[Federal Register Volume 90, Number 246 (Tuesday, December 30, 2025)]
[Notices]
[Pages 61197-61200]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-23940]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104494; File No. SR-ISE-2025-43]
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Adopt a Best
Execution and Interpositioning Rule
December 22, 2025.
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 December 22, 2025, Nasdaq ISE, LLC (``ISE'' 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 adopt a Best Execution and
Interpositioning rule at proposed Options 9, Section 26.
The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/ise/rulefilings,
and at the principal office of the Exchange.
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
Purpose
The Exchange proposes to adopt a Best Execution and
Interpositioning rule at proposed Options 9, Section 26 that is
identical to Nasdaq Phlx LLC (``Phlx'') Best Execution and
Interpositioning rule at General 9, Section 11.
Background
A broker-dealer has a legal duty to seek best execution of customer
orders. The duty of best execution predates the Federal securities laws
and is derived from an implied representation that a broker-dealer
makes to its customers. The duty is established from ``common law
agency obligations of undivided loyalty and reasonable care that an
agent owes to [its] principal.'' \3\ This obligation requires that a
``broker-dealer seek to obtain for its customer orders the most
favorable terms reasonably available under the circumstances.'' \4\ The
duty of best execution is addressed at FINRA Rule 5310.
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\3\ See, e.g., Newton v. Merrill, Lynch, Pierce, Fenner & Smith,
Inc., 135 F.3d 266, 270 (3d Cir.), cert. denied, 525 U.S. 811
(1998).
\4\ See Securities Exchange Act Release No. 37619A (Sept. 6,
1996), 61 FR 48290 (Sept. 12, 1996) (``Order Execution Obligations
Adopting Release'').
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The Commission has previously stated that the duty of best
execution requires a broker-dealer to execute customers' trades at the
most favorable terms reasonably available under the circumstances,
i.e., at the best reasonably available price.\5\ The Commission has
described a non-exhaustive list of factors that may be
[[Page 61198]]
relevant to broker-dealers' best execution analysis. These factors
include the size of the order, speed of execution, clearing costs, the
trading characteristics of the security involved, the availability of
accurate information affecting choices as to the most favorable market
center for execution and the availability of technological aids to
process such information, and the cost and difficulty associated with
achieving an execution in a particular market center.\6\
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\5\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37538 (June 29, 2005) (``Regulation NMS Adopting
Release'').
\6\ See Securities Exchange Act Release No. 96496 (December 14,
2022), 88 FR 5440, 5474 [sic] (January 27, 2023) (File No. S7-32-22)
(Regulation Best Execution).
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In addition, the Commission has expressed concerns regarding
interpositioning and the duty of best execution. Interpositioning can
occur when a broker-dealer places a third party between itself and the
best market for executing a customer trade in a manner that results in
a customer not receiving the best available market price.\7\
Interpositioning can violate the broker-dealer's duty of best execution
when it results in unnecessary transaction costs at the expense of the
customer.\8\
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\7\ See Edward Sinclair, et al., Securities Exchange Act Release
No. 9115, 1971 WL 120487 (Mar. 24, 1971) (Comm'n op.), aff'd, 444
F2d. 399 (2d Cir. 1971) (order clerk in OTC department of broker-
dealer interposed a broker-dealer between his firm and best
available market price in return for split of profits with the
interposed broker); H.C. Keister & Co., et al., Securities Exchange
Act Release No. 7988, 1966 WL 84120 (Nov. 1, 1966) (Comm'n op.) (in
exchange for payments, trader for a large broker-dealer
interpositioned a small broker-dealer between its customers' orders
and the best available market prices); Synovus Securities, Inc.,
Securities Exchange Act Release No. 34313, 1994 WL 323096 (July 5,
1994) (settled order) (broker-dealer and its president placed
customer orders with person who was able to promptly sell the bonds
to or buy the bonds from other brokers at a profit and customers did
not get the best market price). See also SEC v. Ridenour, 913 F.2d
515 (8th Cir. 1990) (a bond salesman violated the antifraud
provisions based on his secret interpositioning of his personal
trading account between his customers' securities transactions and
the fair market price of the trades).
\8\ See Thomson & McKinnon, Securities Exchange Act Release No.
8310, 1968 WL 87637 (May 8, 1968) (Comm'n op.) (a National
Association of Securities Dealers (``NASD'') member firm interposed
broker-dealers between itself and the best available market, and the
added transaction cost was borne by its customers; the Commission
found that, ``[i]n view of the obligation of a broker to obtain the
most favorable price for his customer, where he interposes another
broker-dealer between himself and a third broker-dealer, he prima
facie has not met that obligation and he has the burden of showing
that the customer's total cost or proceeds of the transaction is the
most favorable obtainable under the circumstances'').
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Proposal
At this time, the Exchange proposes to codify the broker dealer's
duty of best execution at Options 9, Section 26 and title the new rule,
``Best Execution and Interpositioning.''
A broker-dealer that engages in a transaction for or with a
customer or a customer of another broker-dealer, a Member and persons
associated with a Member shall use reasonable diligence to ascertain
the best market for the subject security and buy or sell in such market
so that the resultant price to the customer is as favorable as possible
under prevailing market conditions. Utilizing the Commission's non-
exhaustive list of factors, FINRA Rule 5310 and identical to Phlx
General 9, Section 11, the following are among the factors that will be
considered in determining whether a Member has used ``reasonable
diligence'' are:
[ssquf] the character of the market for the security, e.g., price,
volatility, relative liquidity, and pressure on available
communications;
[ssquf] the size and type of transaction;
[ssquf] the number of markets checked;
[ssquf] accessibility of the quotation; and
[ssquf] the terms and conditions of the order which result in the
transaction, as communicated to the Member and persons associated with
the Member.\9\
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\9\ See proposed Options 9, Section 26(a)(1). This rule text is
identical to Phlx General 9, Section 11(a)(1).
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To prevent a broker-dealer from avoiding its best execution
obligation via a third-party, the Exchange proposes to state that in
any transaction for or with a customer or a customer of another broker-
dealer, no Member or person associated with a Member shall interject a
third party between the Member and the best market for the subject
security in a manner inconsistent with paragraph (a)(1) of this
Rule.\10\
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\10\ See proposed Options 9, Section 26(a)(2). This rule text is
identical to Phlx General 9, Section 11(a)(2).
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Next, the Exchange notes that it is the Member's obligation to
demonstrate best execution. To this end, the Exchange proposes to state
that when a Member cannot execute directly with a market maker but must
employ a broker's broker or some other means in order to ensure an
execution advantageous to the customer, the burden of showing the
acceptable circumstances for doing so is on the retail firm. Examples
of acceptable circumstances are where a customer's order is ``crossed''
with another retail firm which has a corresponding order on the other
side, or where the identity of the retail firm, if known, would likely
cause undue price movements adversely affecting the cost or proceeds to
the customer.\11\
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\11\ See proposed Options 9, Section 26(b). This rule text is
identical to Phlx General 9, Section 11(b).
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The Exchange further notes that a Member cannot using staffing or a
third party as a reason to not execute a transaction in accordance with
its best execution obligation. The Exchange proposes to state that
failure to maintain or adequately staff a department assigned to
execute customers' orders cannot be considered justification for
executing away from the best available market; nor can channeling
orders through a third party as described above as reciprocation for
service or business operate to relieve a Member of its obligations.\12\
The proposed rule does however advise that certain executions where
orders are channeled and there are established correspondent
relationships or a give-up relationship to meet the requirements of
best obligation if the executions are confirmed directly to the Member
acting as agent for the customer. The Exchange proposes to state that
the channeling of customers' orders through a broker's broker or third
party pursuant to established correspondent relationships under which
executions are confirmed directly to the Member acting as agent for the
customer, such as where the third party gives up the name of the retail
firm, are not prohibited if the cost of such service is not borne by
the customer.\13\
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\12\ See proposed Options 9, Section 26(c). This rule text is
identical to Phlx General 9, Section 11(c).
\13\ See id.
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The proposed rule also holds Members responsible where they are a
party to the transaction chain where the best execution obligation was
not met. The Exchange proposes to state that a Member through whom a
retail order is channeled, as described above, and who knowingly is a
party to an arrangement whereby the initiating Member has not fulfilled
his obligations under this Rule, will also be deemed to have violated
Options 9, Section 26.\14\
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\14\ See proposed Options 9, Section 26(d). This rule text is
identical to Phlx General 9, Section 11(d).
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A Member is subject the duty of best execution where it acts as
agent for the account of his customer or executes a retail transaction
as principal and the transaction is contemporaneously offset.\15\
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\15\ See proposed Options 9, Section 26(e). This rule text is
identical to Phlx General 9, Section 11(e).
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Finally, the duty of best execution applies when customer orders
are routed to and from a broker/dealer to another broker/dealer for
execution.\16\ This provision is intended to addresses
[[Page 61199]]
certain interpretive questions concerning the applicability of the best
execution rule.
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\16\ See proposed Options 9, Section 26(f). This rule text is
identical to Phlx General 9, Section 11(f).
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The Exchange proposes to note, identical to Phlx General 9, Section
11, that for the purposes of this Rule, the term ``market'' or
``markets'' is to be construed broadly, and it encompasses a variety of
different venues, including, but not limited to, market centers that
are trading a particular security. The rule text notes that this
expansive interpretation is meant to both inform broker/dealers as to
the breadth of the scope of venues that must be considered in the
furtherance of their best execution obligations and to promote fair
competition among broker/dealers, exchange markets, and markets other
than exchange markets, as well as any other venue that may emerge, by
not mandating that certain trading venues have less relevance than
others in the course of determining a firm's best execution
obligations.
Finally, identical to Phlx General 9, Section 11, the Exchange
provides that a Member's duty to provide best execution in any
transaction ``for or with a customer of another broker/dealer'' does
not apply in instances when another broker/dealer is simply executing a
customer order against the Member's quote. The duty to provide best
execution to customer orders received from other broker/dealers arises
only when an order is routed from the broker/dealer to the Member for
the purpose of order handling and execution. Identical to Phlx, this
rule text is intended to draw a distinction between those situations in
which the Member is acting solely as the buyer or seller in connection
with orders presented by a broker/dealer against the Member's quote, as
opposed to those circumstances in which the Member is accepting order
flow from another broker/dealer for the purpose of facilitating the
handling and execution of such orders.
Members are subject to this rule today by virtue of having public
customers. Brokers with public customers are required to be members of
FINRA; accordingly, adoption of these rules by ISE could be seen as
unnecessary. However, ISE believes that the requirements of these rules
are sufficiently important that they should be reinforced through
explicit inclusion in its rules.
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, by adopting a best execution and interpositioning rule at
Options 9, Section 26 to inform Members of their obligations with
respect to their customers.
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\17\ 15 U.S.C. 78f(b).
\18\ 15 U.S.C. 78f(b)(5).
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ISE's proposed Options 9, Section 26 seeks to make clear that a
broker-dealer must seek to obtain for its customer orders the most
favorable terms reasonably available under the circumstances, thereby
protecting investors and general public. The proposal promotes just and
equitable principles of trade by providing examples of reasonable
diligence and identifying use of channeling and third parties that are
and are not violative of the rule. ISE's interpretation of the term
``market'' or ``markets'' is intended to provide Members with context
as to the scope of venues that must be considered in the furtherance of
their best execution obligations. Finally, the Exchange notes that the
duty to provide best execution to customer orders received from other
broker/dealers arises only when an order is routed from the broker/
dealer to the Member for the purpose of order handling and execution.
Finally, the Exchange intends to harmonize ISE's rule with Phlx General
9, Section 11 which is identical to the proposed rule.
Members are subject to these rules today by virtue of having public
customers. Brokers with public customers are required to be members of
FINRA; accordingly, adoption of these rules by ISE could be seen as
unnecessary. However, ISE believes that the requirements of these rules
are sufficiently important that they should be reinforced through
explicit inclusion in its 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 not necessary or appropriate in
furtherance of the purposes of the Act.
The Exchange's proposal to adopt a new Options 9, Section 26, Best
Execution and Interpositioning, does not impose an undue burden on
competition as all Members that conduct business with the public would
be subject to the proposed rule.
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 \19\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\20\
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\19\ 15 U.S.C. 78s(b)(3)(A)(iii).
\20\ 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 (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-ISE-2025-43 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-ISE-2025-43. This file
[[Page 61200]]
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 (https://www.sec.gov/rules/sro.shtml). Copies of the filing will be available for inspection and
copying at the principal office of the Exchange. Do not include
personal identifiable information in submissions; you should submit
only information that you wish to make available publicly. We may
redact in part or withhold entirely from publication submitted material
that is obscene or subject to copyright protection. All submissions
should refer to file number SR-ISE-2025-43 and should be submitted on
or before January 20, 2026.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-23940 Filed 12-29-25; 8:45 am]
BILLING CODE 8011-01-P