Document ID: SEC-2011-0292-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2011-03-04T05:00Z

[Federal Register Volume 76, Number 43 (Friday, March 4, 2011)]
[Notices]
[Pages 12169-12171]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-4903]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63985; File No. SR-Phlx-2011-23]

Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by NASDAQ OMX PHLX LLC Relating 
to Clarifying Changes to Rules 607 and 3202 Concerning the Application 
and Collection of the Covered Sale Fee

February 28, 2011.
    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 February 16, 2011, 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, 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 make clarifying changes to Rules 607and 
3202 concerning the application and collection of the Covered Sale Fee.
    The text of the proposed rule change is available on the Exchange's 
Website at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 
at the principal office of the Exchange, on the Commission's Web site 
at http://www.sec.gov, 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 make clarifying 
changes to Rules 607 and 3202 concerning the application and collection 
of the Covered Sale Fee. In light of the varying means by which a 
Covered Sale Fee is incurred by members, as described below, the 
Exchange believes that a more detailed description of the circumstances 
that trigger the Covered Sale Fee is warranted. Accordingly, the new 
rule language proposed by the Exchange expressly discusses covered 
sales in both equity and option securities. In addition, the proposed 
new rule language includes a description of sell orders entered into 
the Exchange transaction execution systems that result in a covered 
sale on another exchange, expressly discussing the fee incurred by the 
Exchange and

[[Page 12170]]

the application of the Covered Sale Fee in such circumstances.
PHLX Rule 607
    The Exchange is proposing amendments to Rule 607 to make clear the 
circumstances that trigger application of the Covered Sale Fee, and to 
make other clarifying changes. Initially, the Exchange is proposing to 
enumerate all paragraphs in Rule 607 for clarity. Furthermore, the 
Exchange proposes to amend paragraph two by removing the reference to 
Rule 185(g), the former equities platform rule regarding the Exchange's 
Routing Facility; and insert Rule 1080(m)(iii), the current options 
platform rule regarding the Exchange's Routing Facility. This amendment 
is predicated on the fact that upon the implementation of the 
Exchange's current equities platform, NASDAQ OMX PSX, \3\ only options 
transactions may be routed to other markets for executions.
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    \3\ See Exchange Rules 3000-3407.
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    Rule 607 permits the Exchange to collect a fee from its members for 
sales of securities with respect to which the Exchange is obligated to 
pay a fee to the SEC pursuant to Section 31 of the Act \4\ and Rule 31, 
thereunder.\5\ Each national securities exchange and association is 
required to calculate the aggregate dollar amount of ``covered sales'' 
occurring on the exchange or through a member of the national 
securities association and to pay fees based on those covered sales to 
the Commission (``Section 31 fees''). A covered sale is a ``sale of a 
security, other than an exempt sale or a sale of a security future, 
occurring on a national securities exchange or by or through any member 
of a national securities association otherwise than on a national 
securities exchange.'' \6\ Pursuant to Rule 607 the Exchange assesses a 
member the Covered Sale Fee for an executed sell order entered into the 
Exchange's transaction execution systems that results in a covered 
sale. The Covered Sale Fee defrays the cost of the Section 31 fee 
triggered by the covered sale. In this regard, the Covered Sale Fee 
assessed a member is equal to the Section 31 fee assessed by the 
Commission for the covered sale. Further, the Exchange adjusts the 
Covered Sale Fee in lock step with changes to the Section 31 fee made 
by the Commission.\7\ Assessing a sales fee is common practice among 
the national securities exchanges and associations.\8\
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    \4\ 15 U.S.C. 78ee.
    \5\ 17 CFR 240.31.
    \6\ 17 CFR 240.31(a)(6).
    \7\ The Exchange issues Regulatory Alerts to provide members 
with notice of Covered Sale Fee changes. See e.g., http://www.nasdaqtrader.com/TraderNews.aspx?id=ERA2011-01.
    \8\ See e.g., CBOE Fees Schedule (January 3, 2011), Item 6 
``Sales Value Fee,'' ISE Rule 212, NYSE Rule 440H, and NYSE Amex 
Rule 393.
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    As noted above, the Covered Sale Fee defrays the cost of the 
Section 31 fee. The Covered Sale Fee is triggered by the fulfillment of 
a members [sic] sell order in equity or options securities entered into 
the Exchange transaction execution systems that results in a covered 
sale. If the member's sell order is fulfilled on the Exchange's equity 
or options trading markets, the Exchange incurs a Section 31 fee 
obligation. Sell orders in options securities entered into the Exchange 
transaction execution system that are routed to another market for 
execution, however, does [sic] not result in a covered sale on the 
Exchange. Execution of such routed orders is facilitated by the 
Exchange's routing broker,\9\ which acts as the selling member for a 
routed order on the away market on behalf of the Exchange member. Such 
routed sell orders result in a covered sale on the away market, which 
incurs a Section 31 fee obligation. Like the Exchange, the away market 
assesses a sales fee on the member that entered the sell order, in this 
case Nasdaq Options Services LLC,\10\ to defray the cost of the Section 
31 fee obligation. In turn, the Exchange assesses its member, the 
original selling party, a Covered Sale Fee pursuant to Rule 607 to 
defray the cost of the Section 31 fee passed on by the away exchange 
pursuant to its sales fee. As such, the Exchange's Covered Sale Fee 
offsets the sales fee it is assessed by the away market, the result of 
which is to place the parties involved in the transaction in the same 
position as if the covered sale had occurred on the Exchange.
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    \9\ Nasdaq Options Services LLC is the Exchange's routing broker 
for option securities. See PHLX Options Rule 1080(m)(iii).
    \10\ See e-mail from Arlinda Clark, Assistant General Counsel, 
Phlx, to Jennifer Dodd, Special Counsel, Office of Market 
Supervision, Division of Trading and Markets, Commission, dated 
February 22, 2011 (requesting corrections to this sentence).
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    Additionally, the Exchange is updating its rules to indicate that 
the Covered Sale fee is collected by ``designated clearing agency,'' 
which is defined by rule promulgated under the Act as a ``clearing 
agency registered under section 17A of the Act * * * that clears and 
settles covered sales or covered round turn transactions.'' \11\ The 
Exchange employs the National Security Clearing Corporation to collect 
the Covered Sale Fee from members arising from their covered sales in 
equity securities. Covered Sale Fees arising from options covered 
sales, however, are collected from members by the Options Clearing 
Corporation, another designated clearing agency that clears option 
securities.\12\ The Exchange believes such amendment will more 
accurately reflect all parts the Exchange employs to collect the 
Covered Sale Fee from its members.
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    \11\ 17 CFR 240.31(a)(9).
    \12\ In addition to clearing transactions in options, the 
Options Clearing Corporation also clears security futures. See 
http://www.optionsclearing.com.
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PHLX Rule 3202
    The Exchange also proposes to amend its equity rules to clarify 
application and collection of the Covered Sale Fee. PHLX Rule 3202 sets 
forth that certain rules of the Exchange are applicable to market 
participants trading on the Exchange's equity trading platform. PHLX 
Rule 607 is cross referenced within Rule 3202, however Rule 3202 only 
references the first paragraph of Rule 607. For clarification, Rule 
3202 will be amended to indicate that Rule 607 will be referenced in 
its entirety. Such amendment serves to describe the full process for 
collection of the Covered Sale Fee regarding equity transactions.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b)(4) of the Act \13\ in that it provides for the 
equitable allocation of reasonable dues, fees and other charges among 
members and issuers and other persons using any facility or system 
which the Exchange operates or controls, and it does not unfairly 
discriminate between customers, issuers, brokers or dealers. The 
proposed clarifying language does not change the application and 
assessment of the Covered Sale Fee under the rule, but rather provides 
greater detail on the transactions that trigger the fee. The Exchange 
applies Rule 607 uniformly to all members' sell orders entered into the 
Exchange's transaction execution systems resulting in covered sales.
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    \13\ 15 U.S.C. 78f(b)(4).
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    The Exchange also believes the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\14\ in general and with 
Section 6(b)(5) of the Act,\15\ in particular, which requires that the 
rules of an exchange be designed to prevent fraudulent and manipulative 
acts and practices, promote just and equitable principles of trade, 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities,

[[Page 12171]]

remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, protect investors 
and the public interest. The Exchange believes that the proposed rule 
change is consistent with these requirements because the proposed 
amended rule text provides members with more detail regarding the 
circumstances under which the Exchange assesses a Covered Sale Fee. As 
such, the proposed changes will help avoid member confusion and foster 
better understanding of the application of the rule. Accordingly, the 
Exchange believes the proposed rule change will 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.
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    \14\ 15 U.S.C. 78f.
    \15\ 15 U.S.C. 78f(b)(5).
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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 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 establishes or changes a 
due, fee or other charge applicable only to a member, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \16\ and Rule 19b-
4(f)(2) thereunder.\17\
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(2).
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    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 necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2011-23 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-2011-23. 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 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 
a.m. and 3 p.m. 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 Number SR-Phlx-2011-23 and should be 
submitted on or before March 25, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-4903 Filed 3-3-11; 8:45 am]
BILLING CODE 8011-01-P