Document ID: SEC-2009-1764-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to an Options Regulatory Fee
Posted Date: 2009-12-16T05:00Z

[Federal Register: December 16, 2009 (Volume 74, Number 240)]
[Notices]               
[Page 66715-66718]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16de09-109]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61133; File No. SR-Phlx-2009-100]

 
Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
an Options Regulatory Fee

December 9, 2009.
    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 7, 2009, NASDAQ OMX PHLX, Inc. (``Phlx'' 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 eliminate its Registered Representative/
Member Exchange/Off-Floor Trader Registration Fee and establish an 
Options Regulatory Fee.
    While changes to the Exchange's Fee Schedule pursuant to this 
proposal are effective upon filing, the Exchange has designated this 
proposal to be operative for trades settling on or after January 1, 
2010, at which point the Registered Representative/Member Exchange/Off-
Floor Trader Registration Fee would be eliminated.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 
on the Commission's Web site at http://www.sec.gov, 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 eliminate its Registered Representative/
Member Exchange/Off-Floor Registration Trader Fee of $55.00, the 
initial registration fee of $55.00, the transfer fee of $55.00 and the 
termination fee of $30.00 (``Registration Fees''). The Exchange 
proposes to establish an Options Regulatory Fee (``ORF'') of $.0035 per 
contract to each member for all options transactions executed or 
cleared by the member that are cleared by The Options Clearing 
Corporation (``OCC'') in the customer range, excluding Options 
Intermarket Linkage Plan (``Linkage'') P/A Orders.\3\
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    \3\ The Exchange understands that certain Exchanges continue to 
utilize Linkage to send P/A Orders. Linkage may be discontinued by 
the operative date.
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    Registration Fees as well as other regulatory fees collected by the 
Exchange are intended to cover a portion of the cost of the Exchange's 
regulatory programs.\4\ Today options exchanges, regardless of size, 
charge similar registered representative fees or an ORF similar to the 
proposal herein. Currently, Exchange rules require that

[[Page 66716]]

every qualified Registered Representative \5\ of a member or 
participant organization must be registered with and approved by the 
Exchange.\6\ The Member Exchange category refers to Exchange permit 
holders.\7\
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    \4\ In addition to Registration Fees, the Exchange derives 
revenue associated with its regulatory programs from its 
Examinations Fee. This fee is applicable to member/participant 
organizations for which the Exchange is the Designated Examining 
Authority (``DEA''). The Fee is a tiered fee and certain 
organizations are exempted from the fee. See Exchange's Fee 
Schedule.
    \5\ Registered Representative categories include registered 
options principals, general securities representatives, general 
securities sales supervisors and United Kingdom limited general 
securities registered representatives but do not include ``off-
floor'' traders. See Exchange Rule 604(e). See also Exchange Rule 
604(a) and (d).
    \6\ See Exchange Rule 604. Every person who is compensated 
directly or indirectly by a member or participant organization for 
which the Exchange is the DEA, or any other associated person of 
such member or participant organization, and who executes, makes 
trading decisions with respect to, or otherwise engages in 
proprietary or agency trading of securities, including, but not 
limited to, equities, preferred securities, convertible debt 
securities or options off the floor of the Exchange (``off-floor 
traders''), must successfully complete the Series 7 General 
Securities Registered Representative Examination.
    \7\ See Exchange Rule 600.
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    The Exchange believes that Registration Fees are no longer the best 
manner to assess regulatory fees because more than 60% of the 
Exchange's Registration Fees are paid by five member organizations. 
Further to the point, today there are more Internet and discount 
brokerage firms with few registered persons that pay little in 
Registration Fees and fewer traditional brokerage firms with many 
registered persons. The regulatory effort the Exchange expends to 
review the transactions of each type of firm is not commensurate with 
the number of registered persons that each firm employs. In addition, 
due to the manner in which Registration Fees are charged, it is 
possible for a member firm to restructure its business to avoid paying 
these fees altogether. A firm can avoid Registration Fees by 
terminating its Exchange membership and sending its business to the 
Exchange through another member firm, even an affiliated firm that has 
significantly fewer registered persons. If member firms terminated 
their memberships to avoid Registration Fees, the Exchange would suffer 
the loss of a major source of funding for its regulatory programs.
    The Exchange proposes to eliminate Registration Fees and replace 
them with a transaction-based ORF. The ORF would be $.0035 per contract 
and would be assessed by the Exchange to each member for all options 
transactions executed or cleared by the member that are cleared by The 
Options Clearing Corporation (``OCC'') in the customer range (i.e., 
that clear in the customer account of the member's clearing firm at 
OCC), excluding P/A Orders as defined in the Options Intermarket 
Linkage Plan (``Linkage'').\8\ The ORF would be imposed upon all such 
transactions executed by a member, even if such transactions do not 
take place on the Exchange.\9\ The ORF also includes options 
transactions that are not executed by an Exchange member but are 
ultimately cleared by an Exchange member. Thus the Exchange would 
charge a member $.0035 per contract for all options transactions 
executed or cleared by the member that are cleared by OCC in the 
customer range, excluding Linkage P/A Orders, regardless of the 
marketplace of execution. In the case where one member both executes a 
transaction and clears the transaction, the ORF would be assessed to 
the member only once on the execution. In the case where one member 
executes a transaction and a different member clears the transaction, 
the ORF would be assessed only to the member who executes the 
transaction and would not be assessed to the member who clears the 
transaction. In the case where a non-member executes a transaction and 
a member clears the transaction, the ORF would be assessed to the 
member who clears the transaction.
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    \8\ See Securities Exchange Act Release Nos. 60405 (July 30, 
2009), 74 FR 39362 (August 6, 2009) (National Market System Plan 
Relating to Options Order Protection and Locked/Crossed Markets).
    \9\ The ORF would apply to all ``C'' account origin code orders 
executed by a member on the Exchange. Exchange rules require each 
member to record the appropriate account origin code on all orders 
at the time of entry in order to allow the Exchange to properly 
prioritize and route orders and assess transaction fees pursuant to 
the rules of the Exchange and report resulting transactions to the 
OCC. See Exchange Rule 1063, Responsibilities of Floor Brokers, and 
Options Floor Procedure Advice F-4, Orders Executed as Spreads, 
Straddles, Combinations or Synthetics and Other Order Ticket Marking 
Requirements. The Exchange represents that it has surveillances in 
place to verify that members mark orders with the correct account 
origin code.
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    The ORF would not be charged for member options transactions 
because members incur the costs of owning memberships and through their 
memberships are charged transaction fees, dues and other fees that are 
not applicable to non-members.\10\ The dues and fees paid by members go 
into the general funds of the Exchange, a portion of which is used to 
help pay the costs of regulation. Thus, the Exchange believes members 
are already paying their fair share of the costs of regulation.\11\ 
Moreover, because the ORF would replace Registration Fees, which relate 
to a member's customer business, the Exchange believes it is 
appropriate to charge the ORF only to transactions that clear as 
customer at the OCC. The Exchange believes that its broad regulatory 
responsibilities with respect to its members' activities, supports 
applying the ORF to transactions cleared but not executed by a member. 
The Exchange's regulatory responsibilities are the same regardless of 
whether a member executes a transaction or clears a transaction 
executed on its behalf. The Exchange regularly reviews all such 
activity, including performing surveillance for position limit 
violations, manipulation, frontrunning contrary exercise advice 
violations and insider trading.\12\
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    \10\ For example, non-broker-dealer customers generally are not 
charged transaction fees to trade equity options on the Exchange.
    \11\ If the Exchange changes its method of funding regulation or 
if circumstances otherwise change in the future, the Exchange may 
decide to impose the ORF or a separate regulatory fee on members if 
the Exchange deems it advisable. In the event that the Exchange does 
decide to impose such a fee, that fee would be filed with the 
Commission pursuant to Section 19 of the Act.
    \12\ The Exchange also participates in The Options Regulatory 
Surveillance Authority (``ORSA'')\12\ national market system plan 
and in doing so shares information and coordinates with other 
exchanges designed to detect the unlawful use of undisclosed 
material information in the trading of securities options. ORSA is a 
national market system comprised of several self-regulatory 
organizations whose functions and objectives include the joint 
development, administration, operation and maintenance of systems 
and facilities utilized in the regulation, surveillance, 
investigation and detection of the unlawful use of undisclosed 
material information in the trading of securities options. The 
Exchange compensates ORSA for the Exchange's portion of the cost to 
perform insider trading surveillance on behalf of the Exchange. The 
ORF will cover the costs associated with the Exchange's arrangement 
with ORSA.
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    The ORF is collected indirectly from members through their clearing 
firms by OCC on behalf of the Exchange. There is a minimum one-cent 
charge per trade. The Exchange expects that member firms will pass-
through the ORF to their customers in the same manner that firms pass-
through to their customers the fees charged by SROs to help the SROs 
meet their obligation under Section 31 of the Exchange Act.
    The ORF is designed to recover a portion of the costs to the 
Exchange of the supervision and regulation of its members, including 
performing routine surveillances, investigations, examinations, 
financial monitoring, and policy, rulemaking, interpretive, and 
enforcement activities. The Exchange believes that revenue generated 
from the ORF, when combined with all of the Exchange's other regulatory 
fees, will cover a material portion, but not all, of the Exchange's 
regulatory costs. The total amount of regulatory fees collected by the 
Exchange is less than the regulatory costs incurred by the Exchange on 
an annual basis. Registration Fees make up the largest part of the 
Exchange's total regulatory

[[Page 66717]]

fee revenue. The Exchange collects other regulatory revenues from DEA 
Fees.\13\ The Exchange notes that its regulatory responsibilities with 
respect to member compliance with options sales practice rules have 
been allocated to FINRA under a 17d-2 agreement. The ORF is not 
designed to cover the cost of options sales practice regulation.
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    \13\ The Exchange assesses the Examinations Fee to each firm for 
which the SEC has designated the Exchange to be the DEA pursuant to 
SEC Rule 17d-1. The Examinations Fee is intended to reimburse the 
Exchange for its costs associated with examining member firms and is 
generally the same throughout the SRO community. The Examination Fee 
is based on the number of off-floor traders in the same member 
organization.
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    The ORF is designed to generate revenue that, when combined with 
all of the Exchange's other regulatory fees, will approximate the 
Exchange's regulatory costs. The Exchange would monitor the amount of 
revenue collected from the ORF to ensure that it, in combination with 
its other regulatory fees and fines, does not exceed regulatory costs. 
The Exchange expects to monitor regulatory costs and revenues at a 
minimum on an annual basis. If the Exchange determines regulatory 
revenues would exceed regulatory costs, the Exchange would adjust the 
ORF by submitting a fee change filing to the Commission. The Exchange 
notifies members of adjustments to the ORF via an Options Trader Alert 
(``OTA'').
    The Exchange believes the proposed ORF is equitably allocated 
because it would be charged to all members on all their customer 
options business (as defined above). The Exchange believes the proposed 
ORF is reasonable because it will raise revenue related to the amount 
of customer options business conducted by members, and thus the amount 
of Exchange regulatory services those members will require, instead of 
how many registered persons a particular member firm employs.\14\
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    \14\ The Exchange expects that implementation of the proposed 
ORF will result generally in many traditional brokerage firms paying 
less regulatory fees while Internet and discount brokerage firms 
will pay more.
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    The Exchange believes it is reasonable and appropriate for the 
Exchange to charge the ORF for options transactions regardless of the 
exchange on which the transactions occur. The Exchange has a statutory 
obligation to enforce compliance by its members and their associated 
persons with the Act and the rules of the Exchange and to surveil for 
other manipulative conduct by market participants (including non-
members) trading on the Exchange. The Exchange cannot effectively 
surveil for such conduct without looking at and evaluating activity 
across all options markets. Many of the Exchange's market surveillance 
programs require the Exchange to look at and evaluate activity across 
all options markets, such as surveillance for position limit 
violations, manipulation, frontrunning, contrary exercise advice 
violations and locked/crossed markets in connection with the 
Linkage.\15\ The Exchange, along with other options exchanges are 
required to populate a consolidated options audit trail (``COATS'') 
system in order to surveil member activities across markets.\16\
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    \15\ The Exchange and other options SROs are parties to a 17d-2 
agreement allocating among the SROs regulatory responsibilities 
relating to compliance by their common members with rules for 
expiring exercise declarations, position limits, OCC trade 
adjustments, and Large Option Position Report reviews. See 
Securities Exchange Act Release No. 56941 (December 11, 2007), 72 FR 
71723 (December 18, 2007).
    \16\ COATS effectively enhances intermarket options surveillance 
by enabling the options exchanges to reconstruct markets promptly, 
effectively surveil them and enforce order handling, firm quote, 
trade reporting and other rules.
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    In addition to its own surveillance programs, the Exchange works 
with other SROs and exchanges on intermarket surveillance related 
issues. Through its participation in the Intermarket Surveillance Group 
(``ISG'') the Exchange shares information and coordinates inquiries and 
investigations with other exchanges designed to address potential 
intermarket manipulation and trading abuses.\17\
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    \17\ ISG is an industry organization formed in 1983 to 
coordinate intermarket surveillance among the SROs by cooperatively 
sharing regulatory information pursuant to a written agreement 
between the parties. The goal of the ISG's information sharing is to 
coordinate regulatory efforts to address potential intermarket 
trading abuses and manipulations.
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    The Exchange believes that charging the ORF across markets will 
avoid having members direct their trades to other markets in order to 
avoid the fee and to thereby avoid paying for their fair share of 
regulation. If the ORF did not apply to activity across markets, then 
members would send their orders to the least cost, least regulated 
exchange. Other exchanges would, of course, be free to impose a similar 
fee on their member's activity, including the activity of Exchange 
members.
    Finally, there is established precedent for an SRO charging a fee 
across markets, namely, FINRA's Trading Activity Fee \18\ and the 
Chicago Board of Options Exchange, Inc.'s (``CBOE'') ORF.\19\ While the 
Exchange does not have all of the same regulatory responsibilities as 
FINRA, the Exchange believes that like the CBOE, its broad regulatory 
responsibilities with respect to its members' activities, irrespective 
of where their transactions take place, supports a regulatory fee 
applicable to transactions on other markets. Unlike the TAF, the ORF 
would apply only to a member's customer options transactions.
    Currently, the Exchange is in negotiations with FINRA to render 
regulatory services which are currently performed by the Exchange. The 
Exchange anticipates continuing to provide on-floor surveillance 
options review and data storage.\20\
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    \18\ See Securities Exchange Act Release No. 47946 (May 30, 
2003), 68 FR 34021 (June 6, 2003) (SR-NASD-2002-148).
    \19\ See Securities Exchange Act Release Nos. 58817 (October 20, 
2008), 73 FR 63744 (October 27, 2009) (SR-CBOE-2008-105).
    \20\ The costs that are currently identified by the Exchange as 
related to the regulatory program should approximate the costs that 
would in the future be paid to FINRA should a Regulatory Services 
Agreement be executed. The Exchange anticipates that it would pay a 
flat rate to FINRA for its services.
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    The Exchange has designated this proposal to be operative for 
trades settling on or after January 1, 2010.
2. Statutory Basis
    The Exchange believes that its proposal to amend its schedule of 
fees is consistent with Section 6(b) of the Act,\21\ in general, and 
furthers the objectives of Section 6(b)(4) of the Act,\22\ in 
particular, in that it is an equitable allocation of reasonable fees 
and other charges among Exchange members.
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    \21\ 15 U.S.C. 78f(b).
    \22\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that the ORF is objectively allocated to 
Exchange members because it would be charged to all members on all of 
their transactions that clear as customer at the OCC. Moreover, the 
Exchange believes the ORF ensures fairness by assessing higher fees to 
those member firms that require more Exchange regulatory services based 
on the amount of customer options business they conduct.
    The Exchange believes the initial level of the fee is reasonable 
because it relates to the recovery of the costs of supervising and 
regulating members and market activity. Accounting for recent trends in 
the industry, the fee is expected to approximate the Exchange's revenue 
from the Registration Fees. The Commission has addressed the funding of 
an SRO's regulatory operations in the Concept Release Concerning Self-
Regulation \23\ and the release on the Fair Administration and 
Governance of Self-

[[Page 66718]]

Regulatory Organizations.\24\ In the Concept Release, the Commission 
states that: ``Given the inherent tension between an SRO's role as a 
business and as a regulator, there undoubtedly is a temptation for an 
SRO to fund the business side of its operations at the expense of 
regulation.'' \25\ In order to address this potential conflict, the 
Commission proposed in the Governance Release rules that would require 
an SRO to direct monies collected from regulatory fees, fines, or 
penalties exclusively to fund the regulatory operations and other 
programs of the SRO related to its regulatory responsibilities.\26\ The 
Exchange has designed the ORF to generate revenues that, when combined 
with all of the Exchange's other regulatory fees, will approximate the 
Exchange's regulatory costs, which is consistent with the Commission's 
view that regulatory fees be used for regulatory purposes and not to 
support the Exchange's business side.
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    \23\ See Securities Exchange Act Release No. 50700 (November 18, 
2004), 69 FR 71256 (December 8, 2004) (``Concept Release'').
    \24\ See Securities Exchange Act Release No. 50699 (November 18, 
2004), 69 FR 71126 (December 8, 2004) (``Governance Release'').
    \25\ Concept Release at 71268.
    \26\ Governance Release at 71142.
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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.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act \27\ and paragraph (f)(2) of Rule 19b-4 \28\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission may summarily abrogate 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.
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    \27\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \28\ 17 CFR 240.19b-4(f)(2).
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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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2009-100 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2009-100. This file 
number should be included on the subject line if e-mail 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 inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
am and 3 pm. Copies of such 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 No. SR-Phlx-2009-100 and should be 
submitted on or before January 6, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-29830 Filed 12-15-09; 8:45 am]

BILLING CODE 8011-01-P