Document ID: SEC-2007-1694-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NASDAQ Stock Market LLC
Posted Date: 2007-12-12T05:00Z

[Federal Register: December 12, 2007 (Volume 72, Number 238)]
[Notices]               
[Page 70632-70634]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12de07-89]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56917; File No. SR-NASDAQ-2007-085]

 
Self-Regulatory Organizations; the NASDAQ Stock Market LLC; Order 
Approving Proposed Rule Change, as Modified By Amendment No. 1 Thereto, 
Amending Nasdaq's Membership Application Rules

December 6, 2007.

I. Introduction

    On October 30, 2007, The NASDAQ Stock Market LLC (``Nasdaq'') 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 to modify 
Nasdaq's membership application procedures. The proposed rule change 
was published for comment in the Federal Register on November 6, 
2007.\3\ On December 4, 2007, Nasdaq filed Amendment No. 1 to the 
proposed rule change.\4\ The Commission received no comment letters on 
the proposed rule change. This order approves the proposed rule change, 
as modified by Amendment No. 1 thereto.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 56722 (October 31, 
2007), 72 FR 62709 (``Notice'').
    \4\ In Amendment No. 1, Nasdaq corrected typographical errors 
and clarified that in Rule 1013(a)(1), an applicant should file an 
amendment to its membership application no later than 15 days after 
the applicant ``knew or should have known'' about facts and 
circumstances that gave rise to the need for the amendment. Because 
Amendment No. 1 is technical in nature, it is not subject to notice 
and comment.
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II. Description of the Proposal

    Nasdaq is proposing to amend its 1000 Series rules governing its 
membership application process to tailor the rules to proprietary 
trading firms. Under the proposed rule, a ``proprietary trading firm'' 
is defined as an applicant: (1) That is not required to become a member 
of the Financial Industry Regulatory Authority (``FINRA'') by section 
15(b)(8) of the Act \5\ but is a member of another registered 
securities exchange not registered solely under section 6(g) of the 
Act; (2) whose source of funds or proposed source of funds to be used 
for trading are the applicant's own capital, traded through the 
applicant's own accounts; (3) that does not, and will not have 
``customers'' \6\; and (4) whose principals and representatives acting 
or

[[Page 70633]]

to be acting in the capacity of a trader must be owners of, employees 
of, or contractors to the applicant.\7\
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    \5\ 15 U.S.C. 78o(b)(8).
    \6\ The term ``customer'' does not include a broker or dealer. 
See Nasdaq Rule 0120(g).
    \7\ See proposed Nasdaq Rule 1011(o).
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A. Required Information in the Application

    Under the new application process, an applicant would be required 
to submit certain information in its application.\8\ This information 
includes the following:
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    \8\ See proposed Nasdaq Rules 1013(a)(1)(A)-(V). A more detailed 
description of the required information is described in the Notice, 
supra note 3.
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     A copy of the applicant's current Form BD;
     an original Nasdaq-approved fingerprint card for each 
Associated Person who will be subject to Rule 17f-2 under the Act and 
for whom a fingerprint card has not been filed with another SRO;
     Nasdaq's application fee;
     a description of the applicant's proposed trading 
activities on Nasdaq;
     a copy of the applicant's most recent audited financial 
statements and a description of any material changes in the applicant's 
financial condition since the date of the financial statements;
     an organizational chart;
     the intended location of the applicant's principal place 
of business and all other offices, if any, whether or not such offices 
would be required to be registered under the Nasdaq Rules, and the 
names of the persons who will be in charge of each office; \9\
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    \9\ Nasdaq believes that most proprietary trading firms will 
only have one office.
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     a description of the communications and operational 
systems the applicant will employ to conduct business and the plans and 
procedures the applicant will employ to ensure business continuity;
     a copy of any decision or order by a federal or state 
authority or SRO taking permanent or temporary adverse action with 
respect to a registration or licensing determination regarding the 
applicant or an Associated Person;
     a statement indicating whether the applicant is currently 
or has recently been the subject of any investigation or disciplinary 
proceeding;
     a statement indicating whether any person listed on 
Schedule A of the applicant's Form BD (i.e., the direct owners and 
executive officers of the applicant) is currently or has recently been 
the subject of any investigation or disciplinary proceeding;
     a copy of any contract or agreement with another broker-
dealer, a bank, a clearing entity, a service bureau or a similar entity 
to provide the applicant with services regarding the execution or 
clearance and settlement of transactions effected on Nasdaq;
     if the applicant proposes to make markets on Nasdaq, a 
description of the source and amount of applicant's capital to support 
its market making activities on Nasdaq, and the source of any 
additional capital that may become necessary;
     a description of the financial controls to be employed by 
the applicant with respect to Nasdaq Rule 3011, which governs anti-
money laundering controls;
     a copy of the applicant's written supervisory procedures 
with respect to the applicant's proposed trading activities on Nasdaq;
     a list of the persons conducting the applicant's market 
making and other trading activities, and a list of the persons 
responsible for such persons' supervision, together with the CRD number 
(if applicable) or a copy of Form U4 for each such person;
     unless previously provided to FINRA, a FINRA Entitlement 
Program Agreement and Terms of Use and an Account Administration 
Entitlement Form;
     a copy of the applicant's most recent ``FOCUS Report'' 
(Form X-17A-5) filed with the Commission;
     all examination reports and corresponding responses 
regarding the applicant for the previous two years from the SROs of 
which it is a member;
     An agreement to comply with the federal securities laws, 
the rules and regulations thereunder, the Nasdaq Rules, and all 
rulings, orders, directions, and decisions issued and sanctions imposed 
under the Nasdaq Rules;
     An agreement to pay such dues, assessments, and other 
charges; and
     Other reasonable information with respect to the applicant 
as Nasdaq may require.
    Applicants must keep their application current by submitting 
amendments if facts and circumstances change.\10\ Nasdaq proposes to 
amend Rule 1013(a)(1) to require applicants to file amendments with 
Nasdaq no later than 15 business days after the applicant or Nasdaq 
member knew or should have known about the facts or circumstances 
giving rise to the need for the amendment. Nasdaq also amended Rule 
1013(a)(1) to add that an applicant must promptly notify the Nasdaq 
Membership Department (``Department'') \11\ of any material adverse 
change in financial condition.
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    \10\ See Nasdaq Rule 1013(a)(1).
    \11\ The term includes FINRA staff acting on Nasdaq's behalf.
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B. Membership Admission Standard

    Nasdaq proposes to amend the admission standard in Rule 1014. 
Currently, the Department must make specific findings in order to admit 
an applicant as a Nasdaq member. The proposed rule would allow the 
Department to approve an application unless there is a basis for 
denying or conditioning approval.\12\ The proposed rule further 
provides that the Department may deny (or condition) approval of an 
applicant for the same reasons that the Commission may deny or revoke a 
broker-dealer's registration and for those reasons required or allowed 
under the Act. The proposed rule lists specific bases upon which the 
Department may deny (or condition) approval of an applicant which 
include: \13\ (1) inability of the applicant to satisfactorily 
demonstrate the capacity to adhere to applicable Nasdaq and Commission 
policies, rules, and regulations, including, those concerning record-
keeping, reporting, finance, and trading procedures; (2) past rule 
violations by the applicant and a reasonable likelihood that the 
applicant will again engage in acts or practices that violate any 
Nasdaq or Commission policies, rules, or regulations; (3) behavior in 
which the applicant engaged and the existence of a reasonable 
likelihood that the applicant will again engage in, acts or practices 
inconsistent with just and equitable principles of trade; (4) factors 
indicative of financial difficulties, such as not being in compliance 
with the Commission's net capital rule or having financial difficulties 
involving an amount that is more than 5% of the applicant's net worth; 
(5) the applicant is the subject of a current or recent bankruptcy 
proceeding; (6) the applicant has an established pattern of failure to 
pay just debts; (7) failure to have required governmental and SRO 
registrations; or (8) inability to demonstrate reasonably adequate 
systems capability and capacity.
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    \12\ A similar change would be made in Nasdaq Rule 
1017(g)(1)(A), providing that an application for a material change 
in business operations will be approved unless there is a basis for 
denying it under the standards in Rule 1014.
    \13\ See proposed Nasdaq Rule 1014(a)(2).
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    The proposed rule would provide the Department with the discretion 
to conduct a membership interview if it determines an interview is 
necessary to clarify aspects of an application.\14\ The proposed rule 
change also reduces the time allotted for various aspects of review, 
both for initial applications and for changes of ownership, control and

[[Page 70634]]

business operations under Nasdaq Rule 1017.
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    \14\ See proposed Nasdaq Rule 1013(b)(1).
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C. Material Change in Business Operations

    Currently, Nasdaq Rule 1017(a) provides that if there is a material 
change in business operations, the member will be required to file an 
application for approval that describes in detail the change in 
ownership, control, or business operations and include a business plan, 
pro forma financials, an organizational chart, and written supervisory 
procedures reflecting the change. The proposed rule change amends the 
definition of ``material change in business operations'' in Nasdaq Rule 
1011(g) to include ``adding business activities that would cause a 
proprietary trading firm no longer to meet the definition of that term. 
* * *'' If a proprietary trading firm seeks to expand its activities to 
include dealings with customers, the member would be required to 
undergo an assessment and obtain approval of this change under Nasdaq 
Rule 1017.
    If a firm is required to become a FINRA member due to a change in 
ownership, control, or business operations, the amended rule provides 
that the Department is not required to take action on an application 
for approval under Rule 1017 until FINRA has acted on the application 
under its rule or the firm has become a FINRA member, as 
applicable.\15\
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    \15\ See proposed Nasdaq Rule 1017(g)(4).
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E. Other Changes

    In addition, Nasdaq proposes to (1) amend Rule 1021 to provide that 
a proprietary trading firm with 25 or fewer registered representatives 
is required to have only one, rather than two registered principals; 
(2) eliminate the requirement that traders for proprietary trading 
firms register as equity traders under Nasdaq Rule 1032(f); (3) amend 
Rule 1150 to require that a firm's executive representative under 
Nasdaq rules be the same as its executive representative under FINRA 
rules; and (4) amend Nasdaq Rule 1130 to provide that the names and 
addresses of executive representatives will not be available to members 
or the general public. Finally, the proposed rule change also makes 
conforming changes to provisions of Nasdaq rules 1014, 1015, and 1017 
that refer to the standards for admission in Nasdaq Rule 1014.

III. Discussion and Commission Findings

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange \16\ and, in particular, the requirements of 
section 6 of the Act.\17\ Specifically, the Commission finds that the 
proposed rule change is consistent with section 6(b)(5) of the Act,\18\ 
which requires, among other things, that the rules of a national 
securities exchange be designed to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, and processing 
information with respect to, and 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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    \16\ In approving this proposed rule change the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f.
    \18\ 15 U.S.C. 78f(b)(5).
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    The Commission has reviewed the provisions of the proposed rule 
change and believes that they are consistent with the requirements of 
the Act. In particular, the Commission believes that the proposed rule 
under which Nasdaq may deny or condition membership is reasonable and 
consistent with section 6(b)(5) of the Act in that it promotes just and 
equitable principles of trade and, in general, serves to protect 
investors and the public interest, and is also consistent with the 
grounds upon which an exchange may deny or condition membership under 
section 6(c)(3) of the Act. The circumstances described in the proposed 
rule under which the Exchange may deny or condition membership address 
situations in which an applicant has failed to demonstrate the ability 
to comply with the financial and regulatory responsibilities necessary 
for Exchange membership. The Commission notes that these bases for 
denial of membership are similar to those of NYSE Arca, Inc. (``NYSE 
Arca'') and the International Securities Exchange, LLC (``ISE'') which 
were approved by the Commission.\19\ The Commission also notes that an 
applicant who has been denied membership would always have the right to 
appeal that decision.\20\
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    \19\ See Securities Exchange Act Release Nos. 42455 (February 
24, 2000), 65 FR 11388 (March 2, 2000); and 49718 (May 17, 2004), 69 
FR 29611 (May 24, 2004). See also ISE Rule 302 (Denial of and 
Conditions of Becoming a Member); NYSE Arca Equities Rule 2.4 
(Denial of or Conditions to ETPs).
    \20\ See 15 U.S.C. 78s(f).
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    In addition, the Commission believes that the proposal to amend the 
current membership application requirements which focus on a member's 
relationship with its customers is appropriate because a proprietary 
trading firm, by definition, does not handle customer orders. Because 
Nasdaq's rules provide that all applicants must already be a member 
either of FINRA, if they transact business with the public, or of 
another national securities exchange, which acts as an Examining 
Authority for purposes of Rule 15c3-1 under the Act,\21\ the Commission 
believes the level of information required in the amended membership 
application is reasonable. As stated in the Nasdaq rules, if a Nasdaq 
member undergoes a material change in ownership, control, or business 
operations, the member will be required to file an application for 
approval and may need to register as a member of FINRA. Further, based 
on Nasdaq's representation that the proposal to reduce time allotted to 
review applications (for both initial applications and for changes of 
ownership, control and business operations) is due to centralizing the 
review of applications as well as the less complex nature of the 
applicant firms (i.e., proprietary trading firms and members of other 
SROs), the Commission believes that the reduction in review time is 
reasonable.
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    \21\ 17 CFR 240.15c3-1.
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IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\22\ that the proposed rule change (File No. SR-NASDAQ-2007-085), 
as modified by Amendment No. 1 thereto, be, and it hereby is, approved.
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    \22\ 15 U.S.C. 78s(b)(2).
    \23\ 17 CFR 200.30-3(a)(12).

For the Commission, by the Division of Trading and Markets, pursuant 
to delegated authority.\23\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-24045 Filed 12-11-07; 8:45 am]

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