[Federal Register Volume 85, Number 127 (Wednesday, July 1, 2020)]
[Notices]
[Pages 39649-39652]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14119]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89155; File No. SR-IEX-2020-09]
Self-Regulatory Organizations; Investors Exchange LLC; Notice of
Filing and Order Granting Accelerated Approval of a Proposed Rule
Change To Add the Consolidated Audit Trail Industry Member Compliance
Rules to the List of Minor Rule Violations
June 25, 2020.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on June 23, 2020, the Investors Exchange LLC (``IEX'' or
the ``Exchange'') filed with the Securities and Exchange Commission
(the ``Commission'') the proposed rule change as described in Items I
and II below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons and
approving the proposal on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 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
Pursuant to the provisions of Section 19(b)(1) under the Act,\4\
and Rule 19b-
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4 thereunder,\5\ IEX proposes to add the Consolidated Audit Trail
(``CAT'') industry member compliance rules to the list of minor rule
violations in Rule 9.218. The Exchange requests accelerated approval
and effectiveness of this filing.
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\4\ 15 U.S.C. 78s(b)(1).
\5\ 17 CFR 240.19b-4.
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The text of the proposed rule change is available at the Exchange's
website at www.iextrading.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 self-regulatory organization
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 self-regulatory organization
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 proposes to add IEX's CAT industry member compliance
rules (the ``CAT Compliance Rules'') to the list of minor rule
violations in Rule 9.218.\6\ This proposal is based upon the Financial
Industry Regulatory Authority, Inc. (``FINRA'') filing to amend FINRA
Rule 9217 in order to add FINRA's corresponding CAT Compliance Rules to
FINRA's list of rules that are eligible for minor rule violation plan
treatment.\7\
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\6\ IEX's minor rule violation plan (``MRVP'') was declared
effective by the Commission on August 3, 2016. See Securities
Exchange Act Release No. 78474 (August 3, 2016), 81 FR 52717 (August
9, 2016) (File No. 4-701).
\7\ See Securities Exchange Act Release No. 88870 (May 14,
2020), 85 FR 30768 (May 20, 2020) (SR-FINRA-2020-013). The proposal
is also based upon the New York Stock Exchange (``NYSE'') filing to
amend NYSE Rule 9217 in order to add NYSE's corresponding CAT
Compliance Rules to NYSE's list of rules that are eligible for MRVP
treatment. See SR-NYSE-2020-51.
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Proposed Rule Change
The Exchange adopted the CAT Compliance Rules in the Rule Series
11.600 in order to implement the National Market System Plan Governing
the Consolidated Audit Trail (the ``CAT NMS Plan'' or ``Plan'').\8\ The
CAT NMS Plan was filed by the Plan Participants to comply with Rule 613
of Regulation NMS under the Exchange Act,\9\ and each Plan Participant
accordingly has adopted the same compliance rules in the Exchange's
Rule Series 11.600. The common CAT Compliance Rules adopted by each
Plan Participant are designed to require industry members to comply
with the provisions of the CAT NMS Plan, which broadly calls for
industry members to record and report timely and accurately customer,
order, and trade information relating to activity in NMS Securities and
OTC Equity Securities.
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\8\ See Securities Exchange Act Release No. 80256 (March 15,
2017), 82 FR 14526 (March 21, 2017).
\9\ 17 CFR 242.613.
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Rule 9.218 sets forth the list of rules under which a Member \10\
or associated person may be subject to a fine under Rule 9.216(b). Rule
9.216(b) permits the Exchange to impose a fine of up to $2,500 on any
Member or associated person for a minor violation of an eligible rule.
The Exchange proposes to amend Rule 9.218 to add the CAT Compliance
Rules in the Rule Series 11.600 to the list of rules in Rule 9.218
eligible for disposition pursuant to a minor fine under Rule
9.216(b).\11\
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\10\ See Rule 1.160(s).
\11\ FINRA's maximum fine for minor rule violations under FINRA
Rule 9216(b) is also $2,500. Like FINRA, the Exchange, or FINRA on
its behalf, would be able to pursue a fine greater than $2,500 for
violations of the Rule Series 11.600 in a regular disciplinary
proceeding or an acceptance, waiver, and consent (``AWC'') under
Chapter 9 of the IEX Rule Book, as appropriate. Any fine imposed in
excess of $2,500 or not otherwise covered by Rule 19d-1(c)(2) of the
Act would be subject to prompt notice to the Commission pursuant to
Rule 19d-1 under the Act. As noted below, in assessing the
appropriateness of a minor rule fine with respect to CAT Compliance
Rules, the Exchange will be guided by the same factors that FINRA
utilizes. See text accompanying notes 13-14, infra.
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IEX is coordinating with FINRA and other Plan Participants to
promote harmonized and consistent enforcement of all the Plan
Participants' CAT Compliance Rules. The Commission recently approved a
Rule 17d-2 Plan under which the regulation of CAT Compliance Rules will
be allocated among Plan Participants to reduce regulatory duplication
for industry members that are members of more than one Participant
(``common members'').\12\ Under the Rule 17d-2 Plan, the regulation of
CAT Compliance Rules with respect to common members that are members of
FINRA is allocated to FINRA. Similarly, under the Rule 17d-2 Plan,
responsibility for common members of multiple other Plan Participants
that are not members of FINRA will be allocated among those other Plan
Participants, including to the Exchange. For those non-common members
who are allocated to IEX pursuant to the Rule 17d-2 Plan, the Exchange
and FINRA entered into a Regulatory Services Agreement (``RSA'')
pursuant to which FINRA will conduct surveillance, investigation,
examination, and enforcement activity in connection with the CAT
Compliance Rules on the Exchange's behalf. IEX understands that the
other exchanges entered into similar RSAs with FINRA.
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\12\ See Securities Exchange Act Release No. 88366 (March 12,
2020), 85 FR 15238 (March 17, 2020) (File No. 4-618).
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FINRA, in connection with its amendment to FINRA Rule 9217 to make
FINRA's CAT Compliance Rules MRVP eligible, represented that it will
apply MRVP fines for CAT Compliance Rules in the same manner that FINRA
has for its similar existing audit trail-related rules.\13\
Accordingly, in order to promote regulatory consistency, the Exchange,
and FINRA acting on behalf of the Exchange, plan to do the same.
Specifically, application of a MRVP fine with respect to CAT Compliance
Rules will be guided by the same factors that FINRA referenced in its
filing. However, more formal disciplinary proceedings may be warranted
instead of minor rule dispositions in certain circumstances such as
where violations prevent regulatory users of the CAT from performing
their regulatory functions. Where minor rule dispositions are
appropriate, the following factors help guide the determination of fine
amounts:
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\13\ See Securities Exchange Act Release No. 88870 (May 14,
2020), 85 FR 30768, 30768-69 (May 20, 2020) (SR-FINRA-2020-013); see
also FINRA Notice to Members 04-19 (March 2004) (providing specific
factors used to inform dispositions for violations of OATS reporting
rules).
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Total number of reports that are not submitted or
submitted late;
The timeframe over which the violations occur;
Whether violations are batched;
Whether the violations are the result of the actions of
one individual or the result of faulty systems or procedures;
Whether the firm has taken remedial measures to correct
the violations;
Prior minor rule violations within the past 24 months;
Collateral effects that the failure has on customers; and
Collateral effects that the failure has on the Exchange's
ability to perform its regulatory function.\14\
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\14\ See supra note 13.
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Upon effectiveness of this rule change, the Exchange will publish a
regulatory bulletin notifying its
[[Page 39651]]
Members of the rule change and the specific factors that will be
considered in connection with assessing minor rule fines described
above.
For the foregoing reasons, the Exchange believes that the proposed
rule change will result in a coordinated, harmonized approach to CAT
compliance rule enforcement across Plan Participants that will be
consistent with the approach FINRA has taken with the CAT rules.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the
Act,\15\ in general, and furthers the objectives of Section
6(b)(5),\16\ in particular, because it is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in facilitating transactions in securities, 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.
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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
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Minor rule fines provide a meaningful sanction for minor or
technical violations of rules when the conduct at issue does not
warrant stronger, immediately reportable disciplinary sanctions. The
inclusion of a rule in the Exchange's MRVP does not minimize the
importance of compliance with the rule, nor does it preclude the
Exchange from choosing to pursue violations of eligible rules through
an AWC if the nature of the violations or prior disciplinary history
warrants more significant sanctions. Rather, the Exchange believes that
the proposed rule change will strengthen the Exchange's ability to
carry out its oversight and enforcement responsibilities in cases where
full disciplinary proceedings are unwarranted in view of the minor
nature of the particular violation. Thus, the option to impose a minor
rule sanction gives the Exchange additional flexibility to administer
its enforcement program in the most effective and efficient manner
while still fully meeting the Exchange's remedial objectives in
addressing violative conduct. Specifically, the proposed rule change is
designed to prevent fraudulent and manipulative acts and practices
because it will provide the Exchange the ability to issue a minor rule
fine for violations of the CAT Compliance Rules in the Rule Series
11.600 where a more formal disciplinary action may not be warranted or
appropriate consistent with the approach of other Plan Participants for
the same conduct, and thereby promote regulatory consistency across
self-regulatory organizations
The Exchange further believes that the proposed changes to Rule
9.218 are consistent with Section 6(b)(6) of the Act,\17\ which
provides that members and persons associated with members shall be
appropriately disciplined for violation of the provisions of the rules
of the exchange, by expulsion, suspension, limitation of activities,
functions, and operations, fine, censure, being suspended or barred
from being associated with a member, or any other fitting sanction. As
noted, the proposed rule change would provide the Exchange ability to
sanction minor or technical violations of the Rule Series 11.600
pursuant to the Exchange's rules.
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\17\ 15 U.S.C. 78f(b)(6).
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Finally, the Exchange also believes that the proposed changes are
designed to provide a fair procedure for the disciplining of members
and persons associated with members, consistent with Sections 6(b)(7)
and 6(d) of the Act.\18\ Rule 9.216 does not preclude a Member or
associated person from contesting an alleged violation and receiving a
hearing on the matter with the same procedural rights through a
litigated disciplinary proceeding.
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\18\ 15 U.S.C. 78f(b)(7) and 78f(d).
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B. Self-Regulatory Organization's Statement on Burden on Competition
IEX does not believe that the proposed rule change will result in
any burden on competition that is 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 is concerned solely
with making the CAT Compliance Rules in the Rule Series 11.600 eligible
for disposition pursuant to a MRVP, thereby strengthening the
Exchange's ability to carry out its oversight and enforcement functions
and deter potential violative conduct.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. 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-IEX-2020-09 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-IEX-2020-09. 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-IEX-2020-09 and should be submitted on
or before July 22, 2020.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities
[[Page 39652]]
exchange.\19\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\20\ which
requires that the rules of an exchange be designed to promote just and
equitable principles of trade, to remove impediments and to perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. The
Commission also believes that the proposal is consistent with Sections
6(b)(1) and 6(b)(6) of the Act \21\ which require that the rules of an
exchange enforce compliance with, and provide appropriate discipline
for, violations of Commission and Exchange rules. Finally, the
Commission finds that the proposal is consistent with the public
interest, the protection of investors, or otherwise in furtherance of
the purposes of the Act, as required by Rule 19d-1(c)(2) under the
Act,\22\ which governs minor rule violation plans.
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\19\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\20\ 15 U.S.C. 78f(b)(5).
\21\ 15 U.S.C. 78f(b)(1) and 78f(b)(6).
\22\ 17 CFR 240.19d-1(c)(2).
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As stated above, the Exchange proposes to add the CAT Compliance
Rules to the list of minor rule violations in Rule 9.218 to be
consistent with the approach FINRA has taken for minor violations of
its corresponding CAT Compliance Rules.\23\ The Commission has already
approved FINRA's treatment of CAT Compliance Rules violations when it
approved the addition of CAT Compliance Rules to FINRA's MRVP.\24\ As
noted in that order, and similarly herein, the Commission believes that
Exchange's treatment of CAT Compliance Rules violations as part of its
MRVP provides a reasonable means of addressing violations that do not
rise to the level of requiring formal disciplinary proceedings, while
providing greater flexibility in handling certain violations. However,
the Commission expects that, as with FINRA, the Exchange will continue
to conduct surveillance with due diligence and make determinations
based on its findings, on a case-by-case basis, regarding whether a
sanction under the rule is appropriate, or whether a violation requires
formal disciplinary action. Accordingly, the Commission believes the
proposal raises no novel or significant issues.
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\23\ As discussed above, the Exchange has entered into a Rule
17d-2 Plan and an RSA with FINRA with respect to the CAT Compliance
Rules. The Commission notes that, unless relieved by the Commission
of its responsibility, as may be the case under the Rule 17d-2 Plan,
the Exchange continues to bear the responsibility for self-
regulatory conduct and liability for self-regulatory failures, not
the self-regulatory organization retained to perform regulatory
functions on the Exchange's behalf pursuant to an RSA. See
Securities Exchange Release No. 61419 (January 26, 2010), 75 FR 5157
(February 1, 2010) (SR-BATS-2009-031), note 93 and accompanying
text.
\24\ See supra note 7.
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For the same reasons discussed above, the Commission finds good
cause, pursuant to Section 19(b)(2) of the Act,\25\ for approving the
proposed rule change prior to the thirtieth day after the date of
publication of the notice of the filing thereof in the Federal
Register. The proposal merely adds the CAT Compliance Rules to the
Exchange's MRVP and harmonizes its application with FINRA's application
of CAT Compliance Rules under its own MRVP. Accordingly, the Commission
believes that a full notice-and-comment period is not necessary before
approving the proposal.
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\25\ 15 U.S.C. 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\26\ and Rule 19d-1(c)(2) thereunder,\27\ that the proposed rule change
(SR-IEX-2020-09) be, and hereby is, approved on an accelerated basis.
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\26\ 15 U.S.C. 78s(b)(2).
\27\ 17 CFR 240.19d-1(c)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-14119 Filed 6-30-20; 8:45 am]
BILLING CODE 8011-01-P