Document ID: SEC-2020-1386-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX, LLC
Posted Date: 2020-08-31T04:00Z

[Federal Register Volume 85, Number 169 (Monday, August 31, 2020)]
[Notices]
[Pages 53876-53879]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-19053]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89667; File No. SR-Phlx-2020-40]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Order Granting Accelerated Approval of Proposed Rule Change To Add 
the Consolidated Audit Trail Industry Member Compliance Rules to the 
List of Minor Rule Violations

August 25, 2020.
    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 August 13, 2020, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``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 its rulebook.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/phlx/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.

[[Page 53877]]

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 Phlx's CAT industry member compliance 
rules (the ``CAT Compliance Rules'') to the list of minor rule 
violations in IM-9216, in Options 11, and in its Equity Minor Rule 
Violations. 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 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 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. 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-Phlx-2017-07) (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 specific to the Exchange's 
trading floor under which a member, member organization, or any 
partner, officer, director or person employed by or associated with any 
member organization (hereinafter, ``associated person'') may be subject 
to a fine. Exchange Rule 9216(b) permits the Exchange to impose a fine 
(not to exceed $2,500) on any member, member organization, 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 
sets forth the minor rule violation plan (``MRVP'') for members and 
member organizations on the Exchange's options market. Accordingly, the 
Exchange proposes to make conforming changes in Options 11 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. Lastly, the Exchange proposes to make 
similar amendments to the Equity Minor Rule Violations, which sets 
forth the MRVP for members and member organizations on the Exchange's 
equities market. In particular, the Exchange proposes to add General 7 
to the list of rules in the Equity Minor Rule Violations and provide 
that failures to comply with the CAT Compliance Rule requirements may 
be subject to fines 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 General 7 to achieve 
consistency with FINRA and also to amend its MRVP to include such 
fines. Like FINRA, the Exchange would be able to pursue a fine 
greater than $2,500 for violations of General 7 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 the Exchange 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 the 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, member organizations, and 
associated persons 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

[[Page 53878]]

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.
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 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, Options 11, and the Equity Minor Rule Violations are consistent 
with Section 6(b)(6) of the Act,\12\ which provides that a member, 
member organization, or associated person 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, member 
organization, or associated person, consistent with Sections 6(b)(7) 
and 6(d) of the Act.\13\ IM-9216, Options 11, and the Equity Minor Rule 
Violations do not preclude a member, member organization, or associated 
person 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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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.

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 rule-comments@sec.gov. Please include 
File Number SR-PHLX-2020-40 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-PHLX-2020-40. 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-PHLX-2020-40 and should be submitted on 
or before September 21, 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

[[Page 53879]]

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, Options 11, and 
the Equity Minor Rule Violations 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-PHLX-2020-40) 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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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2020-19053 Filed 8-28-20; 8:45 am]
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