[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