Document ID: SEC-2009-0129-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2009-01-29T05:00Z

[Federal Register: January 29, 2009 (Volume 74, Number 18)]
[Notices]               
[Page 5193-5196]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29ja09-104]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59275; File No. SR-NASDAQ-2008-104]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Adopt a Modified Sponsored 
Access Rule

January 22, 2009.
    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 December 30, 2008, The NASDAQ Stock Market LLC (``Nasdaq'') 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 prepared by Nasdaq. On January 8, 2009, Nasdaq filed 
Amendment No. 1 to the proposed rule change. The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, 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

    Nasdaq proposes to adopt a proposed rule change to modify the 
requirements for members that provide ``Sponsored Access'' to Nasdaq's 
execution system.
    The text of the proposed rule change is below. Proposed new 
language is italicized; proposed deletions are in brackets.\3\
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    \3\ Changes are marked to the rule text that appears in the 
electronic manual of Nasdaq found at http://nasdaq.complinet.com.
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* * * * *
4611. Nasdaq Market Center Participant Registration
    (a)-(c) No change.
    (d) Members may provide ``Sponsored Access'' to the Nasdaq Market 
Center in accordance with the provisions below: [Sponsored 
Participants. A Sponsored Participant may obtain authorized access to 
the Nasdaq Market Center only if such access is authorized in advance 
by one or more Nasdaq members as follows:]
    [(1) Sponsored Participants must enter into and maintain customer 
agreements with one or more Sponsoring Members establishing proper 
relationship(s) and account(s) through which the Sponsored Participant 
may trade on the Nasdaq Market Center. Such customer agreement(s) must 
incorporate the Sponsorship Provisions set forth in paragraph (2) 
below.]
    [(2) For a Sponsored Participant to obtain and maintain authorized 
access to the Nasdaq Market Center, a Sponsored Participant and its 
Sponsoring Member must agree in writing to the following Sponsorship 
Provisions:
    (A) Sponsored Participant and its Sponsoring Member must have 
entered into and maintained a User Agreement with The NASDAQ Stock 
Market LLC. The Sponsoring Member must designate the Sponsored 
Participant by name in its User Agreement as such.
    (B) Sponsoring Member acknowledges and agrees that
    (i) All orders entered by the Sponsored Participants and any person 
acting on behalf of or in the name of such Sponsored Participant and 
any executions occurring as a result of such orders are binding in all 
respects on the Sponsoring Member and
    (ii) Sponsoring Member is responsible for any and all actions taken 
by such Sponsored Participant and any person acting on behalf of or in 
the name of such Sponsored Participant.
    (C) Sponsoring Member shall comply with the Nasdaq Certificate of 
Incorporation, Bylaws, Rules and procedures with regard to the Nasdaq 
Market Center and Sponsored Participant shall comply with Nasdaq 
Certificate of Incorporation, Bylaws, Rules and procedures with regard 
to the Nasdaq Market Center, as if Sponsored Participant were a Nasdaq 
Member.
    (D) Sponsored Participant shall maintain, keep current and provide 
to

[[Page 5194]]

the Sponsoring Member a list of individuals authorized to obtain access 
to the Nasdaq Market Center on behalf of the Sponsored Participant.
    (E) Sponsored Participant shall familiarize its authorized 
individuals with all of the Sponsored Participant's obligations under 
this Rule and will assure that they receive appropriate training prior 
to any use or access to the Nasdaq Market Center.
    (F) Sponsored Participant may not permit anyone other than 
authorized individuals to use or obtain access to the Nasdaq Market 
Center.
    (G) Sponsored Participant shall take reasonable security 
precautions to prevent unauthorized use or access to the Nasdaq Market 
Center, including unauthorized entry of information into the Nasdaq 
Market Center, or the information and data made available therein. 
Sponsored Participant understands and agrees that Sponsored Participant 
is responsible for any and all orders, trades and other messages and 
instructions entered, transmitted or received under identifiers, 
passwords and security codes of authorized individuals, and for the 
trading and other consequences thereof.
    (H) Sponsored Participant acknowledges its responsibility to 
establish adequate procedures and controls that permit it to 
effectively monitor its employees', agents' and customers' use and 
access to the Nasdaq Market Center for compliance with the terms of 
this agreement.
    (I) Sponsored Participant shall pay when due all amounts, if any, 
payable to Sponsoring Member, Nasdaq, or any other third parties that 
arise from the Sponsored Participant's access to and use of the Nasdaq 
Market Center. Such amounts include, but are not limited to applicable 
exchange and regulatory fees.]
    [(3) The Sponsoring Member must provide Nasdaq with a Notice of 
Consent acknowledging its responsibility for the orders, executions and 
actions of its Sponsored Participant at issue.]
    (1) Definition. Sponsored Access is the practice by a member firm 
(``Sponsoring Member'') of providing access to Nasdaq to another firm 
or customer (``Sponsored Participant''). Sponsored Access takes 
multiple forms, including but not limited to: (a) Direct market access, 
where the Sponsored Participant's orders pass through the Sponsoring 
Member's systems prior to reaching Nasdaq (``Direct Market Access''), 
(b) sponsored access, where the Sponsored Participant enters orders 
directly into Nasdaq via a dedicated port provided by the Sponsoring 
Member (``Direct Sponsored Access''), and (c) direct access where a 
service bureau or other third party provides Sponsored Participants 
with technology to access Nasdaq under the auspices of and via an 
arrangement with the Sponsoring Member (``Third Party Sponsored 
Access'').
    (2) Compliance. Irrespective of the form of Sponsored Access 
provided, Sponsoring Members are responsible for the conduct of their 
Sponsored Participants as if the conduct were their own. To ensure that 
Sponsored Access is consistent with high market quality and the 
protection of investors, Sponsoring Members shall at a minimum comply 
with the Contractual Provisions, Financial Controls, and Regulatory 
Controls set forth in sections (3), (4), and (5) below.
    (3) Contractual Provisions. A Sponsoring Member that provides 
Direct Sponsored Access or Third Party Sponsored Access shall execute 
and maintain agreements with each Sponsored Participant containing the 
commitments below. A Sponsoring Member that provides Third Party 
Sponsored Access must execute and maintain agreements with each service 
bureau or other entity that facilitates such Third Party Sponsored 
Access providing that such entity will execute and maintain agreements 
with each Sponsored Participant containing the commitments below for 
the benefit of the Sponsoring Member.
    (A) All trading activity by the Sponsored Participant shall comply 
with all applicable federal securities laws and rules and Exchange 
rules, including but not limited to the Nasdaq Certificate of 
Incorporation, Bylaws, Rules and procedures with regard to the Nasdaq 
Market Center (``Regulatory Requirements'').
    (B) Sponsored Participant shall provide Sponsoring Member with 
access to its books and records promptly upon request, and otherwise 
cooperate with the Sponsoring Member in furtherance of Sponsoring 
Member's compliance with applicable Regulatory Requirements.
    (C) Sponsored Participant shall maintain its trading activity 
within the credit, product or other financial limits specified by the 
Sponsoring Member.
    (D) Sponsored Participant shall maintain all technology permitting 
sponsored access to Nasdaq in a physically secure manner and may not 
permit unauthorized individuals to use or obtain access to Nasdaq. 
Sponsored Participant shall familiarize its authorized individuals with 
the Regulatory Requirements and will provide appropriate training prior 
to use or access to Nasdaq.
    (E) Sponsored Participant shall provide the Sponsoring Member 
complete and current corporate and financial information about the 
Sponsored Participant.
    (F) Sponsored Participant shall agree that the Sponsoring Member or 
Nasdaq may immediately terminate the Sponsored Access if the Sponsored 
Participant or third party access provider fails to abide by its 
commitments.
    (4) Financial Controls. Each Sponsoring Member shall establish 
adequate procedures and controls that permit it to effectively monitor 
and control the Sponsored Access to systemically limit the Sponsoring 
Member's financial exposure. At minimum, the Sponsored Access system 
shall:
    (A) Prevent each Sponsored Participant from entering orders that in 
aggregate exceed appropriate pre-set credit thresholds. Sponsoring 
Members may also set finely-tuned credit thresholds by sector, security 
or otherwise.
    (B) Prevent Sponsored Participants from trading products that the 
Sponsored Participant or Sponsoring Member is restricted from trading.
    (C) Prevent Sponsored Participants from submitting erroneous orders 
by providing for the rejection of orders that exceed certain price or 
size parameters, on an order-by-order basis or over a short period of 
time, or that indicate duplicative orders.
    (5) Regulatory Controls.
    (A) Each Sponsoring Member shall have systemic controls to ensure 
compliance by the Sponsored Participant with applicable Regulatory 
Requirements, including but not limited to compliance with rules 
relating to short selling; trading halts; proper uses of order types; 
proper use of Intermarket Sweep Orders; trading ahead of customer limit 
orders; prohibitions against manipulative trading practices, including 
wash sales and marking the close; restricted lists of securities for 
purposes of SEC Rule 10b-18; and applicable margin rules.
    (B) Each Sponsoring Member shall ensure that compliance personnel 
receive timely reports of all trading activity by its Sponsored 
Participants sufficient to permit the Sponsoring Member to comply with 
applicable Regulatory Requirements, and to monitor for illegal activity 
such as market manipulation or insider trading. At minimum, the member 
firm's compliance unit should receive immediate post-trade execution 
reports

[[Page 5195]]

of trading activity of its Sponsored Participants, including their 
identities; all required audit trail information by no later than the 
end of the trading day; all information necessary to create and 
maintain the trading records required by Regulatory Requirements by no 
later than the end of the trading day.
* * * * *

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
    Nasdaq proposes to modify Rule 4611(d) which sets forth the 
requirements applicable to Nasdaq members that provide ``Sponsored 
Access'' by providing customers with electronic access to Nasdaq's 
execution system using the member's market participant identifier 
(``MPID''). Currently, Rule 4611(d) is substantially similar to 
Sponsored Access rules adopted by other national securities exchanges, 
including New York Stock Exchange Rule 123B and NYSE Arca Exchange Rule 
7.29(b). Nasdaq is proposing to amend Rule 4611(d) to ensure that 
member firms that are assuming responsibility for their customers' 
trading activity have effective financial and regulatory oversight of 
the Sponsored Participant, and that Nasdaq has access to all 
information necessary to provide effective exchange oversight.
    The proposal defines Sponsored Access as taking one of three 
general structures. First, ``direct market access'' occurs where the 
Sponsored Participant's orders pass-through the member's systems prior 
to reaching the exchange. Member firms routinely offer this form of 
access in the ordinary course of business presumably with effective 
regulatory and financial controls in place that are equivalent to those 
applied to the member firm's own orders. Second, ``direct sponsored 
access'' occurs where the Sponsored Participant is provided a dedicated 
line or port to Nasdaq, so that its orders do not first pass through 
the member's systems. As explained in more detail below, each port that 
permits entry of quotes and orders into Nasdaq is registered to and 
affiliated with a unique Nasdaq member firm but Nasdaq is not able to 
control or determine what external controls exist to ensure that quotes 
and orders entered into that port comply with applicable regulatory 
requirements, Third, ``third party sponsored access'' occurs where a 
service bureau, such as LAVA Trading, provides Sponsored Participants 
the technology to access the exchange and arranges for use of the 
member's MPID in connection with that arrangement under the auspices 
and via an arrangement with the Sponsoring Member. These definitions 
are non-exhaustive and designed to address the changing needs of the 
marketplace with flexibility while maintaining rigorous oversight.
    The proposed rule re-affirms that member firms that offer any form 
of Sponsored Access assume responsibility for their Sponsored 
Participants' trading activity. The member firm must effectively assure 
compliance by each Sponsored Participant with appropriate financial 
controls and applicable regulatory requirements. As described more 
fully below, this would be accomplished through a combination of 
contractual commitments, financial and regulatory controls, and the 
monitoring of current activity reports that is designed to limit 
financial exposure and bolster regulatory compliance.
    To facilitate effective oversight of Sponsored Access arrangements 
by Nasdaq and the member firms, Nasdaq is proposing to require members 
to obtain a contractual commitment from each Sponsored Access 
Participant that is provided direct access to Nasdaq through a 
dedicated port (``Direct Sponsored Access''). Access to Nasdaq's system 
is available through telecommunications ports that Nasdaq's offers 
exclusively to Nasdaq members. Each port is uniquely identified and is 
registered to one and only one Nasdaq member. Each message delivered to 
that port, delivered from that port into Nasdaq's systems, or delivered 
to the port by Nasdaq is tagged with the unique identifier for that 
port. As a result, every quotation, order, or execution that interacts 
with or is processed by Nasdaq's systems is attributable to a single 
Nasdaq member. That member is responsible for all trading activity 
occurring via that port, including activity of Sponsored Participants.
    Where Sponsored Access is provided through a third party such as a 
service bureau (``Third Party Sponsored Access''), the member registers 
for a port but enables the service bureau to manage access to and 
activity of that port. In that case, the member firm will be required 
to obtain a contractual commitment from the service bureau that would 
include a commitment by the service bureau to obtain from each of its 
Sponsored Participant an appropriate contractual commitment for the 
benefit of the member firm. Through these contractual arrangements, 
Nasdaq will have the ability to obtain from its members any information 
necessary properly to monitor and address trading activity of Sponsored 
Participants. Pursuant to Rule 8210, members are required to comply 
with all requests for information, such as those stemming from 
investigations and enforcement actions, which may require the provision 
of information regarding individual Sponsored Participants.
    To satisfy the proposed Contractual Provisions requirement, the 
Sponsored Participant or service bureau, as appropriate, will be 
required at minimum to commit to the following:
     All trading activity by the Sponsored Participant shall 
comply with all applicable federal securities laws and rules and 
Exchange rules, including but not limited to the Nasdaq Certificate of 
Incorporation, Bylaws, Rules and procedures with regard to the Nasdaq 
Market Center (``Regulatory Requirements'').
     Sponsored Participant shall provide Sponsoring Member with 
access to its books and records promptly upon request, and otherwise 
cooperate with the Sponsoring Member in furtherance of Sponsoring 
Member's compliance with applicable Regulatory Requirements.
     Sponsored Participant shall maintain its trading activity 
within the credit, product or other financial limits specified by the 
Sponsoring Member.
     Sponsored Participant shall maintain all technology 
permitting sponsored access to Nasdaq in a physically secure manner and 
may not permit unauthorized individuals to use or obtain access to 
Nasdaq. Sponsored Participant shall familiarize its authorized 
individuals with the Regulatory Requirements and will provide 
appropriate training prior to use or access to Nasdaq.
     Sponsored Participant shall provide the Sponsoring Member 
complete and current corporate and financial information about the 
Sponsored Participant.

[[Page 5196]]

     Sponsored Participant shall agree that the Sponsoring 
Member or Nasdaq may immediately terminate the Sponsored Access if the 
Sponsored Participant or third party access provider fails to abide by 
its commitments.
    Nasdaq is also proposing that member firms be required to assure 
that the Sponsored Access front-end or other functionality includes 
controls that systemically limit the member firm's financial exposure. 
At minimum, the Sponsored Access system must:
     Prevent each Sponsored Participant from entering orders 
that in aggregate exceed appropriate pre-set credit thresholds. 
Sponsoring Members may also set finely-tuned credit thresholds by 
sector, security or otherwise.
     Prevent Sponsored Participants from trading products that 
the Sponsored Participant or Sponsoring Member is restricted from 
trading.
     Prevent Sponsored Participants from submitting erroneous 
orders by providing for the rejection of orders that exceed certain 
price or size parameters, on an order-by-order basis or over a short 
period of time, or that indicate duplicative orders.
    The member firm would be required to assure that the Sponsored 
Access front-end or other functionality includes controls that assure 
compliance with SEC and Nasdaq rules that can be systemically enforced. 
At minimum, the Sponsored Access system should assure compliance with: 
Rules relating to short selling; trading halts; proper uses of order 
types; proper use of Intermarket Sweep Orders; trading ahead of 
customer limit orders; prohibitions against manipulative trading 
practices, including wash sales and marking the close; restricted lists 
of securities for purposes of SEC Rule 10b-18; and applicable margin 
rules.
    Finally, Nasdaq is proposing that member firms be required to 
assure that its compliance unit receives timely reports of all trading 
activity by its Sponsored Participants sufficient to permit the member 
firm to comply with applicable SEC and Nasdaq recordkeeping and 
reporting requirements, and to monitor for illegal activity such as 
market manipulation or insider trading. At minimum, the member firm's 
compliance unit should receive immediate post-trade execution reports 
of trading activity of its Sponsored Participants, including their 
identities; all required audit trail information no later than the end 
of the trading day; all information necessary to create and maintain 
the trading records required by Regulatory Requirements, no later than 
the end of the trading day.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\4\ in general and with Section 
6(b)(5) of the Act,\5\ in particular, in that it is designed to promote 
just and equitable principles of trade and to protect investors and the 
public interest. The proposal is consistent with these obligations 
because it updates the standards for providing Sponsored Access, and 
clearly articulates the obligations in the Nasdaq's rules.
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    \4\ 15 U.S.C. 78(f).
    \5\ 15 U.S.C. 78f-3(6) [sic].
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq 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, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date 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 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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2008-104 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-NASDAQ-2008-104. 
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 inspection 
and copying in the Commission's Public Reference Room, on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of the 
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-2008-104 and should be submitted on or before 
February 19, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\6\
Florence E. Harmon,
Deputy Secretary.
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    \6\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E9-1871 Filed 1-28-09; 8:45 am]

BILLING CODE 8011-01-P