Document ID: SEC-2008-1484-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2008-10-29T04:00Z

[Federal Register: October 29, 2008 (Volume 73, Number 210)]
[Notices]               
[Page 64377-64379]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29oc08-102]                         

[[Page 64377]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58840; File No. SR-NASDAQ-2008-081]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Related to Rules Governing Options Trading

October 23, 2008.
    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 October 10, 2008, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been substantially prepared by Nasdaq. 
The Exchange has designated the proposed rule change as constituting a 
``non-controversial'' rule change under Rule 19b-4(f)(6) under the 
Act,\3\ which renders the proposal effective upon filing with the 
Commission. 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.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq proposes to amend the Nasdaq Options Market Rules (``NOM 
Rules'') to eliminate the requirement for separate designations of 
Senior Registered Options Principal (``SROP'') and Compliance 
Registered Options Principal (``CROP''), to require a member to 
integrate the responsibility for supervision of its public customer 
options business into its overall supervisory and compliance program, 
and to make certain related changes to the NOM Rules. The rule 
proposal, which is effective upon filing with the Commission, shall 
become operative 30 days after filing pursuant to Rule 19b-4(f)(6) of 
the Act. The text of the proposed rule is available on the Exchange's 
Web site at http://nasdaqomx.cchwallstreet.com, at the Exchange's 
principal office, 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, Nasdaq 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. Nasdaq 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 Exchange proposes to amend the NOM Rules to integrate the 
responsibility for supervision of a member's public customer options 
business into its overall supervisory and compliance program. The 
proposed rule change is substantively similar to recent amendments to 
the rules of Financial Industry Regulatory Authority (``FINRA''), which 
were approved by the Commission.\4\ As part of these changes, the 
Exchange proposes to eliminate the requirement that a firm must 
designate a SROP and CROP to be responsible for the overall supervision 
and compliance programs, respectively, for a member's public customer 
options activities. Nasdaq believes that the supervisory and compliance 
function of a member's public customer options activities would be 
better integrated into the matrix of a firm's overall supervisory and 
compliance functions rather than separately vested in a SROP and CROP.
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    \4\ Securities Exchange Act Release No. 57775 (May 5, 2008), 73 
FR 26453 (May 9, 2008) (SR-FINRA-2007-035) (approval order)
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    The Exchange does not believe that eliminating the SROP and CROP 
requirements would lead to a reduction in supervision, as firms have an 
obligation to designate an appropriately registered principal(s) to 
supervise their public customer options activities pursuant to Nasdaq 
Rule 3010, which requires Nasdaq members to comply with NASD Rule 3010 
\5\ as if such Rule were part of Nasdaq's Rules. In this regard, the 
Exchange proposes to amend NOM Rules Chapter II, Section 2(g)(1) to 
delete the reference to the SROP and CROP and to clarify that if a 
person is engaged in the supervision of options and security futures 
sales practices, including a person designated pursuant to NASD Rule 
3010(a)(2),\6\ then such person must be registered as a Registered 
Options and Security Futures Principal. The Exchange believes that the 
proposed rule change would provide firms greater flexibility to 
incorporate supervision into existing, firm-wide supervisory 
structures.
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    \5\ NASD Rule 3010 sets forth member firms' responsibilities 
with respect to supervision.
    \6\ NASD Rule 3010(a)(2) requires that members designate ``an 
appropriately registered principal(s) with authority to carry out 
the supervisory responsibilities of the member for each type of 
business in which it engages for which registration as a broker/
dealer is required.''
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    The proposed rule change also makes two technical changes. First, 
all references to ``Options Principal'' would be changed to 
``Registered Options and Security Futures Principal'' to reflect the 
correct title of such principals, consistent with the other NOM Rules. 
Second, all references to ``put and call'' would be deleted before 
options, and ``options'' will mean all types of options.
    In addition, the proposed rule change would amend NOM Rules Chapter 
XI in several respects. First, Section 7, paragraph (f), which relates 
to the opening of accounts, would be amended to delete the reference to 
the SROP and CROP and require that a specific Registered Options and 
Security Futures Principal(s) be designated to be responsible for 
approving customer accounts that do not meet the specific criteria and 
standards for writing uncovered short option transactions and for 
maintaining written records of the reasons for every account so 
approved. The proposed rule change would allow members the flexibility 
to assign this responsibility, which currently rests with the SROP and/
or CROP, to a specific Registered Options and Security Futures 
Principal.
    Second, references to the SROP and CROP would be deleted and a new 
paragraph (a) would be inserted into Section 8, which relates to 
supervision of accounts. The new paragraph (a) would make clear that a 
member that conducts a public customer options business must ensure its 
written supervisory system policies and procedures pursuant to NASD 
Rules 3010, 3012, and 3013 adequately address its public customer 
options business. Although the proposed rule change would eliminate 
entirely the positions and titles of the SROP and CROP, a member would 
still be required pursuant to NASD Rule 3010(a)(2) to designate ``an 
appropriately registered principal(s) with authority to carry out the 
supervisory responsibilities of the member for each type of business in 
which it engages for which registration as a broker/dealer is 
required,'' which would include designating an Options Principal to 
supervise a member's public customer options activities.
    Third, Nasdaq proposes amending Section 10, which relates to 
discretionary accounts, to eliminate references to the CROP and SROP, 
and

[[Page 64378]]

require that a specific Registered Options and Security Futures 
Principal(s) be designated to be responsible for the review of the 
acceptance of discretionary accounts. Under the proposed rule change, 
each firm would be required to have a Registered Options and Security 
Futures Principal other than the Registered Options and Security 
Futures Principal who accepted the account review the acceptance of 
each discretionary account to determine that the Registered Options and 
Security Futures Principal accepting the account had a reasonable basis 
for believing that the customer was able to understand and bear the 
risk of the strategies or transactions proposed. The firm must maintain 
a record of the basis for such determination. In addition, the proposed 
rule change would eliminate the requirement in paragraph (a)(ii) that 
discretionary options orders be approved and initialed on the day of 
entry by the branch office manager or other Options Principal, or 
confirmed within a reasonable time by an Options Principal if the 
branch office manager is not an Options Principal. Under the proposed 
rule change, discretionary orders would be required to receive frequent 
appropriate supervisory review by a Registered Options and Security 
Futures Principal who is not exercising discretionary authority 
(instead of a CROP) and be reviewed in accordance with a member's 
written supervisory procedures. The proposed rule change would ensure 
that supervisory responsibilities are assigned to specific Registered 
Options and Security Futures Principal-qualified individuals, thereby 
enhancing the quality of supervision.
    Proposed NOM Rules Chapter XI, Section 10(e) would allow a 
participant to exercise time and price discretion on orders for the 
purchase or sale of a definite number of options contracts in a 
specified security. The Exchange proposes to limit the duration of this 
discretionary authority to the day it is granted, absent written 
authorization to the contrary. Additionally, the proposed rule would 
require any exercise of time and price discretion to be reflected on 
the customer order ticket. The proposed one-day limitation would not 
apply to time and price discretion exercised for orders affected with 
or for an institutional account (as defined in the NOM Rules) pursuant 
to valid Good-Till Cancelled instructions issued on a ``not held'' 
basis.
    The Exchange believes that investors will receive greater 
protection by clarifying the time such discretionary orders remain 
pending.
    Nasdaq also proposes to add NOM Rules Chapter XI, Section 10(f), 
which requires any participant that does not utilize computerized 
surveillance tools for the frequent and appropriate review of 
discretionary account activity to establish and implement procedures to 
require Registered Options and Security Futures-qualified individuals 
who have been designated to review discretionary accounts to approve 
and initial each discretionary order on the day entered. The Exchange 
believes that any member that does not use computerized tools for the 
frequent and adequate surveillance of options discretionary account 
activity should continue to be required to perform the daily manual 
review of discretionary orders.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\7\ in general, and with Section 
6(b)(5) of the Act,\8\ in particular, in that the proposal is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, 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. The Exchange believes that 
the supervisory and compliance function of a member's public customer 
options activities would be better integrated into the matrix of a 
firm's overall supervisory and compliance functions rather than 
separately vested in a SROP and CROP.
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    \7\ 15 U.S.C. 78f.
    \8\ 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 
result in any burden on competition that is 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 solicited nor were any received with 
respect to the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange has designated the proposed rule change as one that 
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. Therefore, the 
foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \9\ and Rule 19b-4(f)(6) thereunder.\10\
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to provide the Commission 
with written notice of its intent to file the proposed rule change, 
along with a brief description and text of 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 the Commission may 
designate. The Exchange had satisfied the five business-day pre-
filing requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate 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.

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-NASDAQ-2008-081 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-2008-081. 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).

[[Page 64379]]

    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 inspection and copying in the 
Commission's Public Reference Room, 100 F Street, NW., 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 Nasdaq.
    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-NASDAQ-2008-081 and 
should be submitted on or before November 19, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Florence Harmon,
Acting Secretary.
 [FR Doc. E8-25810 Filed 10-28-08; 8:45 am]

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