[Federal Register Volume 85, Number 142 (Thursday, July 23, 2020)]
[Notices]
[Pages 44556-44559]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-15911]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89339; File No. SR-NASDAQ-2020-042]


Self-Regulatory Organizations; The Nasdaq Stock Market 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

July 17, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on July 14, 2020, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``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 Exchange. 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\ 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 add the Consolidated Audit Trail (``CAT'') 
industry member compliance rules to the list of minor rule violations 
in IM-9216 and in Options 11, Section 1.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, 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 proposes to add Nasdaq's CAT industry member 
compliance rules (the ``CAT Compliance Rules'') to the list of minor 
rule violations in IM-9216 and in Options 11, Section 1. 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.\3\
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    \3\ See Securities Exchange Act Release No. 88870 (May 14, 
2020), 85 FR 30768 (May 20, 2020) (SR-FINRA-2020-013); see also 
Release No. 89123 (June 23, 2020), 85 FR 39016 (June 29, 2020) (SR-
NYSE-2020-51).
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Proposed Rule Change
    The Exchange adopted the CAT Compliance Rules in General 7, 
Sections 1 through 13 in order to implement the National Market System 
Plan Governing the Consolidated Audit Trail (the ``CAT NMS Plan'' or 
``Plan'').\4\ The CAT NMS Plan was filed by the Plan Participants

[[Page 44557]]

to comply with Rule 613 of Regulation NMS under the Exchange Act,\5\ 
and each Plan Participant accordingly has adopted the same compliance 
rules as the Exchange's General 7 Sections. The common 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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    \4\ See Securities Exchange Act Release No. 80256 (March 15, 
2017), 82 FR 14526 (March 21, 2017) (SR-NASDAQ-2017-008) (Order 
Approving Proposed Rule Changes To Adopt Consolidated Audit Trail 
Compliance Rules).
    \5\ 17 CFR 242.613.
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    IM-9216 sets forth the list of rules under which a member or 
associated person may be subject to a fine under Rule 9216(b). Exchange 
Rule 9216 permits the Exchange to impose a fine (not to exceed $2,500) 
and/or censure on any member or associated person with respect to any 
rule listed under IM-9216. The Exchange proposes to amend IM-9216 to 
add the CAT Compliance Rules in General 7 to the list of rules in IM-
9216 eligible for disposition pursuant to a minor fine under Rule 
9216(b). In addition, Options 11, Section 1 sets forth the minor rule 
violation plan for Options Participants on The Nasdaq Options Market 
(``NOM''). Accordingly, the Exchange proposes to make conforming 
changes in Options 11, Section 1 to add the CAT Compliance Rules to the 
list of rules therein, and specify that for failures to comply with the 
Consolidated Audit Trail Compliance Rule requirements under General 7, 
the Exchange may impose a minor rule violation fine of up to $2,500.\6\
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    \6\ FINRA's maximum fine for minor rule violations under FINRA 
Rule 9216(b) is $2,500. The Exchange will apply an identical maximum 
fine amount for eligible violations of the General 7 Sections to 
achieve consistency with FINRA and also to amend its minor rule 
violation plan (``MRVP'') to include such fines. Like FINRA, the 
Exchange would be able to pursue a fine greater than $2,500 for 
violations of the rules in General 7, Sections in a regular 
disciplinary proceeding or an acceptance, waiver, and consent 
(``AWC'') under the Rule 9000 Series 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 8-9, infra.
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    The Exchange 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'').\7\ 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 
and not a member of FINRA will be allocated among those other Plan 
Participants, including to the Exchange. For those non-common members 
who are allocated to Nasdaq 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. We expect that the 
other exchanges would be entering into a similar RSA.
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    \7\ 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 proposed amendment to FINRA Rule 9217 
to make FINRA's CAT Compliance Rules MRVP eligible, has represented 
that it will apply the minor fines for CAT Compliance Rules in the same 
manner that FINRA has for its similar existing audit trail-related 
rules.\8\ Accordingly, in order to promote regulatory consistency, the 
Exchange plans to do the same. Specifically, application of a minor 
rule 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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    \8\ See 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.\9\
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    \9\ See id.
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    Upon effectiveness of this rule change, the Exchange will publish a 
regulatory alert notifying its members, associated persons, or Options 
Participants 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.
    Additionally, the Exchange proposes to make a technical change to 
remove a cross reference to General 5, Section 2 in Options 11. 
Currently, Nasdaq Rule General 5 does not have a Section 2. Therefore, 
the Exchange is deleting the erroneous cross reference to Section 2.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Act,\10\ in general, and furthers the objectives of Section 
6(b)(5),\11\ 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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    \10\ 15 U.S.C. 78f(b).
    \11\ 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

[[Page 44558]]

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. 
Rather, 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 General 7 where a more formal disciplinary 
action may not be warranted or appropriate consistent with the approach 
of other Plan Participants for the same conduct.
    The Exchange further believes that the proposed amendments to IM-
9216 and Options 11, Section 1 are consistent with Section 6(b)(6) of 
the Act,\12\ which provides that members, or associated persons, or 
Options Participants 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 General 7 pursuant to the Exchange's rules.
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    \12\ 15 U.S.C. 78f(b)(6).
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    The Exchange also believes that the proposed changes are designed 
to provide a fair procedure for the disciplining of a member, or 
associated person, or Options Participant consistent with Sections 
6(b)(7) and 6(d) of the Act.\13\ IM-9216 and Options 11, Section 1 do 
not preclude a member, or associated person, or Options Participant 
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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    \13\ 15 U.S.C. 78f(b)(7) and 78f(d).
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    Finally, removing the erroneous cross reference in Options 11 is 
reasonable as it would add clarity to the Exchange's rules.

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 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 General 7 eligible for a 
minor rule fine disposition, thereby strengthening the Exchange's 
ability to carry out its oversight and enforcement functions and deter 
potential violative conduct.
    Removing the erroneous cross reference to Section 2 in Options 11 
is not designed to impact competition but instead should add clarity to 
the Exchange's rules.

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. 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-2020-042 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-2020-042. 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-NASDAQ-2020-042 and should be submitted 
on or before August 13, 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 exchange.\14\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\15\ 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 \16\ 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,\17\ which 
governs minor rule violation plans.
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    \14\ 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).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ 15 U.S.C. 78f(b)(1) and 78f(b)(6).
    \17\ 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 IM-9216 and in Options 
11, Section

[[Page 44559]]

1 to be consistent with the approach FINRA has taken for minor 
violations of its corresponding CAT Compliance Rules.\18\ 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.\19\ 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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    \18\ 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.
    \19\ See SR-FINRA-2020-013.
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    For the same reasons discussed above, the Commission finds good 
cause, pursuant to Section 19(b)(2) of the Act,\20\ 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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    \20\ 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 
\21\ and Rule 19d-1(c)(2) thereunder,\22\ that the proposed rule change 
(SR-NASDAQ-2020-042) be, and hereby is, approved on an accelerated 
basis.
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    \21\ 15 U.S.C. 78s(b)(2).
    \22\ 17 CFR 240.19d-1(c)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-15911 Filed 7-22-20; 8:45 am]
BILLING CODE 8011-01-P