Document ID: SEC-2012-0370-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Stock Exchange, Inc.
Posted Date: 2012-03-07T05:00Z

[Federal Register Volume 77, Number 45 (Wednesday, March 7, 2012)]
[Notices]
[Pages 13675-13676]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-5474]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66503; File No. SR-CHX-2012-02]

Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Order Approving a Proposed Rule Change To Add to and Amend Its Rules 
Regarding the Obligations of Institutional Brokers Registered With the 
Exchange

March 1, 2012.

I. Introduction

    On January 6, 2012, the Chicago Stock Exchange, Inc. (``CHX'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to permit broker-dealers registered as 
Institutional Brokers with CHX to operate a non-Institutional Broker 
unit within the same Participant Firm. The proposed rule change was 
published for comment in the Federal Register on January 24, 2012.\3\ 
The Commission received no comment letters on the proposal. This order 
approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 66177 (January 18, 
2012), 77 FR 3527 (``Notice'').
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II. Description of the Proposal

    Institutional Brokers are an elective sub-category of Exchange 
Participants who are subject to the obligations of Article 17 of the 
CHX rules. Registration as an Institutional Broker is limited to 
Participant Firms, and is not available to individual persons.\4\ Under 
current CHX rules, each individual person authorized to enter bids and 
offers and execute transactions on behalf of an Institutional Broker is 
considered an Institutional Broker Representative (``IBR'') and must be 
registered with the Exchange as provided in Article 6.
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    \4\ See CHX Rules, Article 17, Rule 1, Interpretation and Policy 
.02.
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    Institutional Brokers are the successors to the floor brokers that 
operated within the Exchange's previous floor-based, auction trading 
model. The Exchange replaced its floor-based, auction trading model 
with its New Trading Model, which features an electronic limit order 
matching system as its core trading facility (``Matching System''), 
beginning in late 2006.\5\ Under CHX's New Trading Model, Institutional 
Brokers were regarded as operating on the Exchange.\6\ Recently, the 
Exchange amended its rules to provide that Institutional Brokers are no 
longer considered to be operating on the Exchange.\7\ Given this change 
in the status of Institutional Brokers, the Exchange stated that the 
instant proposal is designed to enable Institutional Brokers to engage 
in business activities beyond those handled by IBRs, such as over-the-
counter (``OTC'') market making, while ensuring that their activities 
as an Institutional Broker are appropriately governed by CHX rules.
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    \5\ See Securities Exchange Act Release No. 54550 (September 29, 
2006), 71 FR 59563 (October 10, 2006) (SR-CHX-2006-05).
    \6\ See id.
    \7\ See Securities Exchange Act Release No. 65633 (October 26, 
2011), 76 FR 67509 (November 1, 2011) (SR-CHX-2011-29).
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    The Exchange proposed to permit Institutional Brokers to operate a 
non-Institutional Broker unit within the same Participant Firm. A firm 
registered with the Exchange as Institutional Broker could maintain 
other lines of business separate and distinct from its Institutional 
Broker activities without subjecting those other areas to the 
requirements of Article 17, Rule 3 contingent upon the creation and 
maintenance of effective information barrier procedures as specified in 
proposed Rule 6 of Article 17. The Exchange stated that non-IBR 
activities of a Participant Firm registered as an Institutional Broker 
would remain subject to all other applicable provisions of the 
Exchange's rules.\8\ The non-IBR personnel at an Institutional Broker 
could continue to send orders to the Exchange, but those orders would 
be regarded as standard order-sending Participant orders, not as 
Institutional Broker activity. The Exchange stated that it can and will 
distinguish between orders sent to the Matching System by IBRs and 
other orders sent by Institutional Brokers to the Matching System for 
billing and other purposes.\9\
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    \8\ See Notice, 77 FR at 3529.
    \9\ See id.
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    CHX proposed to modify its rules correspondingly to redefine IBR 
\10\ and ``Participant Firm,'' \11\ and amend the obligations of 
Institutional Brokers and IBRs.\12\ Certain Institutional Broker 
privileges and responsibilities would apply only to the activities of 
those individuals registered with the Exchange as IBRs (and clerks 
thereto).\13\ Further, the Exchange proposed to

[[Page 13676]]

correct typographical mistakes and to make clarifying changes.
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    \10\ See Article 1, new Rule 1(gg) (defining IBR). See also 
amended Interpretation and Policy .02 to Article 17, Rule 1 
(redefining IBR as an individual person affiliated with an 
Institutional Broker who is authorized to accept orders, enter bids 
and offers and execute transactions on behalf of an Institutional 
Broker and who has registered with the Exchange as an IBR as 
provided in Article 6).
    \11\ See Article 17, revised Rule 2 (clarifying that only 
Participants Firms are eligible to register as Institutional 
Brokers).
    \12\ See Article 17, Rule 3(e) (the obligations owed by 
Institutional Brokers under Article 11 include the affirmative 
obligation to provide electronic information to the Exchange in 
certain circumstances); Interpretation and Policy .01(a) to Article 
6, Rule 3 (all applicants seeking to register as IBRs must 
successfully complete an Institutional Broker exam).
    \13\ See amended Article 17, Rule 3 (enumerated Institutional 
Broker responsibilities apply to activities by or through an 
affiliated IRR); amended Article 17, Rule 5(a) (the ability to make 
clearing submissions is limited to IBRs); new Article 17, Rule 6 
(creating a duty of Institutional Brokers with a non-Institutional 
Broker unit to establish and maintain information barriers between 
the Institutional Broker unit and non-Institutional Broker unit); 
amended Article 17, Rule 1 (only registered IBRs are permitted to 
use Exchange systems provided for Institutional Brokers for handling 
orders and reporting transactions, i.e., Brokerplex[supreg]). For a 
description of Brokerplex[supreg], see Notice, 77 FR at 3528, n.9.
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III. Discussion

    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\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\15\ in that it is designed to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transaction in 
securities, to remove impediments and perfect the mechanisms of a free 
and open market, and, in general, to protect investors and the public 
interest.
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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).
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    As noted above, the Exchange recently amended its rules to provide 
that Institutional Brokers are no longer deemed to be operating on the 
Exchange.\16\ Accordingly, Institutional Brokers are now permitted to 
handle and execute orders otherwise than on the Exchange.\17\ Given 
this change, the Commission believes that it is appropriate and 
consistent with the Act for the Exchange to alter the privileges and 
responsibilities of Institutional Brokers to apply only to the 
activities of IBRs (and their clerks). The proposed changes would allow 
Institutional Brokers to carry out business strategies similar to those 
of other participants on the Exchange, while still ensuring that 
persons acting as IBRs are subject to the appropriate regulatory 
obligations. Further, the proposed rules regarding information barrier 
procedures should help ensure that there are adequate safeguards to 
prevent IBR units and non-IBR units from sharing non-public market 
information. As it gains experience overseeing the new multi-unit 
Institutional Brokers, the Commission expects the Exchange to assess 
whether any other informational barriers are necessary to prevent the 
flow of market information between IBR units and non-IBR units.
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    \16\ See supra note 7.
    \17\ See id.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-CHX-2012-02) be, and it 
hereby is, approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-5474 Filed 3-6-12; 8:45 am]
BILLING CODE 8011-01-P