15262 Federal Register / Vol. 80, No. 55 / Monday, March 23, 2015 / Notices 

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. 

13 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 73261 

(September 30, 2014), 79 FR 60226 (‘‘Notice’’). 

4See Letter from John Kinahan, Chief Executive 

Officer, Group One Trading, L.P., dated October 27, 

2014 (‘‘Group One Letter’’). 

5See Letter from Michael J. Simon, Secretary and 

General Counsel, International Securities Exchange, 

LLC, dated November 14, 2014 (‘‘ISE Response 

Letter’’). 

6See Securities Exchange Act Release No. 73614 

(November 17, 2014), 79 FR 69547 (November 21, 

2014). 

7See Securities Exchange Act Release No. 73973 

(December 31, 2014), 80 FR 583 (January 6, 2015). 

8 In Amendment No. 1 the Exchange clarifies that 

an Electronic Access Member (‘‘EAM’’) would only 

have access to the publicly available orders and 

quotes of its affiliated market maker. In addition, 

the Exchange clarifies that the proposed rule change 

would not permit a member’s EAM unit to access 

any non-public order or quote information of its 

affiliated market maker, including any hidden or 

undisplayed size or price information. The 

Exchange also clarifies that market makers are not 

allowed to post hidden or undisplayed orders and 

quotes on the Exchange. Finally, the Exchange 

clarifies that its members would not expect to 

receive any additional order or quote information 

as a result of this proposed rule change. 

Amendment No. 1 is not subject to notice and 

comment because it is a technical amendment that 

does not materially alter the substance of the 

proposed rule change or raise any novel regulatory 

issues. 

Amendment No. 1 has been placed in the public 

comment file for SR–ISE–2014–43 at http://

www.sec.gov/comments/sr-ise-2014–43/

ise201443.shtml (see letter from Michael J. Simon, 

Secretary and General Counsel, International 

Securities Exchange, LLC, to Secretary, 

Commission, dated March 9, 2015) and also is 

available at the Exchange’s Web site at 

www.ise.com. 

9According to ISE Rule 805(b)(1)(ii), market 

makers may only have orders on the order book in 

option classes to which they are not appointed. 

10See Notice, supra note 3, 79 FR 60226, 60226. 

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: (i) Necessary or appropriate in 

the public interest; (ii) for the protection 

of investors; or (iii) 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 (http://www.sec.gov/

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

NASDAQ–2015–022 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–NASDAQ–2015–022. 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 Web site (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 Web site 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; 

the Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR– 

NASDAQ–2015–022 and should be 

submitted on or before April 13, 2015. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.13

Jill M. Peterson, 

Assistant Secretary. 

[FR Doc. 2015–06513 Filed 3–20–15; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–74521; File No. SR–ISE– 

2014–43] 

Self-Regulatory Organizations; 

International Securities Exchange, 

LLC; Order Approving Proposed Rule 

Change, as Modified by Amendment 

No. 1, Amending its Information Barrier 

Rules 

March 17, 2015. 

I. Introduction 

On September 15, 2014, International 

Securities Exchange, LLC (‘‘Exchange’’ 

or ‘‘ISE’’) filed with the Securities and 

Exchange Commission (‘‘Commission’’), 

pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a 

proposed rule change amending its 

information barrier rules. The proposed 

rule change was published for comment 

in the Federal Register on October 6, 

2014.3 The Commission received one 

comment letter regarding the proposed 

rule change 4 and one response letter 

from ISE.5 On November 17, 2014, the 

Commission extended the time period 

in which to either approve the proposed 

rule change, disapprove the proposed 

rule change, or institute proceedings to 

determine whether to approve or 

disapprove the proposed rule change to 

January 2, 2015.6 On December 31, 

2014, the Commission instituted 

proceedings to determine whether to 

approve or disapprove the proposed 

rule change.7 On March 9, 2015, the 

Exchange filed Amendment No. 1 to the 

proposed rule change.8 This order 

approves the proposed rule change, as 

modified by Amendment No. 1. 

II. Description of the Proposal 

The Exchange proposes to amend ISE 

Rules 810 (Limitations on Dealings) and 

717 (Limitations on Orders) governing 

information barriers. Specifically, the 

Exchange proposes to amend Rule 810 

to permit information to flow to a 

member’s EAM unit, which handles the 

customer/agency side of the business, 

from its affiliated Primary Market Maker 

(‘‘PMM’’) and/or Competitive Market 

Maker (‘‘CMM’’) (jointly, ‘‘market 

makers’’) unit. As amended, ISE Rule 

810 will allow EAMs to know where, 

and at what price, their affiliated market 

makers are either quoting or have orders 

on the order book 9 and to use that 

information to influence routing 

decisions. The Exchange represents that 

it currently provides guidance to its 

members that ISE Rule 810 is to be 

interpreted as a two-way information 

barrier between the EAM unit and its 

affiliated market maker unit.10

The Exchange also proposes to amend 

ISE Rule 717, Supplementary Material 

.06 to specify that the orders of a EAM 

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Federal Register / Vol. 80, No. 55 / Monday, March 23, 2015 / Notices 15263 

11See Group One Letter, supra note 5. 

12See ISE Response Letter, supra note 6. 

13See Group One Letter at 1, supra note 4. 

14 Id. 

15 Id. 

16 Id. at 2. 

17 Id. 

18 Id. 

19 Id. 

20 Id. 

21See ISE Response Letter at 1, supra note 6. 

22 Id. 

23 Id. 

24 Id. 

25 Id. 

26 Id. at 2. 

27 In approving this rule change, the Commission 

notes that it has considered the proposed rule’s 

impact on efficiency, competition, and capital 

formation. See 15 U.S.C. 78c(f). 

28 15 U.S.C. 78f(b)(5). 

29See 15 U.S.C. 78o(g). Section 15(g) of the Act 

requires every broker or dealer to ‘‘establish, 

maintain, and enforce written policies and 

procedures reasonably designed, taking into 

consideration the nature of such broker’s or dealer’s 

business, to prevent the misuse. . .of material, 

nonpublic information by such broker or dealer or 

any person associated with such broker or dealer.’’ 

30Further, Exchange members will continue to be 

subject to ISE Rules 400 (Just and Equitable 

Principles of Trade), 401 (Adherence to Law), and 

405 (Manipulation). 

31See Amendment No. 1, supra note 8. 

unit and its affiliated PMM and/or CMM 

unit may interact within one second 

without violating the ISE Rule 717(d) 

and (e) order exposure requirements 

when the firm can demonstrate that: (1) 

The customer order was marketable 

when routed; (2) the EAM was not 

handling the affiliated market maker 

quote/order; and (3) the affiliated 

market maker quote/order was in 

existence at the time the customer 

order(s) were entered into the ISE 

system. In combination, the proposed 

amendments to ISE Rules 810 and 717 

will make it possible for an EAM to 

route a customer order to the ISE to 

immediately interact with the quote or 

an order of an affiliated market maker, 

but only subject to the conditions stated 

above. 

III. Comment Letter and ISE’s Response 

As noted above, the Commission 

received one comment letter 11 opposing 

the proposed rule change.12 The 

commenter asserts that the proposed 

one-way information barrier would 

introduce a conflict of interest which 

could result in EAMs routing orders 

based on self-interest as opposed to the 

customer’s interest.13 The commenter 

disagrees with the Exchange’s premise 

that the proposed rule change would not 

compromise market integrity or cause 

customer harm.14 The commenter also 

indicates that although other exchanges 

may interpret their rules to permit the 

sharing of information between the 

various units of a firm, such sharing 

only weakens a customer’s chance of 

best execution. 

The commenter believes there are two 

specific scenarios where a costumer 

may be harmed under this proposed 

rule change. First, the commenter states 

that EAMs could route customer orders 

to an affiliated market maker’s quote at 

an exchange’s best bid or offer rather 

than to an exchange with a better fill 

rate or price improvement 

mechanism.15 Second, the commenter 

argues that an EAM holding a large 

customer order that could influence the 

price in the underlying could opt to 

route away from the quote of its 

affiliated market maker to avoid the 

potential risk of the trade and deprive 

the customer of a fill they were 

otherwise entitled to.16

The commenter indicates that these 

routing scenarios are not ‘‘mere 

conjecture’’ as broker-dealers ‘‘openly 

admit’’ that numerous factors are built 

into routing decisions that are primarily 

beneficial to broker-dealers.17 The 

commenter also notes that there are 

litigation and academic studies that 

suggest that routing decisions are 

negatively impacted by conflicts of 

interest. The commenter believes that 

the erosion of information barriers 

would increase the likelihood that 

customer orders are routed based on the 

firm’s best interest as opposed to duty 

of best execution owed to the 

customer.18 The commenter concludes 

that two-way information barriers are 

the ‘‘only way to truly guard customer 

interests and protect against the misuse 

of material non-public information,’’ 

and a shift to a one-way information 

barrier would not provide any benefits 

EAM customers.19 The commenter also 

believes that exchange rules should be 

written and interpreted in a way that 

prevents conflicts of interest from ever 

arising, and a two-way information 

barrier takes the potential conflict of 

interest out of the equation.20

The ISE responds that the commenter 

did not raise any new issues and its 

concerns were addressed in the 

Notice.21 The ISE states that nothing in 

the proposed rule change would relieve 

members of their best execution 

obligation to obtain the most favorable 

terms reasonably available for customer 

orders.22 The Exchange notes that, as a 

national securities exchange, it has a 

comprehensive surveillance program to 

monitor member compliance with 

applicable securities and regulations, 

including best execution.23 ISE also 

represents that it would continue to 

monitor for abnormalities in interaction 

rates between members, and investigate 

and take appropriate regulatory action 

against members that fail to comply 

with their best execution obligations.24

ISE believes that its surveillance tools 

will allow it to fulfill its regulatory 

responsibilities.25 ISE also suggests that 

the filing is a competitive imperative as 

other options exchanges currently 

interpret their information barrier rules 

to be one way barriers that permit 

members to make routing decisions 

based on the quotes and orders of 

affiliated business units.26

IV. Discussion and Commission 

Findings 

After careful consideration, the 

Commission finds that the proposed 

rule change, as modified by Amendment 

No. 1, is consistent with the 

requirements of the Act and the rules 

and regulations thereunder applicable to 

a national securities exchange.27 The 

Commission believes that the proposed 

rule change, as modified by Amendment 

No. 1, is consistent with Section 

6(b)(5) 28 in particular, in that 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. 

Amended ISE Rule 810 permits a less 

restrictive, one-way information barrier 

between market makers and other 

business units, as opposed to the prior 

rule that required a prescriptive, twoway information barrier. Nonetheless, 

the Commission notes that Exchange 

members are still required to have 

policies and procedures that are 

reasonably designed to prevent the 

misuse of material, non-public 

information consistent with Section 

15(g) of the Act 29 and ISE Rule 408.30

The Commission notes that the EAM 

unit of a member would not, pursuant 

to the proposed rule change, have access 

to any non-public quote or order 

information, including hidden or 

undisplayed price or size information, 

of an affiliated market maker.31 The 

Commission also notes that the 

Exchange has represented that its 

ongoing surveillance for manipulative 

conduct and the Financial Industry 

Regulatory Authority’s exam program 

that reviews for member compliance 

with such policies and procedures 

should provide a regulatory framework 

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15264 Federal Register / Vol. 80, No. 55 / Monday, March 23, 2015 / Notices 

32See Notice, supra note 3, 79 FR 60226, 60227. 

33See Notice, supra note 3, 79 FR 60226, 60227; 

ISE Response Letter at 1, supra note 6. 

34See e.g., FINRA Rule 5310 (Best Execution and 

Interpositioning); see also Securities Exchange Act 

Release No. 34–51808, 70 FR 37496, 37537–8 (Jun. 

29, 2005) (File No. S7–10–04) (Regulation NMS 

Final Rules); Securities Exchange Act Release No. 

37619A, 61 FR 48290, 48322–3 (Sep. 12, 1996) (File 

No. S7–30–95) (Order Execution Obligations Final 

Rules). 

35See ISE Response Letter at 1, supra note 6. 

36 15 U.S.C. 78s(b)(2). 

37 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

that guards customer interests and 

protects against the misuse of material 

non-public information.32

Finally, as noted above, the 

commenter expressed concern that this 

proposed rule change would introduce 

a conflict of interest that would erode 

the duty of best execution and harm 

customers. The Exchange believes, and 

the Commission agrees, that this 

proposed rule change, as modified by 

Amendment No. 1, does not alter a 

broker-dealer’s duty of best execution.33

Although the proposed rule change, as 

modified by Amendment No. 1, will 

permit EAMs to know and consider the 

quotes of its affiliated market makers 

when making routing decisions, the 

Commission continues to expect that 

routing decisions related to the duty of 

best execution will be premised solely 

on customer considerations such as the 

likelihood of execution, the opportunity 

to obtain price improvement, 

availability of best price and 

minimization of market impact.34 The 

Commission emphasizes that a brokerdealer’s duty of best execution exists 

whether an EAM determines to route 

customer order flow toward its affiliated 

market maker or away from its affiliated 

market maker. Further, the Commission 

notes that in response to the 

commenter’s concern that the proposed 

rule change would negatively impact 

best execution considerations, ISE 

stated that it would ‘‘continue to 

monitor for abnormalities in interaction 

rates between members, and will 

investigate and take appropriate 

regulatory action against members that 

fail to comply with their best execution 

obligations . . . [and that] these 

surveillance tools will allow ISE to 

comply with its regulatory 

responsibilities, consistent with 

treatment across competitor options 

exchanges.’’ 35 Among other things, the 

Commission’s oversight of the ISE 

program is designed to evaluate the 

ISE’s performance in regard to that 

representation. 

V. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act 36 that the 

proposed rule change (SR–ISE–2014– 

43), as modified by Amendment No. 1, 

be, and it hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.37

Jill M. Peterson, 

Assistant Secretary. 

[FR Doc. 2015–06515 Filed 3–20–15; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–74519; File No. SR–CBOE– 

2015–026] 

Self-Regulatory Organizations; 

Chicago Board Options Exchange, 

Incorporated; Notice of Filing of a 

Proposed Rule Change Relating to 

Rules 6.74A and 6.74B 

March 17, 2015. 

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 March 6, 

2015, Chicago Board Options Exchange, 

Incorporated (the ‘‘Exchange’’ or 

‘‘CBOE’’) filed with the Securities and 

Exchange Commission (the 

‘‘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. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange seeks to amend CBOE 

Rules 6.74A and 6.74B. The text of the 

proposed rule change is provided below 

(additions are italicized; deletions are 

[bracketed]). 

* * * * * 

Chicago Board Options Exchange, 

Incorporated Rules 

Rule 6.74A. Automated Improvement 

Mechanism (‘‘AIM’’) 

* * * * * 

. . . Interpretations and Policies: 

* * * * * 

.04 [Any solicited orders submitted 

by the Initiating Trading Permit Holder 

to trade against the Agency Order may 

not be for the account of a Market-Maker 

assigned to the option class.] A MarketMaker submitting a solicited order to 

execute against a particular Agency 

Order may not modify its preprogrammed response to Request for 

Responses based on information 

regarding the particular Agency Order 

or solicited order. 

* * * * * 

Rule 6.74B. Solicitation Auction 

Mechanism 

* * * * * 

. . . Interpretations and Policies: 

* * * * * 

.03 Under Rule 6.74B, Trading Permit 

Holders may enter contra orders that are 

solicited. The Auction provides a 

facility for Trading Permit Holders that 

locate liquidity for their customer 

orders. Trading Permit Holders may not 

use the Auction to circumvent Rules 

6.45A.01, 6.45B.01 or 6.74A limiting 

principal transactions. This may 

include, but is not limited to, Trading 

Permit Holders entering contra orders 

that are solicited from (a) affiliated 

broker-dealers, or (b) broker-dealers 

with which the Trading Permit Holder 

has an arrangement that allows the 

Trading Permit Holder to realize similar 

economic benefits from the solicited 

transaction as it would achieve by 

executing the customer order in whole 

or in part as principal. Additionally, 

[solicited contra orders entered by 

Trading Permit Holders to trade against 

Agency Orders may not be for the 

account of a CBOE Market-Maker 

assigned to the options class.] a MarketMaker submitting a solicited order to 

execute against a particular Agency 

Order may not modify its preprogrammed response to Request for 

Responses based on information 

regarding the particular Agency Order 

or solicited order. 

* * * * * 

The text of the proposed rule change 

is also available on the Exchange’s Web 

site (http://www.cboe.com/AboutCBOE/

CBOELegalRegulatoryHome.aspx), at 

the Exchange’s Office of the Secretary, 

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. 

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