Document ID: SEC-2014-1725-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2014-10-14T04:00Z

[Federal Register Volume 79, Number 198 (Tuesday, October 14, 2014)]
[Notices]
[Pages 61674-61677]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-24301]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73311; File No. SR-Phlx-2014-65]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
Rule 705 (Fidelity Bonds)

October 7, 2014.
    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 September 25, 2014, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``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.
---------------------------------------------------------------------------

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

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

    The Exchange proposes to delete certain extraneous language from 
Exchange Rule 705 to amend an inadvertent error in the rule text.

[[Page 61675]]

    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxphlx.cchwallstreet.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 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 purpose of the proposed rule change is to correct the text of 
Exchange Rule 705, entitled ``Fidelity Bonds,'' by deleting certain 
text which was not deleted when the Exchange filed to replace Rule 705 
\3\ with a rule in substantially the same form as that of the Financial 
Industry Regulatory Authority, Inc. (``FINRA'').\4\ Exchange Rule 705 
was replaced by a new Rule 705 as of April 2, 2012, in order to 
harmonize the Phlx Rules with FINRA rules. The title of Exchange Rule 
705 was changed from ``Members Must Carry'' to ``Fidelity Bonds.'' The 
Exchange intended to delete Rule 705 in its entirety and rename the 
rule and replace the text with new text similar to that in FINRA Rule 
4360. The Exchange inadvertently did not include all of the 
Supplementary Material section of the Rule in the original filing so 
that it could be deleted. The Exchange proposes to delete the current 
Supplementary Material .03 to Exchange Rule 705 in accordance with the 
intent of the original rule proposal.
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 66362 (February 9, 
2012), 77 FR 8931 (February 15, 2012) (SR-Phlx-2012-13). See also 
Securities Exchange Act Release No. 66407 (February 16, 2012), 77 FR 
10787 (February 23, 2012) (SR-Phlx-2012-21). See also Securities 
Exchange Act Release No. 66411 (February 16, 2012), 77 FR 10788 
(February 23, 2012) (SR-NYSE-2012-04) (an immediately effective 
filing which incorporated the FINRA rule by merely noting the text 
would be the same as the FINRA rule). See also Securities Exchange 
Act Release No. 66412 (February 16, 2012), 77 FR 10791 (February 23, 
2012) (SR-NYSEAmex-2012-08) (an immediately effective filing which 
incorporated the FINRA rule by merely noting the text would be the 
same as the FINRA rule).
    \4\ See FINRA Rule 4360 ``Fidelity Bonds.''
---------------------------------------------------------------------------

    The purpose of a fidelity bond is to protect a member organization 
against certain types of losses, including, but not limited to, those 
caused by the malfeasance of its officers and employees, and the effect 
of such losses on the member organization's capital. At this time the 
Exchange is seeking to delete rule text which covers Employee Blanket 
Bond Coverage in Supplementary Material .03. The rule text that the 
Exchange proposes to delete states that member organizations subject to 
minimum net capital under Rule 15c3-1 are required to have Brokers 
Blanket Bond Coverage with respect to employees (including officers, 
regardless of their duties) in amounts not less than the minimums 
prescribed above which apply both to partner coverage and employee 
blanket bond coverage. In addition to this basic Brokers Blanket Bond 
Coverage, ``member organizations are required to include the following 
minimum specific coverages with respect to: MISPLACEMENT, FRAUDULENT 
TRADING, CHECK FORGERY and SECURITIES FORGERY, ON PREMISES AND IN 
TRANSIT.'' Further, all employee Fidelity coverage shall be on the 
Standard Form 14 Stock Brokers' Bond, Federal Insurance Company's Form 
B Bond or Lloyd's form if it is the full equivalent. With respect to 
Misplacement, Check Forgery, On Premises and In Transit, at least the 
amount of the basic bond minimum requirement shall be carried. With 
respect to Fraudulent Trading, at least $50,000 or 50% of the basic 
bond minimum requirement, whichever is greater, with a top minimum of 
$500,000 shall be carried. With respect to Securities Forgery, at least 
$50,000 or 25% of the basic bond minimum requirement, whichever is 
greater, with a top minimum of $250,000 shall be carried.
    The rule text the Exchange is proposing to delete further goes on 
to note that a ``review for adequacy of coverage shall be made at least 
annually as of the anniversary date of the issuance of the bond and 
minimum requirements for the next twelve months shall be established by 
reference to the highest net capital requirement in the preceding 
twelve months. Each member organization will be expected to review 
carefully any need for coverage greater than that provided by the 
required minimums. Where experience or the nature of the business 
warrants additional coverage the Exchange expects the member 
organization to acquire it.''
    Each member and member organization, according to the rule text the 
Exchange is proposing to delete, is required to carry certain forms of 
insurance and advise the Exchange if such insurance is entirely or 
partially cancelled. Members and member organizations are required to 
provide details in writing within 10 days of cancellation. ``A member 
organization which becomes eligible to elect and does elect to compute 
its minimum required net capital under the alternative net capital 
requirement set forth in paragraph (f) of Rule 15c3-1, instead of under 
the requirements set forth in paragraph (a) in the deleted rule text, 
shall determine its minimum required coverage in the same manner as 
specified in sections .02(b) and .03 hereof.''
    Finally, the rule states that each member organization ``may self-
insure to the extent of $5,000 or 10% of its minimum insurance 
requirement as fixed by the Exchange, whichever is greater, for each 
type of coverage required by the rule. The excess of any such amount 
self-insured over the maximum permissible self-insurance must be 
deducted from the member organization's net worth in the calculation of 
net capital for purposes of Rule 15c3-1.''
    The Exchange notes that at the time of the filing it sought to 
replace the current rule in its entirety and adopt the FINRA rule as 
noted in the original filing.\5\ FINRA Rule 4360 requires a member 
(including a firm that signs a multi-year insurance policy), annually 
as of the yearly anniversary date of the issuance of the fidelity bond, 
to review the adequacy of its fidelity bond coverage and make any 
required adjustments to its coverage, as set forth in the rule. Under 
FINRA Rule 4360(d), a member's highest net capital requirement during 
the preceding 12-month period, based on the applicable method of 
computing net capital (dollar minimum, aggregate indebtedness or 
alternative standard), is used as the basis for determining the 
member's minimum required fidelity bond coverage for the succeeding 12-
month period. The ``preceding 12-month period'' includes the 12-month 
period that ends 60 days before the yearly anniversary date of a 
member's fidelity bond. This would give a firm time to determine its 
required fidelity bond coverage by the anniversary date of the bond.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 66362 (February 9, 
2012), 77 FR 8931 (February 15, 2012) (SR-Phlx-2012-13).

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

[[Page 61676]]

    Further, FINRA Rule 4360 allows a member that has only been in 
business for one year and elected the aggregate indebtedness ratio for 
calculating its net capital requirement to use, solely for the purpose 
of determining the adequacy of its fidelity bond coverage for its 
second year, the 15 to 1 ratio of aggregate indebtedness to net capital 
in lieu of the 8 to 1 ratio (required for broker-dealers in their first 
year of business) to calculate its net capital requirement. 
Notwithstanding the above, such member would not be permitted to carry 
less minimum fidelity bond coverage in its second year than it carried 
in its first year.
    FINRA Rule 4360 exempts from the fidelity bond requirements members 
in good standing with a national securities exchange that maintain a 
fidelity bond subject to the requirements of such exchange that are 
equal to or greater than the requirements set forth in Rule 4360. 
Additionally, FINRA Rule 4360 continues to exempt from the fidelity 
bond requirements any firm that acts solely as a Designated Market 
Maker, floor broker or registered floor trader and does not conduct 
business with the public.
    The Exchange intended to adopt the FINRA rule instead.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \6\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \7\ in particular, in that it is designed to promote 
just and equitable principles of trade, 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, 
by correcting an error in the Exchange's rules in order that the Rule 
properly reflect the correct text. An accurate and up-to-date Rulebook 
will avoid confusion for market participants. This proposal is not 
substantive, rather, the proposal seeks to update the rules to reflect 
the current operation of the Exchange. The Exchange believes that the 
requirements of FINRA Rule 4360, including, but not limited to, 
requiring each member that is required to join the Securities Investor 
Protection Corporation to maintain blanket fidelity bond coverage, 
increasing the minimum requirement fidelity bond coverage and 
maintaining a fidelity bond that provides for per loss coverage without 
an aggregate limit of liability promotes investor protection by 
protecting firms from unforeseen losses. The proposed amendments will 
conform Phlx's rule to a corresponding FINRA rule, to promote 
application of consistent regulatory standards.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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 not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange is merely seeking 
to correct an inadvertent error in the rule text. The Exchange's 
original intent was to adopt the FINRA rule and the changes proposed 
herein further that intent and conform the Phlx rule to the FINRA rule 
to promote application of consistent regulatory standards.

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) of the Act \8\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\9\
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing.\10\ 
Rule 19b-4(f)(6)(iii), however, permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest.\11\ The Exchange has requested that 
the Commission waive the 30-day operative delay so that the Exchange 
can quickly correct the inadvertent error and avoid inconsistency in 
its rules.
---------------------------------------------------------------------------

    \10\ 17 CFR 240.19b-4(f)(6)(iii).
    \11\ Id.
---------------------------------------------------------------------------

    The Commission believes that the waiver of the 30-day operative 
delay is consistent with the protection of investors and the public 
interest because accurate rules are important to the function of the 
Exchange. The proposed amendments reflect the Exchange's intent in a 
prior filing. Furthermore, the proposed rule change is not substantive 
but merely seeks to properly amend rules to reflect the current 
operation of the Exchange. Therefore, the Commission designates the 
proposal operative upon filing.\12\
---------------------------------------------------------------------------

    \12\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act.\13\ If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.\14\
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78s(b)(3)(C).
    \14\ Id.
---------------------------------------------------------------------------

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-Phlx-2014-65 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-Phlx-2014-65. 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

[[Page 61677]]

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 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; 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-Phlx-2014-65 and 
should be submitted on or before November 4, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-24301 Filed 10-10-14; 8:45 am]
BILLING CODE 8011-01-P