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[Federal Register Volume 89, Number 249 (Monday, December 30, 2024)]
[Notices]
[Pages 106689-106692]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-31340]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-102029; File No. SR-NASDAQ-2024-083]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Assume Operational 
Responsibility for Litigating Contested Disciplinary Proceedings 
Arising Out of Nasdaq-Led Investigations and Enforcement Activities and 
Amend Rules 9131 and 9810 (of General 5, the Nasdaq Discipline Rules) 
To Grant Nasdaq Regulation the Same Authority as FINRA In Contested 
Disciplinary Proceedings To Serve Complaints and Memoranda of Authority

December 23, 2024.
    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 11, 2024, The Nasdaq Stock Market LLC (``Nasdaq'' 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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[[Page 106690]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to assume operational responsibility for 
certain enforcement functions currently performed by the Financial 
Industry Regulatory Authority (``FINRA'') under the Exchange's 
authority and supervision. Specifically, the Exchange proposes to (1) 
assume operational responsibility for litigating contested disciplinary 
proceedings arising out of Nasdaq-led investigations and enforcement 
activities, and (2) amend Rules 9131 and 9180[sic] (of General 5, the 
Nasdaq Discipline Rules) to grant Nasdaq Regulation the same authority 
as FINRA in contested disciplinary proceedings to serve complaints and 
memoranda of authority.
    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
    Section 6 of the Act requires that national securities exchanges 
enforce their members' compliance with federal securities laws and 
rules as well as the exchanges' own rules.\3\ As a self-regulatory 
organization (``SRO''), Nasdaq must have a comprehensive regulatory 
program that includes the investigation and prosecution of rule 
violations. Since it became a national securities exchange, Nasdaq has 
contracted with FINRA through various regulatory services agreements 
(``RSAs'') to perform certain of these regulatory functions on its 
behalf. However, as the Commission has made clear, ``the Nasdaq 
Exchange bears the responsibility for self-regulatory conduct and 
primary liability for self-regulatory failures, not the SRO retained to 
perform regulatory functions on the Exchange's behalf.'' \4\
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    \3\ 15 U.S.C. 78(f).
    \4\ Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550, 3556 (January 23, 2006).
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a. Background
    In April 2019, Nasdaq received Commission approval to reallocate 
operational responsibility from FINRA to Nasdaq Regulation Department 
\5\ for certain investigation and enforcement activity,\6\ namely:
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    \5\ Under Nasdaq Rule 9120(t), Nasdaq Regulation includes the 
Nasdaq Enforcement Department.
    \6\ Securities Exchange Act Release No. 85505 (April 3, 2019), 
84 FR 14170, 14171 (April 9, 2016).
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     investigation and enforcement responsibilities for conduct 
occurring on The Nasdaq Options Market,\7\ and
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    \7\ As appropriate, Nasdaq Regulation coordinates with other 
SROs to avoid regulatory duplication in cross-market investigations, 
primarily through the Cross Market Regulation Working Group.
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     investigation and enforcement responsibilities for conduct 
occurring on Nasdaq's equity market only, i.e., conduct not also on 
non-Nasdaq-affiliated equities markets.\8\
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    \8\ With respect to the operational responsibilities described, 
Nasdaq Regulation already performed these functions for the Nasdaq 
PHLX LLC (``Phlx''), Nasdaq ISE, LLC (``ISE''), Nasdaq GEMX, LLC 
(``GEMX''), and Nasdaq MRX, LLC (``MRX'') because there is no 
comparable rule to Rule General 2, Section 7 on those markets. 
Nasdaq BX, Inc. (``BX''), which does have a comparable rule to Rule 
General 2, Section 7, received Commission approval to perform these 
functions in June 2019. See Securities Exchange Act Release No. 
86051 (June 6, 2019), 84 FR 27387 (June 22, 2019).
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    In March 2020, Nasdaq received Commission approval to reallocate 
operational responsibility from FINRA to Nasdaq Regulation for 
additional enforcement activity, namely the handling of certain 
contested disciplinary proceedings.\9\ Specifically, Nasdaq requested 
and received authority to handle contested disciplinary proceedings 
arising out of Nasdaq-led investigation and enforcement activities that 
``FINRA is unable or unwilling to handle due to strained resources or 
other similar limitations.'' \10\ For those contested disciplinary 
proceedings over which Nasdaq did not request approval to assume 
operational responsibility, FINRA continues to litigate those matters 
under the Exchange's supervision.
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    \9\ See Securities Exchange Act Release No. 88209 (February 13, 
2020), 85 FR 9870 (February 20, 2020), as modified by Amendment No 
1.; Securities Exchange Act Release No. 88516 (March 30, 2020), 85 
FR 19042 (April 3, 2020).
    \10\ Id.
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b. Proposed Rule Change
    Now the Exchange requests approval to (1) assume operational 
responsibility for litigating contested disciplinary proceedings 
arising out of Nasdaq-led investigations and enforcement activities, 
and (2) amend Rules 9131 and 9180[sic] (of General 5, the Nasdaq 
Discipline Rules) to grant Nasdaq Regulation the same authority as 
FINRA in contested disciplinary proceedings to serve complaints and 
memoranda of authority.
Reallocation of Operational Responsibility
    The March 2020 Commission approval vested Nasdaq with the authority 
to litigate a subset of contested disciplinary proceedings pertinent to 
the Exchange (i.e., those contested disciplinary matters arising out of 
Nasdaq-led investigations and enforcement activities that ``FINRA is 
unable or unwilling to handle due to strained resources or other 
similar limitations'').\11\ This proposal expands Nasdaq's enforcement 
authority by enabling Nasdaq Regulation to litigate contested 
disciplinary proceedings arising out of Nasdaq-led investigations and 
enforcement activities in the first instance, regardless of FINRA's 
ability or willingness to handle the matter.
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    \11\ See supra n. 9.
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    Nasdaq's assumption of broader operational responsibility for 
litigating contested disciplinary proceedings arising out of Nasdaq-led 
investigations and enforcement activities allows for the more immediate 
and efficient enforcement of federal securities laws and rules and 
Nasdaq's own rules. Nasdaq enjoys deep expertise in its own market 
structure and in surveillance on the Exchange. When a Nasdaq 
investigation identifies impermissible activity on its Exchange and 
Nasdaq cannot settle the matter with the responsible Nasdaq member, 
Nasdaq Regulation's assumption of the ability to litigate the contested 
disciplinary proceeding avoids the need for FINRA's Enforcement 
Department to familiarize itself with the Nasdaq-led investigation and 
consequently helps expedites the enforcement of Nasdaq's rules and the 
securities laws and rules with which Nasdaq members must comply.
    The Exchange notes that this proposal would not change the 
disciplinary process or the procedural protections already afforded to 
Nasdaq members in contested disciplinary proceedings. For example, the 
rules applicable to the disciplinary process remain the same, and 
FINRA's Office of Hearing Officers

[[Page 106691]]

will continue to administer the hearing process for all contested 
disciplinary proceedings. Therefore, regardless of whether FINRA or the 
Exchange is responsible for litigating the matter, FINRA's Office of 
Hearing Officers will administer the hearing process.\12\
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    \12\ FINRA's Office of Hearing Officers plays no role in 
uncontested disciplinary proceedings.
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    Nasdaq Rule General 2, Section 7 requires that Nasdaq obtain 
Commission approval if regulatory functions subject to RSAs in effect 
at the time that Nasdaq began to operate as a national securities 
exchange are no longer performed by FINRA or an affiliate thereof, or 
by another independent self-regulatory organization. Nasdaq believes 
that assuming operational responsibility for contested disciplinary 
proceedings arising out of Nasdaq-led investigations will further its 
regulatory program and benefit investors and the markets. Commission 
approval of the proposal would allow Nasdaq to deliver increased 
efficiencies in the regulation of its market and to more effectively 
and promptly regulate activity on its market.
    Notwithstanding that approval, FINRA will continue to perform 
certain functions pursuant to a RSA,\13\ including, among other things, 
the handling of certain contested disciplinary proceedings arising out 
of FINRA-led investigation and enforcement activities.\14\
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    \13\ In addition to work performed pursuant to a RSA, FINRA also 
performs work for matters covered by agreements to allocate 
regulatory responsibility under Rule 17d-2 of the Act.
    \14\ Although Nasdaq anticipates handling contested disciplinary 
proceedings arising out of Nasdaq-led investigations and enforcement 
activities, Nasdaq retains the right to refer particular matters 
arising out of Nasdaq-led investigations or enforcement activities 
to FINRA's Department of Enforcement to handle in appropriate 
circumstances.
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Technical Amendments Permitting Nasdaq Regulation To Serve Complaints 
and Memoranda of Authorities
    Nasdaq also proposes two technical updates to its Code of 
Procedure. Specifically, the proposed amendments will permit Nasdaq 
Regulation Department to serve (1) complaints and; (2) memoranda of 
authority in support of temporary cease-and-desist orders in contested 
disciplinary proceedings. Under the current rules, which Nasdaq adopted 
before the March 2020 rule change permitting Nasdaq Regulation to 
litigate certain contested disciplinary matters, only FINRA's 
Department of Enforcement may serve a respondent with either a 
complaint or a memorandum of authorities supporting a temporary cease-
and-desist order. These technical amendments would avoid the need for 
FINRA to serve Nasdaq-authored complaints and memoranda of authority on 
respondents, streamlining litigation in contested disciplinary 
proceedings handled by Nasdaq Regulation. These technical amendments 
also align the two affected rules with the remainder of General 5 (the 
Nasdaq Discipline Rules), which rules grant Nasdaq Regulation and 
FINRA's Department of Enforcement equivalent powers.
    Pursuant to Rule 9131(a) (contained in General 5), ``a complaint 
shall be served on each Party by the [FINRA] Department of 
Enforcement.'' The proposed amendment would permit Nasdaq Regulation to 
also serve a complaint. Similarly, in contested disciplinary 
proceedings in which Nasdaq or FINRA seeks a temporary cease-and-desist 
order, Rule 9810(b)(2) (contained in General 5) permits only FINRA's 
Department of Enforcement to serve a memorandum of authorities in 
support of the temporary cease-and-desist request. This proposed 
amendment grants Nasdaq Regulation the same authority as FINRA's 
Department of Enforcement to serve a memorandum of authorities.
2. Statutory Basis
    The Exchange believes that its proposals are consistent with 
Section 6(b) of the Act,\15\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act,\16\ 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.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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    In addition, the Exchange believes that the proposals furthers the 
objectives of Section 6(b)(7) of the Act,\17\ in particular, in that 
these changes will continue to provide for fair procedures for the 
disciplining of members and persons associated with members, the denial 
of membership to any person seeking membership therein, the barring of 
any person from becoming associated with a member thereof, and the 
prohibition or limitation by the Exchange of any person with respect to 
access to services offered by the Exchange or a member thereof.
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    \17\ 15 U.S.C. 78f(b)(7).
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    The Exchange believes that its proposal is in keeping with those 
principles because it will ensure that contested matters retained by 
the Nasdaq Regulation Department are handled effectively, efficiently 
and with immediacy. Nasdaq will manage these cases directly in all 
instances, with Nasdaq retaining the option to refer cases to FINRA if 
Nasdaq's resources are constrained or if another circumstance warrants 
FINRA litigating a contested disciplinary proceeding under Nasdaq's 
supervision. This approach allows Nasdaq to take timely action when 
appropriate, enforce its rules, and uphold investor protection and 
market integrity. The proposed amendments, however, would not change or 
alter in any way the disciplinary processes around how contested 
matters are handled. Rather, they will result in more effective 
regulation because it will facilitate timely and more efficient action. 
Internalizing the litigation function in Nasdaq-led contested matters 
will also facilitate effective regulation because the Exchange will 
continue to bring to bear its overall market and surveillance expertise 
throughout the disciplinary proceedings. Permitting Nasdaq to serve (1) 
complaints and (2) memoranda of authority in support of temporary 
cease-and-desist orders are ministerial changes that will enable Nasdaq 
to more quickly and efficiently litigate contested disciplinary matters 
arising out of Nasdaq-led investigations.

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 proposed rule change is 
primarily administrative in nature and does not introduce any 
competitive concerns. Rather than addressing competitive issues, the 
purpose and effect of the proposed rule change is to enable Nasdaq to 
litigate contested disciplinary proceedings arising out of Nasdaq-led 
investigations and enforcement activities. Permitting Nasdaq to serve 
(1) complaints and (2) memoranda of authority in support of temporary 
cease-and-desist orders are ministerial changes and do not introduce 
any competitive concerns.

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

    Within 45 days of the date of publication of this notice in the 
Federal

[[Page 106692]]

Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) by order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be 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-NASDAQ-2024-083 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-2024-083. 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 (https://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 
a.m. and 3 p.m. Copies of the filing also 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-NASDAQ-2024-083 and should 
be submitted on or before January 21, 2025.
    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-31340 Filed 12-27-24; 8:45 am]
BILLING CODE 8011-01-P
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