Document ID: SEC-2014-1997-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE MKT, LLC
Posted Date: 2014-11-28T05:00Z

[Federal Register Volume 79, Number 229 (Friday, November 28, 2014)]
[Notices]
[Pages 70900-70903]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-28083]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73671; File No. SR-NYSEMKT-2014-97]

Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of 
Proposed Rule Change Amending Rules 311--Equities and 313--Equities To 
Add Limited Liability Companies as Eligible Member Organizations and 
Delineate the Information Limited Liability Companies Must Submit to 
the Exchange as Part of the Membership Process; Eliminate the 
Requirement That a Member Corporation Be Created or Organized, and 
Maintain Its Principal Place of Business, in the United States; and 
Make Additional Related Amendments To Update Its Membership Rules

November 21, 2014.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on November 12, 2014, NYSE MKT LLC (the ``Exchange'' or 
``NYSE MKT'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been substantially prepared by the self-
regulatory organization. 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\ 15 U.S.C. 78a.
    \3\ 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 amend Rules 311--Equities and 313--
Equities to add limited liability companies as eligible member 
organizations and delineate the information limited liability companies 
must submit to the Exchange as part of the membership process; 
eliminate the requirement that a member corporation be created or 
organized, and maintain its principal place of business, in the United 
States; and make additional related amendments to update its membership 
rules. The text of the proposed rule change is available on the 
Exchange's Web site at www.nyse.com, 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 self-regulatory organization 
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 those 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 parts of such statements.

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

1. Purpose
    The Exchange proposes to amend Rules 311--Equities (``Rule 311'') 
and 313--Equities (``Rule 313'') to add limited liability companies 
(``LLCs'') to the types of eligible member organizations and delineate 
the information LLCs must submit to the Exchange as part of the 
membership process; eliminate the requirement that a member corporation 
be created or organized, and maintain its principal place of business, 
in the United States; and make additional related amendments to update 
its membership rules.
Rule 311
    NYSE MKT Rule 311 governs the formation and approval of member 
organizations. The Exchange proposes to revise Rule 311 to explicitly 
provide for LLCs to apply to become member organizations and eliminate 
the requirement that a member corporation be created or organized, and 
maintain its principal place of business, in the United States.
    First, the Exchange's membership rules currently provide for member 
organizations to be corporations or partnerships, but have not 
explicitly provided for LLCs.\4\ The Exchange proposes to add LLCs to 
the types of potential member organizations and require LLCs to meet 
the same

[[Page 70901]]

requirements currently applicable to partnerships and corporations set 
forth in Rule 311(b). As part of the proposed revision, the Exchange 
seeks to add a new section (4) to Rule 311(b) requiring every member of 
an LLC to be a member, principal executive or approved person.\5\ 
Similarly, the Exchange proposes to amend current Rule 311(b)(6) to 
reflect that proposed LLC member organizations must, like corporations 
and partnerships, also comply with any additional requirements as the 
rules of the Exchange may prescribe. The Exchange also proposes to add 
new Supplementary Material .16 to Rule 311 to specify that LLC 
applicants for Exchange membership are subject to Rule 313.24 regarding 
the submission of copies of proposed or existing limited liability 
company documents and other agreements.
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    \4\ Current Rule 311(f) permits the Exchange to approve 
``entities that have characteristics essentially similar to 
corporations, partnerships, or both'' as a member organization ``on 
such terms and conditions as the Exchange may prescribe.''
    \5\ Rule 311(b)(2) and (b)(3) currently impose the same 
requirement on the relevant control persons at corporations and 
partnerships, respectively.
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    The Exchange also proposes to amend Rule 311(f) to eliminate the 
geographic limitation on incorporation and domicile of corporation 
members. The first sentence of Rule 311(f) currently provides that 
every member corporation be a corporation ``created or organized under 
the laws of, and shall maintain its principal place of business in, the 
United States or any State thereof.'' \6\ The Exchange does not believe 
that the Exchange's restriction on whether foreign entities may be a 
member organization is consistent with either Federal rules or those of 
other self-regulatory organizations (``SRO''). For an example 
supporting its belief, the Exchange states that rules promulgated 
pursuant to the Act require, under certain circumstances, a foreign 
broker-dealer to register with the Commission.\7\ The Exchange also 
states that other SROs, including the Financial Industry Regulatory 
Authority, Inc. (``FINRA''), do not require their members to be 
domiciled in the United States.\8\
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    \6\ The first sentence of Rule 311(f) also provides that every 
member firm organization shall be a partnership or corporation. This 
statement is redundant to Rule 311(b), which the Exchange is 
amending to add LLCs. Accordingly, the Exchange proposes to delete 
the first sentence of Rule 311(f) in its entirety.
    \7\ See 17 CFR 240.15a-6 and Commission Guide to Broker-Dealer 
Registration, Division of Trading and Markets, available at http://www.sec.gov/divisions/marketreg/bdguide.htm (foreign broker-dealers 
that, from the outside of the United States, induce or attempt to 
induce securities transactions by any person in the United States, 
or that use the means or instrumentalities of interstate commerce in 
the United States for this purpose, must register as broker-dealers 
with the Commission).
    \8\ See e.g., NASD Membership and Registration Rules (1000 
Series). NASD Rule 1090 imposes specific requirements on members 
that do not maintain an office in the United States responsible for 
preparing and maintaining financial and other reports required to be 
filed with the SEC and the Exchange, which the Exchange proposes to 
import into Rule 313. See the discussion infra. See also BATS 
Exchange, Inc. Rules 2.3, 2.5 and 2.6.
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    The Exchange believes that the current restriction in Rule 311(f) 
puts it at a competitive disadvantage because it restricts foreign 
broker-dealers that are registered with the Commission and are members 
of another SRO from also becoming Exchange member organizations. The 
Exchange notes that its rules already require member organizations to 
meet prerequisites as specified in Rule 2(b). Specifically, regardless 
of corporate form, all member organizations must be registered broker-
dealers that are members of FINRA or another registered securities 
exchange. If a registered broker-dealer transacts business with public 
customers or conducts business on the Floor of the Exchange, such 
member organization must be a member of FINRA.
    The Exchange further notes that a member organization will be 
subject to regulatory examination and jurisdiction for misconduct 
whether or not it is based in the United States. However, for the 
avoidance of doubt, as discussed below, the Exchange proposes to add 
supplementary material to Rule 313 based on NASD Rule 1090 that imposes 
certain requirements on foreign members that do not maintain an office 
in the United States.
Rule 313
    Rule 313 sets forth certain corporate or partnership documents that 
each member organization must submit to enter into and continue in NYSE 
membership. The Rule also sets forth certain restrictions on capital 
withdrawals and distributions applicable to member corporations and 
partnerships. The Exchange proposes to amend Rule 313 to delineate the 
types of documents LLCs must submit that, as noted, mirror the 
requirements currently in place for member corporations and 
partnerships.
    First, the Exchange proposes to add a subsection (d) to Rule 313 
requiring all articles of organization and operating documents for LLCs 
to be submitted for Exchange approval prior to becoming effective. 
Relatedly, the Exchange proposes to add Supplementary Material .24 
setting forth that existing LLCs must promptly submit certified copies 
(to the extent possible) of articles of organization and operating 
agreements to the Exchange.
    Second, the Exchange proposes to add Supplementary Material .25 
providing restrictions on capital withdrawals by LLC members that are 
substantially the same as those applicable to corporations and 
partnerships. The Supplementary Material would provide that the capital 
contribution of any LLC member may not be withdrawn on less than six 
months' written notice of withdrawal given no sooner than six months 
after such contribution was first made without the prior written 
approval of the Exchange. The Supplementary Material would also specify 
that each member firm shall promptly notify the Exchange of the receipt 
of any notice of withdrawal of any part of a member's capital 
contribution or if any withdrawal is not made because prohibited under 
the provisions of Securities and Exchange Commission Rule 15c3-1.
    Third, the Exchange proposes to add Supplementary Material .26 
providing that LLCs not organized under the laws of New York State must 
subject themselves to the following restrictions: no distributions 
shall be declared or paid that impair the LLC's capital; and no 
distribution of assets shall be made to any member unless the value of 
the LLC's assets remaining after such payment or distribution is at 
least equal to the aggregate of its debts and liabilities, including 
capital. These proposed restrictions are based on existing restrictions 
applicable to member corporations and partnerships.
    In addition, as noted above, the Exchange proposes to add new 
Supplementary Material .27 to Rule 313 specifying the requirements 
applicable to Foreign Member Organizations. The proposed new rule text 
would adopt, without substantive change, paragraphs (a), (b), and (c) 
of NASD Rule 1090 (Foreign Members), which impose specific requirements 
on FINRA members that do not maintain an office in the United States 
responsible for preparing and maintaining financial and other reports 
required to be filed by the SEC and FINRA.\9\ As proposed, foreign

[[Page 70902]]

member organizations that do not maintain an office in the United 
States responsible for preparing and maintaining financial and other 
reports required to be filed with the Commission and the Exchange would 
be required to: (1) Prepare all such reports, and maintain a general 
ledger chart of account and any description thereof, in English and 
U.S. dollars; (2) reimburse the Exchange or its representatives for 
expenses incurred in connection with examinations of the member 
organization to the extent that such expenses exceed the cost of 
examining a member organization located within the continental United 
States in the geographic location most distant from the Exchange's 
principal office or, in such other amount as the Exchange may deem to 
be an equitable allocation of such expenses; and (3) ensure the 
availability of an individual fluent in English and knowledgeable in 
securities and financial matters to assist representatives of the 
Exchange during examinations.
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    \9\ The Exchange is not proposing to adopt a rule similar to 
NASD Rule 1090(d), which requires foreign members to ``utilize, 
either directly or indirectly, the services of a broker/dealer 
registered with the Commission, a bank or a clearing agency 
registered with the Commission located in the United States in 
clearing all transactions involving members of the Association, 
except where both parties to a transaction agree otherwise.'' The 
Exchange agrees with FINRA, which similarly recommended skipping 
paragraph (d) as part of its contemplated adoption of NASD Rule 
1090, that the provision is ``outdated'' and that clearing 
arrangements are better addressed by FINRA Rule 4311 (Carrying 
Agreements), which is based in part on Rule 382--Equities that FINRA 
Rule 4311 replaced. See FINRA Regulatory Notice 13-29 (September 
2013). FINRA Rule 4311 governs the requirements applicable to 
members when entering into agreements for the carrying of any 
customer accounts in which securities transactions can be effected.
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    The Exchange also proposes to eliminate certain restrictions, which 
the Exchange considers redundant, on member organizations and 
prospective member organizations organized as partnerships and 
corporations. The Exchange proposes to eliminate the requirement in 
Rule 313.11 that the partnership articles of each member firm provide 
that capital withdrawals by partners cannot be made without the prior 
written approval of the Exchange. Rule 313.11 already requires the 
Exchange's prior written approval for any such capital withdrawals, and 
member organizations need to monitor for and comply with the 
prohibition, including whether particular withdrawals violate net 
capital requirements. The Exchange believes that because Exchange rules 
already govern this behavior, a partnership seeking approval as a 
member organization would not need to amend its partnership articles to 
reflect this existing rule requirement.\10\
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    \10\ See also footnote 11, infra.
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    Further, the Exchange proposes to eliminate the requirement in Rule 
313.20 that prospective member corporations submit an opinion of 
counsel stating, among other things, that the corporation is duly 
organized and existing, that its stock is validly issued and 
outstanding, and that the restrictions and provisions required by the 
Exchange on the transfer, issuance, conversion and redemption of its 
stock have been made legally effective. Corporate members are required 
under the Rule to submit relevant corporate documents, including 
articles of incorporation, that contain the same information required 
in the opinion of counsel. The Exchange represents that requiring a 
legal opinion attesting to facts contained in a corporation's public 
filings is redundant and, given the expense, potentially a disincentive 
to smaller entities applying for Exchange membership.
    Similarly, the Exchange proposes to remove the requirement in Rule 
313.23 that the opinion of counsel submitted to the Exchange at the 
time the corporation applies for approval under Rule 313.20 state the 
extent to which the corporation has made the following prohibitions 
legally effective: the prohibition on declaring or paying a dividend 
that impairs the capital of the corporation and the prohibition on 
distributing assets to any stockholder unless the value of the 
corporate assets remaining after such payment or distribution is at 
least equal to the aggregate of its debts and liabilities, including 
capital. Rule 313.23 would continue to prohibit corporation members 
from declaring or paying dividends or distributing corporate assets 
that impair the corporation's capital, and member corporations would 
not be relieved of the obligation to monitor and enforce these 
prohibitions. The Exchange believes that requiring these 
representations in a separate legal opinion is redundant and serves no 
necessary regulatory or other purpose.\11\
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    \11\ FINRA Rule 4110 (Capital Compliance) contains similar 
prohibitions on capital withdrawals by FINRA members without 
requiring that the prohibitions be reflected in a firm's partnership 
articles or requiring a legal opinion that the member has made the 
prohibitions legally effective. See FINRA Rule 4110 (c)(1) (``No 
equity capital of a member may be withdrawn for a period of one year 
from the date such equity capital is contributed, unless otherwise 
permitted by FINRA in writing.'').
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    Finally, the Exchange proposes to make certain miscellaneous 
amendments to Rule 313. Specifically, the Exchange proposes to replace 
outdated references to ``Regulation and Surveillance'' with ``the 
Exchange'' in Rules 313.10 and 313.20.\12\ Similarly, the Exchange 
proposes to replace outdated references to ``photostatic'' copies in 
Rules 313.10 and 313.20 in connection with the submission of documents 
to the Exchange and replace them with ``electronically or mechanically 
reproduced.''
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    \12\ Under Rule 0--Equities, references to the Exchange also 
refer to FINRA staff and FINRA departments acting on behalf of the 
Exchange pursuant to a Regulatory Services Agreement (``RSA''). 
FINRA currently provides member application proceedings services to 
the Exchange pursuant to an RSA.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\13\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\14\ in particular, because it 
is designed to prevent fraudulent and manipulative acts and practices, 
promote just and equitable principles of trade, remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and protect investors and the public interest. The 
Exchange believes that adding LLCs to the list of eligible member 
organizations would remove impediments to and perfect the mechanism of 
a free and open market and a national market system by expanding the 
types of organizational forms a member organization may take. The 
Exchange also believes that permitting LLCs to become member 
organizations subject to the same restrictions and requirements 
currently applicable to corporations and partnerships also protects 
investors and the public interest by holding LLCs to the same high 
standards.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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    In addition, the Exchange believes that permitting non-United 
States-based registered broker-dealers that are members of FINRA or 
another registered securities exchange and that do not have their 
principal place of business in the United States to become Exchange 
member organizations would remove impediments to and perfect the 
mechanism of a free and open market by removing geographic restrictions 
on Exchange membership that are not required by FINRA or other 
exchanges. The Exchange further believes that broadening the Exchange 
membership pool by facilitating the participation of additional 
foreign-based U.S. registered broker-dealers would benefit investors 
and the public interest by increasing market participation and depth at 
the Exchange. Moreover, the Exchange believes that adoption of specific 
requirements for foreign members that do not maintain an office in the 
United States based on NASD Rule 1090 would further assure that foreign 
Exchange members, once approved, remain subject to regulatory 
examination and jurisdiction.
    Similarly, the Exchange represents that updating the Exchange's 
rules to remove requirements, which the Exchange believes are 
redundant, that a member firm's partnership articles

[[Page 70903]]

provide that capital withdrawals by partners cannot be made without the 
prior written approval of the Exchange, that prospective member 
corporations submit an opinion of counsel reciting facts contained in 
its public filings, and that certain prohibitions have been made 
legally effective would remove impediments to and perfect the mechanism 
of a free and open market and a national market system by ensuring that 
potential member organizations, persons subject to the Exchange's 
jurisdiction, regulators, and the public could more easily navigate the 
Exchange's rulebook and better understand what obligations attach and 
when. Further, the Exchange represents that updating the Exchange's 
rules to remove what the Exchange considers redundant requirements is 
also designed to protect investors as well as the public interest by 
providing transparency and reducing potential confusion regarding the 
Exchange membership process that may result from having what the 
Exchange characterizes as obsolete rules and outdated guidelines in the 
Exchange's rulebook. For the same reasons, the Exchange represents that 
updating the Exchange's rules to remove requirements that the Exchange 
considers outdated would remove impediments to and perfect the 
mechanism of a free and open market and a national market system and is 
equally designed to protect investors as well as the public interest.

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

    The Exchange does not believe that the proposed rule change would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange believes that 
the proposed rule change would foster competition by expanding the 
types of organizational forms a member organization may take and, by 
removing geographic restrictions on corporate Exchange membership, 
permitting foreign broker-dealers that are members of FINRA or another 
SRO and that do not have their principal place of business in the 
United States to become Exchange member organizations. The Exchange 
represents that, by removing outdated and redundant provisions from the 
Exchange membership rules not found in the rules of other SROs and 
adding a provision found in the rules of another SRO, the proposed rule 
change also would foster competition by providing greater harmonization 
between Exchange membership requirements and the requirements of other 
SROs, resulting in less burdensome and more efficient and consistent 
standards for prospective member organizations.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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 Register or up to 90 days (i) as the Commission may designate 
if it finds such longer period to be appropriate and publishes its 
reasons for so finding or (ii) as to which the self-regulatory 
organization consents, the Commission will:
    (A) By order approve or disapprove the 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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEMKT-2014-97 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-NYSEMKT-2014-97. 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 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 Web site viewing and 
printing in the Commission's Public Reference Section, 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 will also be available 
for inspection and copying at the NYSE's principal office and on its 
Internet Web site at www.nyse.com. 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-NYSEMKT-2014-97 and should be submitted on or before 
December 19, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-28083 Filed 11-26-14; 8:45 am]
BILLING CODE 8011-01-P