Document ID: SEC-2019-0193-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market LLC
Posted Date: 2019-02-22T05:00Z

[Federal Register Volume 84, Number 36 (Friday, February 22, 2019)]
[Notices]
[Pages 5752-5754]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-03040]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85153; File No. SR-NASDAQ-2019-007]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Reassign Certain 
Investigation and Enforcement Functions Under the Exchange's Authority 
and Supervision

February 15, 2019.
    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 5, 2019, The Nasdaq Stock Market LLC (``Nasdaq'' 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.
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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 assume operational responsibility for 
certain investigation and enforcement functions currently performed by 
the Financial Industry Regulatory Authority (``FINRA'') under the 
Exchange's authority and supervision. Nasdaq Rule 0150 requires 
Commission approval for this transfer of operational responsibility to 
Nasdaq. Nasdaq anticipates a phased transition, whereby Nasdaq would 
assume increasing responsibility throughout 2019 and into early 2020 
for investigation and enforcement activities for certain conduct 
occurring on the Nasdaq and Nasdaq BX, Inc. (``BX'') markets 
(collectively, the ``Exchanges'').
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaq.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
    Section 6 of the Act requires that national securities exchanges 
enforce their members' compliance with federal securities laws and 
rules as well as the exchanges' own rules.\3\ As a self-regulatory 
organization (``SRO''), Nasdaq must have a comprehensive regulatory 
program that includes investigation and prosecution of suspicious 
activity. Since it became a national securities exchange, Nasdaq has 
contracted with FINRA through various regulatory services agreements 
(``RSAs'') to perform certain of these regulatory functions on its 
behalf. However, as the Commission has made clear, ``the Nasdaq 
Exchange bears the responsibility for self-regulatory conduct and 
primary liability for self-regulatory failures, not the SRO retained to 
perform regulatory functions on the Exchange's behalf.'' \4\
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    \3\ 15 U.S.C. 78(f).
    \4\ Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550, 3556 (January 23, 2006).
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    Notwithstanding its use of FINRA, the Exchange has also retained 
operational responsibility for a number of regulatory functions, 
including real-time surveillance, qualification of companies listed on 
Nasdaq and most surveillance related to its affiliated options markets. 
Historically, Nasdaq retained operational responsibility in areas where 
Nasdaq's expertise regarding its own markets, technology and listed 
companies enhanced regulation. In recognition of this, on September 30, 
2013, the Commission approved Nasdaq's proposal to reallocate 
operational responsibility from FINRA to Nasdaq for certain equities 
surveillance patterns and related review functions, focused on: (1) 
Manipulation patterns that monitor solely Nasdaq activity; and (2) 
monitoring of compliance by member firms with elements of the 
Commission's Regulation M and Nasdaq Rule 4619 compliance.\5\
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    \5\ Securities Exchange Act Release No. 70569 (September 30, 
2013), 78 FR 62814 (October 22, 2013) (SR-NASDAQ-2013-102).
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    Building on Nasdaq's experience and expertise, this proposal 
reflects a natural evolution of Nasdaq's proven model to assume and 
retain operational responsibility in areas where its in-depth knowledge 
of its markets and members enhances market regulation. For the reasons 
outlined below, Nasdaq now seeks Commission approval to reallocate 
operational responsibility from FINRA to Nasdaq Regulation \6\ for 
certain investigation and enforcement activity, namely:
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    \6\ Under Nasdaq Rule 9120(t), Nasdaq Regulation includes the 
Nasdaq Enforcement Department.
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     Investigation and enforcement responsibilities for conduct 
occurring on its options markets (The BX Options Market and The Nasdaq 
Options Market), and
     investigation and enforcement responsibilities for conduct 
occurring on the Nasdaq and BX equity markets only, i.e., not also on 
non-Nasdaq equities markets.\7\
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    \7\ Nasdaq Regulation currently performs these functions for the 
Nasdaq PHLX LLC (``Phlx''), Nasdaq ISE, LLC (``ISE''), Nasdaq GEMX, 
LLC (``GEMX''), and Nasdaq MRX, LLC (``MRX'') because there is no 
comparable rule to Rule 0150 on those markets.
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    Currently, under RSAs, FINRA is responsible for, among other 
things, the investigation of matters referred from Nasdaq MarketWatch 
and the Phlx Market Surveillance department. FINRA is also responsible 
for providing services related to Nasdaq's formal disciplinary process, 
including the issuance of Wells Notices, Cautionary Action Letters, 
Complaints, and settlement documents.
    Nasdaq now proposes to perform these functions and is seeking 
Commission approval to do so. Nasdaq

[[Page 5753]]

believes that its expertise in its own market structure coupled with 
its expertise in surveillance activities will enable it to conduct 
investigation and enforcement responsibilities for the Exchanges 
effectively, efficiently and with immediacy. In addition, this proposal 
represents an incremental reallocation of operational responsibility 
because Nasdaq Regulation currently performs investigative and 
enforcement work on behalf of Phlx, ISE, GEMX, and MRX, providing it 
with relevant experience to perform these functions for the Exchanges 
as well. Most recently, Phlx filed for immediate effectiveness 
amendments to the Phlx's rules that vested its Regulation Department 
with investigation and enforcement authority.\8\ Nasdaq now seeks 
Commission approval to exercise this same authority for conduct on the 
Exchanges that it already exercises for Phlx, ISE, GEMX, and MRX.
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    \8\ See Securities Exchange Act Release No. 82143 (November 22, 
2017), 82 FR 56672 (November 29, 2017) (SR-Phlx-2017-92) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Adopt 
Investigatory and Disciplinary Processes Substantially Similar to 
Nasdaq BX, Inc. and The Nasdaq Stock Market LLC for Phlx, which, 
among other things, similarly enabled Phlx to retain discretion to 
perform these functions).
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    Notwithstanding this proposal, FINRA will continue to have 
responsibility for, among other things: (1) The investigation and 
enforcement of conduct occurring on the Nasdaq and BX equity markets 
that also relates to cross market activity on non-Nasdaq exchanges; (2) 
the handling of contested disciplinary proceedings arising out of 
Nasdaq Regulation-led investigation and enforcement activities; and (3) 
matters covered by agreements to allocate regulatory responsibility 
under Rule 17d-2 of the Act. As with all investigation and enforcement 
work, all tasks delegated to FINRA are subject to Nasdaq's supervision 
and ultimate responsibility.
    Nasdaq Regulation has instituted the requisite infrastructure to 
accommodate the internalization of investigative and enforcement work 
on behalf of the Exchanges. Specifically, Nasdaq created a new 
investigation and enforcement group to perform the functions covered by 
this proposal, which included hiring additional staff. Nasdaq is also 
leveraging its existing staff of experienced analysts, lawyers, 
programmers, and market structure experts to assist, where necessary, 
with performing the new functions covered by this proposal. In 
addition, Nasdaq Regulation has developed comprehensive plans covering 
the transition and has met regularly for more than one year to ensure a 
smooth transition of the work and prevent any gaps in regulatory 
coverage. Finally, Nasdaq filed for immediate effectiveness amendments 
to its rules to vest the Nasdaq Enforcement Department with the 
investigative and enforcement authority that Nasdaq now seeks to 
exercise.\9\
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    \9\ Securities Exchange Act Release No. 84355 (October 3, 2018), 
83 FR 51015 (October 10, 2018) (SR-NASDAQ-2018-066).
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    Nasdaq anticipates a phased transition of investigative and 
enforcement responsibility, whereby Nasdaq would assume increasing 
investigation and enforcement responsibility throughout 2019 and into 
early 2020 for the conduct occurring on the Exchanges. Nasdaq also 
anticipates transitioning certain matters currently pending with FINRA 
to the Nasdaq Enforcement Department if Nasdaq Regulation believes 
doing so is consistent with ensuring prompt resolution of regulatory 
matters.
    Nasdaq Rule 0150 requires that Nasdaq obtain Commission approval if 
regulatory functions subject to RSAs in effect at the time that Nasdaq 
began to operate as a national securities exchange are no longer 
performed by FINRA or another independent SRO. For the reasons stated 
above, Nasdaq believes that the reassignment of investigation and 
enforcement responsibility will further its regulatory program and 
benefit investors and the markets. Commission approval of the proposal 
would allow Nasdaq: To better leverage its surveillance, investigation, 
and enforcement teams; to deliver increased efficiencies in the 
regulation of its market; and to act promptly and provide more 
effective regulation.
    In addition, Nasdaq notes that its proposal is consistent with, but 
more limited than, investigation and enforcement work performed by 
other national securities exchanges. For example, in 2015, the SEC 
approved the New York Stock Exchange's (``NYSE'') application whereby 
NYSE amended certain of its disciplinary rules to facilitate the 
reintegration of certain market surveillance, investigation and 
enforcement functions performed on behalf of NYSE by FINRA.\10\ Unlike 
NYSE, however, Nasdaq will also continue to rely on FINRA to prosecute 
contested matters before a Hearing Panel.\11\
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    \10\ See Securities Exchange Act Release No. 75721 (August 18, 
2015), 80 FR 51334 (August 24, 2015) and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1, 
3 and 5, Amending Exchange Disciplinary Rules to Facilitate the 
Reintegration of Certain Regulatory Functions from Financial 
Industry Regulatory Authority, Inc., Securities Exchange Act Release 
No. 76436 (November 13, 2015), 80 FR 72460 (November 19, 2015) (SR-
NYSE-2015-35).
    \11\ See Nasdaq Rule 9120(q) (``The term ``Hearing Panel'' means 
an Adjudicator that is constituted under Rule 9231 to conduct a 
disciplinary proceeding governed by the Rule 9200 Series, that is 
constituted under the Rule 9520 Series or the Rule 9550 Series to 
conduct a proceeding, or that is constituted under the Rule 9800 
Series to conduct a temporary cease and desist proceeding.'').
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\12\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\13\ 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.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that this proposal is in keeping with those 
principles because it leverages Nasdaq's extensive operational 
experience and expertise in regulating its markets and marries Nasdaq's 
surveillance capabilities with its surveillance, investigation and 
enforcement staff, thereby increasing effectiveness and enabling prompt 
action. Nasdaq believes that it can achieve these important objectives 
because it is uniquely positioned to understand conduct on its own 
markets and take timely action when appropriate to investigate 
potential violations and enforce the rules to punish and deter 
misconduct, hold bad actors accountable, and protect investors and 
market integrity. In this regard, Nasdaq Regulation's surveillance, 
investigative and enforcement teams work together to identify and 
review potentially violative conduct. This results in more effective 
regulation because it facilitates timely and more efficient action. 
Indeed, the underlying driving force for the current proposal is 
Nasdaq's belief that it can conduct this regulatory work more 
effectively and efficiently given its technology, structure and in-
depth knowledge of its markets and members. For these reasons, Nasdaq 
believes it can conduct investigative and enforcement functions in a 
thorough and timely manner, thereby promoting the fair and orderly 
operation of the markets and serving the interests of market 
participants and investors. In so doing, Nasdaq Regulation will fulfill 
the Commission's mandate that Nasdaq bear

[[Page 5754]]

responsibility for self-regulatory conduct.\14\
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    \14\ See supra note 4.
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    Nasdaq will continue to refer certain potentially violative conduct 
to FINRA for further review, including matters covered by agreements to 
allocate regulatory responsibility under Rule 17d-2 of the Act. 
Moreover, FINRA will continue to have responsibility for, among other 
things, the investigation and enforcement of conduct occurring on the 
Nasdaq and BX equity markets that also occurs on non-Nasdaq exchanges, 
as well as the handling of contested disciplinary proceedings arising 
out of Nasdaq Regulation-led investigation and enforcement activities. 
All referrals to FINRA remain subject to Nasdaq's supervision and 
ultimate responsibility.
    Nasdaq also believes that the proposal is consistent with the Act 
because, as the Commission has made clear, Nasdaq bears the ultimate 
responsibility for self-regulatory conduct and primary liability for 
self-regulatory failures.\15\ In addition, Nasdaq notes that its 
proposal is consistent with, but more limited than, investigation and 
enforcement work performed by NYSE. As noted above, the SEC approved 
NYSE's application to amend certain of its disciplinary rules to 
facilitate the reintegration of certain market surveillance, 
investigation and enforcement functions performed on behalf of NYSE by 
FINRA.\16\ Nasdaq believes it would therefore be consistent with the 
Act for Nasdaq to perform more limited investigation and enforcement 
work than NYSE.
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    \15\ Id.
    \16\ See supra note 10.
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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. The proposed rule change is not 
intended to address competitive issues but rather to enable the 
Exchange to directly investigate and initiate disciplinary actions 
following the integration of certain regulatory functions from FINRA.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period 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 such 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-NASDAQ-2019-007 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-NASDAQ-2019-007. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2019-007 and should be submitted 
on or before March 15, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-03040 Filed 2-21-19; 8:45 am]
 BILLING CODE 8011-01-P