[Federal Register Volume 85, Number 84 (Thursday, April 30, 2020)]
[Notices]
[Pages 24064-24066]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-09124]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88746; File No. SR-BX-2020-007]


Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing 
of Proposed Rule Change, as Modified by Amendment No. 1, To Assume 
Operational Responsibility for Certain Enforcement Functions Currently 
Performed by FINRA Under the Exchange's Authority and Supervision

April 24, 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 April 16, 2020, Nasdaq BX, Inc. (``BX'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change. On April 23, 2020, the Exchange filed Amendment 
No. 1 to the proposed rule change, which amended and replaced the rule 
change in its entirety.\3\ The proposed rule change, as modified by 
Amendment No. 1, 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, as 
modified by Amendment No. 1, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaces and supersedes in its entirety the 
proposal as originally filed. In Amendment No. 1, the Exchange makes 
clear in Item 8 of Form 19b-4 that the Staff for each of Phlx, ISE, 
GEMX, and MRX act in a similar manner to what the proposal seeks for 
BX Staff and that the Commission recently approved Nasdaq Staff to 
do the same with respect to Nasdaq. See note 17 infra.
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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 certain contested 
disciplinary proceedings arising out of BX Regulation-led investigation 
and enforcement activities. BX Rule General 2, Section 7 \4\ requires 
Commission approval for this proposal.
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    \4\ Formerly BX Rule 0150.
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    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

[[Page 24065]]

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.\5\ As a self-regulatory 
organization (``SRO''), BX must have a comprehensive regulatory program 
that includes investigation and prosecution of violative activity. 
Since its acquisition by The NASDAQ OMX Group, Inc., BX has contracted 
with FINRA through various regulatory services agreements (``RSAs'') to 
perform certain of these regulatory functions on its behalf. However, 
as the Commission has made clear with respect to BX's affiliate, The 
Nasdaq Stock Market LLC (``Nasdaq''), ``the Nasdaq Exchange bears the 
responsibility for self-regulatory conduct and primary liability for 
self-regulatory failures, not the SRO retained to perform regulatory 
functions on the Exchange's behalf.'' \6\
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    \5\ 15 U.S.C. 78(f).
    \6\ Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550, 3556 (January 23, 2006).
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    In June 2019, BX received Commission approval to reallocate 
operational responsibility from FINRA to BX Regulation \7\ for certain 
investigation and enforcement activity,\8\ namely:
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    \7\ Under BX Rule 9120(t), the Exchange's Regulation Department 
includes the Exchange's Enforcement Department. The Exchange notes 
that the Staff that comprises the Exchange's Regulation Department 
is the same that comprises the Nasdaq Regulation Department.
    \8\ Securities Exchange Act Release No. 86051 (June 6, 2019), 84 
FR 27387 (June 12, 2019).
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     Investigation and enforcement responsibilities for conduct 
occurring on The BX Options Market,\9\ and
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    \9\ As appropriate, the Exchange's Regulation Department will 
coordinate with other SROs to the extent it is investigating 
activity occurring on non-Nasdaq-affiliated options markets to 
ensure no regulatory duplication occurs.
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     investigation and enforcement responsibilities for conduct 
occurring on BX's equity market only, i.e., not also on non-Nasdaq-
affiliated equities markets.\10\
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    \10\ With respect to the operational responsibilities described 
in both bullet points, Nasdaq Regulation Staff currently performs 
these functions for the Nasdaq PHLX LLC (``Phlx''), Nasdaq ISE, LLC 
(``ISE''), Nasdaq GEMX, LLC (``GEMX''), and Nasdaq MRX, LLC 
(``MRX'') because there is no comparable rule to General 2, Section 
7 on those markets.
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    Notwithstanding that approval, FINRA continues to perform certain 
functions pursuant to a RSA,\11\ including, among other things, the 
handling of contested disciplinary proceedings arising out of BX 
Regulation-led investigation and enforcement activities.\12\ BX now 
requests Commission approval to reallocate operational responsibility 
from FINRA to BX Regulation for certain enforcement activity, namely 
the handling of certain contested disciplinary proceedings.\13\ 
Specifically, BX Regulation anticipates handling those contested 
disciplinary proceedings that FINRA is unable or unwilling to handle 
due to strained resources or other similar limitations.\14\ For those 
contested disciplinary proceedings over which BX Regulation does not 
assume operational responsibility, the Exchange will continue to use 
FINRA to litigate those matters.
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    \11\ 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.
    \12\ For example, pursuant to Rule 9216, if at the conclusion of 
a BX Regulation-led investigation, BX Regulation has reason to 
believe that a violation occurred but the Respondent disputes the 
violation and therefore does not execute an Acceptance, Waiver, and 
Consent (``AWC'') letter, or if the Respondent executes the AWC 
letter but the Exchange Review Council, Review Subcommittee or 
FINRA's Office of Disciplinary Affairs does not accept the executed 
letter, the Exchange may decide to pursue formal disciplinary 
proceedings. In such a case, the Exchange would refer the matter to 
FINRA to handle the formal disciplinary proceedings on its behalf. 
FINRA's Office of Hearing Officers will continue to be responsible 
for the administration of the hearing process.
    \13\ BX may determine to engage a third party, such as a law 
firm, to litigate the matter on its behalf. In all cases, the 
Exchange will continue to use FINRA's Office of Hearing Officers to 
administer the hearing process.
    \14\ BX Regulation's decision to assume operation reasonability 
for any given contested disciplinary proceeding will be made on a 
case by case basis.
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    In its prior request for Commission approval to reallocate 
operational responsibility from FINRA to BX 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.\15\ The Exchange believes that assuming 
responsibility for litigating certain contested disciplinary 
proceedings, as discussed above, will similarly ensure that matters are 
handled effectively, efficiently and with immediacy. The Exchange notes 
that this proposal would not change or alter in any way the 
disciplinary processes around how contested matters are handled. For 
example, the rules applicable to the disciplinary process remain the 
same and FINRA's Office of Hearing Officers will continue to administer 
the hearing process for all contested disciplinary proceedings. 
Therefore, regardless of whether FINRA or the Exchange is responsible 
for litigating the matter, FINRA's Office of Hearing Officers will 
administer the hearing process.\16\
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    \15\ Securities Exchange Act Release No. 85691 (April 18, 2019), 
84 FR 17219, 17220 (April 24, 2019).
    \16\ FINRA's Office of Hearing Officers plays no role in 
uncontested disciplinary proceedings.
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    BX Rule General 2, Section 7 requires that BX obtain Commission 
approval if regulatory functions subject to RSAs in effect at the time 
BX executed the agreement in 2008 are no longer performed by FINRA or 
an affiliate thereof, or by another independent self-regulatory 
organization. BX believes that assuming operational responsibility for 
certain contested disciplinary proceedings will further its regulatory 
program and benefit investors and the markets. Commission approval of 
the proposal would allow BX to deliver increased efficiencies in the 
regulation of its market and to act promptly and provide more effective 
regulation.\17\
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    \17\ In a separate filing Nasdaq also proposed to reallocate 
operational responsibility from FINRA to Nasdaq Regulation for 
enforcement responsibilities for litigating certain contested 
disciplinary proceedings arising out of Nasdaq Regulation-led 
investigation and enforcement activities. See SR-Nasdaq-2020-007. 
The Commission approved that rule filing on March 30, 2020. See 
Securities Exchange Act Release No. 34-88516 (Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1, to Assume Operational Responsibility for Certain 
Enforcement Functions Currently Performed by FINRA under the 
Exchanges Authority and Supervision).
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    Finally, BX 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.\18\ That 
reintegration also included the handling of contested disciplinary 
proceedings.
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    \18\ 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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[[Page 24066]]

2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\19\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\20\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest. In addition, the Exchange believes that the proposal furthers 
the objectives of Section 6(b)(7) of the Act,\21\ in particular, in 
that these changes will continue to provide for fair procedures for the 
disciplining of members and persons associated with members, the denial 
of membership to any person seeking membership therein, the barring of 
any person from becoming associated with a member thereof, and the 
prohibition or limitation by the Exchange of any person with respect to 
access to services offered by the Exchange or a member thereof.
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    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(5).
    \21\ 15 U.S.C. 78f(b)(7).
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    The Exchange believes that this proposal is in keeping with those 
principles because it will ensure that certain contested matters 
retained by BX Regulation are handled effectively, efficiently and with 
immediacy. The ability to assume responsibility for the handling of 
certain 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 or unwilling 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 in certain contested matters will 
also facilitate effective regulation because the Exchange will continue 
to bring to bear its overall market and surveillance expertise 
throughout the disciplinary proceedings.

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 litigate certain contested matters when 
FINRA is unable or unwilling to do so through the RSA.

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, as modified by Amendment No. 1, is consistent with the Act. 
Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-BX-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-BX-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 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-2020-007 and should be submitted on 
or before May 21, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-09124 Filed 4-29-20; 8:45 am]
 BILLING CODE 8011-01-P