange Act Release No. 85505 (April 3, 2019), 
84 FR 14170, 14171 (April 9, 2016).
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     Investigation and enforcement responsibilities for conduct 
occurring on The Nasdaq Options Market,\8\ and
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    \8\ As appropriate, Nasdaq Regulation coordinates 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 Nasdaq's equity market only, i.e., not also on non-Nasdaq-
affiliated equities markets.\9\
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    \9\ With respect to the operational responsibilities described, 
Nasdaq Regulation already performed 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 General 1, Section 7 on those markets. 
Nasdaq BX, Inc. (``BX''), which does have a comparable rule to Rule 
General 1, Section 7, received Commission approval to perform these 
functions in June 2019. See Securities Exchange Act Release No. 
86051 (June 6, 2019), 84 FR 27387 (June 22, 2019).
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    Notwithstanding that approval, FINRA continues to perform certain 
functions pursuant to a RSA,\10\ including, among other things, the 
handling of contested disciplinary proceedings arising out of Nasdaq 
Regulation-led investigation and enforcement activities.\11\ Nasdaq now 
requests Commission approval to reallocate operational responsibility 
from FINRA to Nasdaq Regulation for certain enforcement activity, 
namely the handling of contested disciplinary proceedings through the 
use a third party, not just FINRA.\12\
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    \10\ In addition to work performed pursuant to a RSA, FINRA also 
performs work for matters covered by agreements to allocate 
regulatory responsibility under Rule 17d-2 of the Act.
    \11\ For example, pursuant to Rule 9216, if at the conclusion of 
a Nasdaq Regulation-led investigation, Nasdaq 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 Nasdaq 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 continues to be responsible for the 
administration of the hearing process.
    \12\ A third party may include a law firm or another self-
regulatory organization. The Exchange will continue to use FINRA's 
Office of Hearing Officers to administer the hearing process.
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    In its prior request for Commission approval to reallocate 
operational responsibility from FINRA to Nasdaq Regulation for certain 
investigation and enforcement functions, the Exchange noted 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.\13\ The Exchange believes that assuming 
responsibility for litigating contested disciplinary proceedings 
through the use of more than one third party will similarly ensure that 
matters are handled effectively, efficiently and with immediacy. As it 
does with FINRA, the Exchange would directly oversee the work performed 
by the third party. This will ensure that the Exchange continues to 
bring to bear its overall market and surveillance expertise throughout 
the disciplinary proceedings. Moreover, the Exchange will only use 
third parties that

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have the requisite legal experience, ensuring that only those third 
parties with the appropriate qualifications handle contested matters on 
the Exchange's behalf. Having the option to use a third party other 
than FINRA will also ensure that contested cases are handled promptly 
when, for example, FINRA's litigation resources are strained or when it 
is otherwise unable to handle a particular matter.\14\ The Exchange 
notes that this proposal would not change or alter in any way the 
disciplinary processes around how contested matters are handled.
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    \13\ Securities Exchange Act Release No. 85153 (February 15, 
2019), 84 FR 5748, 5752 (February 22, 2019).
    \14\ The Exchange intends to continue to use FINRA to handle 
contested disciplinary proceedings. The Exchange is requesting 
permission to have the option to use a third party other than FINRA 
when it believes that doing so is consistent with ensuring prompt 
resolution of regulatory matters.
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    Nasdaq Rule General 1, Section 7 requires that Nasdaq obtain 
Commission approval if regulatory functions subject to RSAs in effect 
at the time that Nasdaq began to operate as a national securities 
exchange are no longer performed by FINRA or an affiliate thereof, or 
by another independent self-regulatory organization. Nasdaq believes 
that assuming operational responsibility for contested disciplinary 
proceedings by using more than one third party to litigate such matters 
will further its regulatory program and benefit investors and the 
markets. Commission approval of the proposal would allow Nasdaq to 
deliver increased efficiencies in the regulation of its market and to 
act promptly and provide more effective regulation.\15\
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    \15\ BX, which has a comparable rule to Rule General 1, Section 
7, will file a similar rule filing to request Commission approval to 
use a third party to handle contested disciplinary proceedings.
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    Finally, Nasdaq notes that its proposal is consistent with 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.\16\ That 
reintegration also included the handling of contested disciplinary 
proceedings.
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    \16\ 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).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\17\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\18\ 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,\19\ 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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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
    \19\ 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 will ensure that contested matters are handled 
effectively, efficiently and with immediacy. The ability to assume 
responsibility for this function by using more than one party to handle 
contested matters will ensure that contested cases are handled promptly 
when, for example, FINRA's litigation resources are strained or when it 
is otherwise unable to handle a particular matter. This will enable the 
Exchange to take timely action when appropriate to enforce its rules, 
hold bad actors accountable, and protect investors and market 
integrity. This proposal, however, would not change or alter in any way 
the disciplinary processes around how contested matters are handled. 
Rather, it will result in more effective regulation because it will 
facilitate timely and more efficient action. Internalizing the 
litigation function through the use of a third party other than FINRA 
will also enhance regulation because the Exchange will continue to 
bring to bear its overall market and surveillance expertise throughout 
the disciplinary proceedings. Moreover, the Exchange, consistent with 
its statutory obligations, will only use third parties that have the 
requisite legal experience, ensuring that only those third parties with 
the appropriate qualifications handle contested matters on the 
Exchange's behalf.

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 have the option to use a third party other than FINRA to 
litigate contested matters on the Exchange's behalf.

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 (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (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-NASDAQ-2020-007 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-NASDAQ-2020-007. 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

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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-NASDAQ-2020-007 and should be submitted 
on or before March 12, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2020-03322 Filed 2-19-20; 8:45 am]
 BILLING CODE 8011-01-P