Document ID: SEC-2009-1712-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX BX
Posted Date: 2009-12-07T05:00Z

[Federal Register: December 7, 2009 (Volume 74, Number 233)]
[Notices]               
[Page 64110-64112]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07de09-936]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61073; File No. SR-BX-2009-075]

 
Self-Regulatory Organizations; NASDAQ OMX BX; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change To Clarify the 
Definition of Material Changes in Business Operations Found in the 
Membership Rules and To Make a Technical Correction

November 30, 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 November 23, 2009, NASDAQ OMX BX, Inc. (``BX'') 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 BX. BX has designated the proposed rule change as 
constituting a non-controversial rule change under Rule 19b-4(f)(6) 
under the Act,\3\ which renders the proposal effective upon filing with 
the Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

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

    BX proposes to amend Rule 1011(g)(2) to clarify the definition of 
what BX considers a ``material change in business operations,'' and to 
delete a superfluous ``and'' from the rule text.
    The text of the proposed rule change is below. Proposed new 
language is in italics and proposed deletions are in brackets.

1011. Definitions

    Unless otherwise provided, terms used in the Rule 1000 Series shall 
have the meaning as defined in Rule 0120.
    (a)-(f) No change.
    (g) ``material change in business operations''
    The term ``material change in business operations'' includes, but 
is not limited to:
    (1) removing or modifying a membership agreement restriction;
    (2)(A) [market making, underwriting, or ] acting as a dealer for 
the first time; or
    (B) market making for the first time on NASDAQ OMX BX; provided, 
however, that market making for the first time on NASADQ OMX BX will 
not be considered a material change in business operations if the 
member's market making has previously been approved by FINRA under NASD 
Rule 1017 or NASDAQ under NASDAQ Rule 1017; [and]
    (3) adding business activities that require a higher minimum net 
capital under SEC Rule 15c3-1; and
    (4) adding business activities that would cause a proprietary 
trading firm no longer to meet the definition of that term contained in 
this rule.
    (h)-(o) No change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, BX 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. BX 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
    BX is proposing to amend Rule 1011(g)(2) to clarify its 
applicability. Rule 1011(g) defines what BX considers a ``material 
change in business operations.'' Pursuant to Rule 1017(a)(5), a member 
must file an application for approval of any material change in its 
business operations with BX. Rule 1011(g)(2) includes ``market making, 
underwriting, or acting as a dealer for the first time'' within the 
definition of ``material change in business operations.'' Rule 
1011(g)(2) is intended to require BX members to undergo an assessment 
and obtain approval pursuant to Rule 1017 if they intend to expand 
their business operations to include market making, underwriting, or 
acting as a dealer. The definition found in Rule 1011(g)(2) could, 
however, also be interpreted to include engaging in market making for 
the first time on a market other than BX, notwithstanding that BX has 
no regulatory responsibility with respect to that business activity.
    BX's Rule 1011(g)(2) is based on NASD Rule 1011(k)(2), and as such, 
was drafted by NASD \4\ (now known as ``FINRA'') to be broad in 
application given its broad, cross-market regulatory 
responsibilities.\5\ In adopting Rule 1011(g)(2), however, BX did not 
contemplate that the rule would extend to business operations engaged 
in on other markets. Under such an interpretation of the rule, BX would 
be required to approve a member's planned change in business operations 
that would be conducted solely on another market. For example, a BX 
member that is not a market maker, yet determines to make markets on a 
market other than BX would, under this interpretation,

[[Page 64111]]

technically be required to file an application for approval of the 
market making pursuant to BX Rule 1017, in addition to satisfying the 
other market's market making application and approval process. Under 
this scenario, even though the business activity is not associated with 
BX, and BX has no responsibility to oversee the business activity, BX 
would be required to duplicate the efforts of another market and make 
an independent determination whether the member could conduct such 
business operations on that market. BX believes that this would be an 
erroneous outcome, and would represent unnecessary duplication of 
regulatory efforts among self-regulatory organizations.
---------------------------------------------------------------------------

    \4\ In late July 2007, NASD changed its name to the Financial 
Industry Regulatory Authority (``FINRA''). Accordingly, we use the 
term NASD in this filing only (i) when referring to period of time 
before the name change, and (ii) with respect to rules that are 
still officially designated by FINRA as ``NASD rules.''
    \5\ BX's membership rules mirror, in most respects, those of 
Nasdaq, which were derived from NASD's rules. BX notes that Nasdaq 
is seeking to amend its Rule 1011(g)(2) consistent with the changes 
to the BX rules proposed herein.
---------------------------------------------------------------------------

    BX is proposing to separate market making from the other business 
activities currently found under Rule 1011(g)(2) by creating two new 
subparts to the rule. Proposed new Rule 1011(g)(2)(B) will address 
market making and adds new language to make clear that the rule applies 
only to engaging in market making for the first time on BX, and as a 
consequence, a BX member seeking to be designated as a market maker for 
the first time on another market would not be required to follow the 
Rule 1017 process. BX believes that the proposed rule change would not 
lessen the regulatory oversight of members, since market making on 
another market would fall within the jurisdiction and oversight of that 
market together with the member's designated examining authority.\6\
---------------------------------------------------------------------------

    \6\ 17 CFR 240.17d-1. Rule 17d-1 authorizes the Commission to 
name a single SRO as the designated examining authority to examine 
common members for compliance with the financial responsibility 
requirements imposed by the Act, or by Commission and SRO rules.
---------------------------------------------------------------------------

    In making it clear that market making under Rule 1011(g)(2)(B) 
applies only to such activity ``on BX,'' BX is concerned that common 
members of BX and FINRA, or of BX and The NASDAQ Stock Market LLC 
(``Nasdaq''), may misinterpret Rule 1011(g)(2)(B) to require approval 
pursuant to BX Rule 1017 of market making on BX for the first time when 
the same business operation had been previously approved by FINRA or 
Nasdaq pursuant to their respective Rules 1017. BX based much of its 
membership rules on those of Nasdaq, which had based much of its 
membership rules on those of NASD, with minor modifications in some 
instances resulting from Nasdaq's exchange status. As noted above, BX 
Rule 1011(g) is virtually identical to NASD Rule 1011(k), except for 
the addition of a fourth material change to business operations to 
reflect a change that results in a loss of proprietary trading firm 
status. BX Rule 1017 is also substantially similar to NASD Rule 1017. 
In a similar regard, the membership rules of BX mirror those of Nasdaq 
in most respects. BX notes that the underlying review pursuant to 
either BX Rule 1017 or Nasdaq Rule 1017, upon which BX or Nasdaq would 
reference in making a determination, is conducted by FINRA.\7\ As such, 
the process leading to a prior approval of market making by either 
FINRA or Nasdaq pursuant to their Rules 1017 would follow the same 
process as if the BX Rule 1017 review were conducted.
---------------------------------------------------------------------------

    \7\ When conducting a review on behalf of BX or Nasdaq pursuant 
to their respective Rules 1017, FINRA provides a recommendation on 
whether to approve the change in business operations or not.
---------------------------------------------------------------------------

    BX is proposing to add language to Rule 1011(g)(2)(B) that will 
make it clear that BX does not consider market making under the rule 
for the first time on BX to be a material change, if the market making 
has already been approved by either FINRA pursuant to NASD Rule 1017, 
or alternatively by Nasdaq pursuant to Nasdaq Rule 1017. BX believes 
that the proposed clarifying language under BX Rule 1011(g)(2)(B) 
recognizing prior approvals of market making under the rules of FINRA 
and Nasdaq will serve to avoid confusion over the application of the 
rule in regards to common members. BX believes the proposed changes are 
consistent BX's current practice and will avoid unnecessary regulatory 
duplication.
    BX is also proposing to delete references to underwriting from Rule 
1011(g)(2). Underwriting is not conducted on BX and there is no 
circumstance in which a BX member could act as an underwriter unless 
that member was also a member of FINRA, and hence subject to FINRA's 
rules and oversight. BX believes that the keeping the term in Rule 
1011(g)(2) serves no purpose and could be misleading. Accordingly, BX 
is proposing to delete the term from the rule.
    BX is also proposing to make a minor technical correction to the 
rule by deleting a superfluous ``and'' from the rule text.
2. Statutory Basis
    BX believes that the proposed rule change is consistent with the 
provisions of Section 6 of the Act,\8\ in general and with Section 
6(b)(5) of the Act,\9\ 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 regulating, clearing, settling, 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. The proposed rule change is 
designed to clarify the application of BX Rule 1011(g)(2) to ensure its 
consistent interpretation, and to avoid extending the Rule 1017 
approval process to non-BX business operations conducted on other 
exchanges of which the BX member is also a member. Further, the 
proposed rule change makes clear that BX recognizes FINRA and Nasdaq 
approvals of material changes in business operations, which is based 
upon the similarity of their rules and processes to those of BX. Such 
recognition will serve to avoid unnecessary regulatory duplication 
among self-regulatory organizations. The proposed rule change also 
makes a minor technical correction to the rule.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq [sic] 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.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) \10\ of the Act and Rule 19b-
4(f)(6) thereunder.\11\ 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,

[[Page 64112]]

or otherwise in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    BX believes that the proposed rule change does not significantly 
affect the protection of investors or the public interest because it 
merely clarifies the application of an existing rule to avoid erroneous 
interpretation of its applicability, prevents unnecessary regulatory 
duplication among self-regulatory organizations, and makes a minor 
technical correction to the rule.
    BX has asked that the Commission waive the 30-day pre-operative 
waiting period contained in Rule 19b-4(f)(6)(iii).\12\ BX requests this 
waiver so that these corrections can be immediately operative, 
eliminating any potential confusion caused by the currently unclear 
rule.
---------------------------------------------------------------------------

    \12\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------

    The Commission notes the proposal presents no novel issues and is 
designed to provide clarity regarding the application of an existing 
rule. For these reasons, the Commission believes it is consistent with 
the protection of investors and the public interest to waive the 30-day 
operative delay, and hereby grants such waiver.\13\
---------------------------------------------------------------------------

    \13\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule change's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

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-BX-2009-075 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BX-2009-075. 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 on official business 
days between the hours of 10 a.m. and 3 p.m. Copies of such filing also 
will be available for inspection and copying at the principal office of 
BX. 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-BX-2009-075 
and should be submitted on or before December 28, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-29039 Filed 12-4-09; 8:45 am]

BILLING CODE 8011-01-P