Document ID: SEC-2016-0925-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange LLC
Posted Date: 2016-05-31T04:00Z

[Federal Register Volume 81, Number 104 (Tuesday, May 31, 2016)]
[Notices]
[Pages 34393-34398]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-12673]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77899; File No. SR-NYSE-2016-37]

Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change Removing From Its Rules 
Certain Internal Procedures Regarding the Use of Fine Income

May 24, 2016.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'' or ``Exchange Act'') \2\ and Rule 19b-4 
thereunder,\3\ notice is hereby given that, on May 13, 2016, New York 
Stock Exchange LLC (``NYSE'' or the ``Exchange'') filed with the 
Securities and Exchange Commission (the ``Commission'') the proposed 
rule change as described in Items I, II, and III below, which Items 
have been prepared by the self-regulatory organization. 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\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to remove from its rules certain internal 
procedures regarding the use of fine income. The proposed rule change 
is available on the Exchange's Web site at www.nyse.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 self-regulatory organization 
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 those 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 parts of such statements.

[[Page 34394]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to remove from its rules certain internal 
procedures regarding the use of fine income, which were approved in 
2007 (the ``Fine Income Procedures'') in order to align the Exchange's 
use of fine income with other self-regulatory organizations (``SROs''). 
The Exchange believes that the Fine Income Limitations [sic] are no 
longer necessary and are duplicative of the limitations on the use of 
regulatory assets and income, including fine income, set forth in 
Article IV, Section 4.05 of the operating agreement of the Exchange 
(``Section 4.05''). Section 4.05 prohibits the Exchange from using any 
regulatory assets or any regulatory fees, fines or penalties collected 
by the Exchange's regulatory staff for commercial purposes or 
distributing such assets, fees, fines or penalties to NYSE Group, Inc. 
(``NYSE Group''), the Exchange's member, or any other entity.\4\
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    \4\ See Ninth Amended and Restated Operating Agreement of New 
York Stock Exchange LLC, Art. IV, Sec. 4.05; see also Securities 
Exchange Act Release No. 75991 (September 28, 2015), 80 FR 59837 
(October 2, 2015) (SR-NYSE-2015-27) (``NYSE Approval Order''), at 
59839.
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    For the reasons discussed below, the Exchange believes that 
together Section 4.05 and the provisions governing the Regulatory 
Oversight Committee (``ROC'') of the Exchange's Board of Directors 
adequately address the concerns underlying the Fine Income Procedures 
and provide sufficient protections to ensure the proper use of fine 
income by the Exchange.
Background
The Fine Income Procedures
    In 2006, New York Stock Exchange, Inc. merged with Archipelago 
Holdings, Inc. (the ``Archipelago Merger'').\5\ Prior to approval of 
rule changes related to the Archipelago Merger, in conversation with 
the staff of the Securities and Exchange Commission (``Commission''), 
the Exchange undertook to subsequently file a proposed rule change 
regarding the use of fines collected from member organizations 
following disciplinary action against such member organizations.\6\ On 
January 31, 2007, the Commission approved the proposed rule change 
establishing the Fine Income Procedures.\7\
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    \5\ See id. The Archipelago Merger had the effect of 
``demutualizing'' New York Stock Exchange, Inc. by separating equity 
ownership from trading privileges, and converting it to a for-profit 
entity. See Securities Exchange Act Release No. 53382, 71 FR 11251, 
11254 (February 27, 2006) [sic] (SR-NYSE-2005-77) (``Merger Approval 
Order''). In the resulting re-organization, the Exchange became a 
wholly-owned subsidiary of NYSE Group, and succeeded to New York 
Stock Exchange, Inc.'s registration as a national securities 
exchange under the Exchange Act. See id. at 11255.
    \6\ See id. at 11270, note 231. Subject to the requirement to 
file fees with the Commission, the Exchange determines, assesses, 
collects and retains certain registration and regulatory fees set 
forth in its Price List.
    \7\ See Securities Exchange Act Release No. 55216 (January 31, 
2007), 72 FR 5779 (February 7, 2007) (NYSE-2006-109) (``Order 
Approving the Fine Income Procedures'').
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    The Exchange's Fine Income Procedures referred to actions to be 
taken by the Exchange's subsidiary, NYSE Regulation, Inc. (``NYSE 
Regulation''), and NYSE Regulation's board of directors (the ``NYSE 
Regulation Board''), because at the time performance of certain of the 
Exchange's regulatory functions was delegated to NYSE Regulation. Such 
delegation was made in 2006 pursuant to a Delegation Agreement (the 
``Delegation Agreement'') between the Exchange, NYSE Regulation, and 
NYSE Market (DE), Inc. (``NYSE Market (DE)'').\8\
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    \8\ See NYSE Approval Order, supra note 4, at 59839. The 
Exchange's market functions were delegated to NYSE Market (DE). 
Although the Delegation Agreement set forth the terms under which 
the Exchange delegated its functions to NYSE Regulation and NYSE 
Market (DE), the Exchange retained ultimate responsibility for the 
operations, rules and regulations developed by NYSE Regulation and 
NYSE Market (DE) and for their enforcement.
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    As approved, the Fine Income Procedures provided that: \9\
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    \9\ See Securities Exchange Act Release No. 55003 (December 22, 
2006), 71 FR 78497, 78498 (December 29, 2006) (NYSE-2006-109) (the 
``Proposing Release'').
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     Fines would play no role in the annual NYSE Regulation 
budget process. Beginning with the preparation of the 2007 operating 
budget, fines would be budgeted at zero, that is, budgeted expenses of 
NYSE Regulation would be offset entirely by budgeted income that did 
not include any anticipated income from fines. Among other things, this 
meant that fines would not offset amounts budgeted for compensation of 
NYSE Regulation employees or directors. During the course of a year, 
income from fines would be considered as available to fund non-
compensation expenses of NYSE Regulation, which expenses were not 
anticipated in the budget process or which could not be included in the 
budget prepared in advance of the fiscal year because NYSE Regulation 
was unable to budget sufficient income from sources other than fines to 
offset the expenses.
     The use of fine income by NYSE Regulation would be subject 
to specific review and approval by the NYSE Regulation board of 
directors. On a quarterly basis, the staff of NYSE Regulation would 
provide to the NYSE Regulation Board a report on the amount of fine 
income received to date during the year and recommendations regarding 
its proposed use to fund regulatory expenses as above described. The 
use of the fine income would be subject to NYSE Regulation Board 
approval. Following each year, the staff of NYSE Regulation would 
provide the NYSE Regulation Board a report reprising the fines imposed 
and the utilization of fine income by NYSE Regulation during that year. 
This report would analyze fines imposed by NYSE Regulation for 
consistency with precedent from both other NYSE disciplinary cases as 
well as publicly available disciplinary cases adjudicated by the 
National Association of Securities Dealers, Inc. and the Commission.
    Each year the NYSE Regulation Board would also consider whether 
unused fine income had accumulated beyond a level reasonably necessary 
for future contingencies, and could determine to utilize any such 
excess to fund one or more special projects of NYSE Regulation, to 
reduce fees charged by NYSE Regulation to its member organizations or 
the markets that it serves, or for a charitable purpose.
Amendment of the Fine Income Procedures
    Effective February 16, 2016, the Delegation Agreement terminated 
and NYSE Regulation ceased performing regulatory functions on behalf of 
the Exchange, which has re-integrated its regulatory functions. The ROC 
of the Exchange's Board of Directors now provides independent oversight 
of the regulatory function of the Exchange.\10\
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    \10\ See NYSE Approval Order, supra note 4, at 59838. Similarly, 
following termination of the Delegation Agreement, NYSE Market 
(DE)'s delegated market responsibilities are performed by the 
Exchange.
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    In its filing proposing the creation of the ROC and termination of 
the Delegation Agreement, the Exchange addressed the Fine Income 
Procedures. Specifically, it ``reiterate[ed] [sic] the previous 
commitments that fines would play no role in the annual regulatory 
operating budget process and that the use of fine income by Exchange 
regulatory staff would be subject to review and approval by the 
proposed ROC.'' \11\ Accordingly, the ROC has

[[Page 34395]]

assumed the responsibilities previously held by the NYSE Regulation 
Board.
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    \11\ See Securities Exchange Act Release No. 75288 (June 24, 
2015), 80 FR 37316 (June 30, 2015) (SR-NYSE-2015-27), note 25.
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Proposed Amendment
    The Exchange proposes to delete the Fine Income Procedures from the 
Exchange rules. The Exchange would remain subject to Section 4.05, 
which prohibits it from using any regulatory assets or any regulatory 
fees, fines or penalties collected by the Exchange's regulatory staff 
for commercial purposes or distributing such assets, fees, fines or 
penalties to the Exchange's member or any other entity.\12\
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    \12\ All fine monies previously collected would remain subject 
to the restrictions in Section 4.05.
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    In its Order Approving the Fine Income Procedures, the Commission 
stated that the Fine Income Procedures were ``to assure the proper 
exercise by NYSE Regulation of its power to fine member organizations 
of the Exchange and the proper use by NYSE Regulation of the funds so 
collected.'' \13\ The Exchange believes that Section 4.05 and the 
operating agreement provisions governing the ROC adequately address 
these concerns.
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    \13\ Order Approving the Fine Income Procedures, supra note 7, 
at 5779.
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    First, the Exchange believes that limitations on the use of fines 
is not the most effective way to assure proper exercise by Exchange 
regulatory staff of the Exchange's power to fine member organizations. 
Simply put, usage limitations on fine income do not provide oversight 
of regulatory performance. They just monitor how the resulting income 
is spent. The Exchange believes that the responsibility to assure 
proper exercise by Exchange regulatory staff of the Exchange's power to 
fine member organizations more properly lies with the ROC, which is 
responsible to oversee the Exchange's regulatory and self-regulatory 
organization responsibilities and assess the Company's regulatory 
performance.\14\
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    \14\ See Ninth Amended and Restated Operating Agreement of New 
York Stock Exchange LLC, Art. II, Sec. 2.03(h)(ii). The ROC is made 
up entirely of independent directors of the Exchange.
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    In addition, the disciplinary process itself contains a powerful 
check on the improper exercise by Exchange regulatory staff of the 
power to fine members and member organizations, specifically the 
appellate process, whereby adverse hearing panel determinations can be 
appealed to the Committee for Review, a committee of the Board of 
Directors of the Exchange that includes independent directors and 
individuals associated with member organizations of the Exchange, which 
recommends a disposition to the Board of Directors of the Exchange. 
Final actions of the Exchange can be appealed to the Commission, and 
Commission determinations can be challenged in federal court.
    Second, the Exchange believes that, by setting clear limitations on 
its use, Section 4.05 is sufficient to ensure the proper use by the 
Exchange of fine income. Section 4.05 addresses this concern by 
prohibiting the use of fines for commercial purposes or distributions. 
Indeed, because Section 4.05 encompasses all regulatory assets and 
income, not just fines, it ensures the proper use by the Exchange of a 
broader range of regulatory funds, by prohibiting their use for 
commercial purposes or distributions.
    The Commission stated in its Order Approving the Fine Income 
Procedures that it believed the Fine Income Procedures would ``guard 
against the possibility that fines may be assessed to respond to 
budgetary needs rather than to serve a disciplinary purpose.'' \15\ 
Section 4.05 also guards against this possibility by limiting the use 
of fines. However, unlike the Fine Income Procedures, Section 4.05 also 
guards against the possibility that other regulatory income, such as 
examination, access, registration, qualification, arbitration, dispute 
resolution and other regulatory fees, or regulatory assets, could be 
used or assessed to respond to budgetary needs, by making them 
unavailable for commercial purposes or distributions. At the same time, 
the ROC is specifically charged with reviewing the regulatory budget of 
the Exchange and inquiring into the adequacy of resources available in 
the budget for regulatory activities.\16\ Accordingly, the Exchange 
believes that removing the Fine Income Procedures and relying on 
Section 4.05 and the provisions governing the ROC would provide 
adequate protections against the use of regulatory assets, or 
assessment of regulatory income, to respond to budgetary needs.
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    \15\ Order Approving the Fine Income Procedures, supra note 7, 
at 5780.
    \16\ See note 14, supra.
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    The Exchange believes that the circumstances that led to the Fine 
Income Procedures no longer exist. At the time the Fine Income 
Procedures were adopted, a predecessor to Section 4.05 was in effect 
(the ``Predecessor Section''). Indeed, the Commission cited that fact 
when approving the Archipelago Merger:

    The Commission further notes that the NYSE has taken steps to 
safeguard the use of regulatory monies. Specifically, New York Stock 
Exchange LLC will not be permitted to use any assets of, or any 
regulatory fees, fines, or penalties collected by, NYSE Regulation 
for commercial purposes or distribute such assets, fees, fines, or 
penalties to NYSE Group or any entity other than NYSE 
Regulation.\17\
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    \17\ See Merger Approval Order, supra note 5, at 11263.
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    At the time, NYSE Regulation performed regulatory functions on 
behalf of the Exchange. On its face, the Predecessor Section, found 
in the Exchange's 2006 operating agreement, only limited the 
Exchange itself. NYSE Regulation had the obligation under the 
Delegation Agreement to assure compliance with the rules of the 
Exchange, but the Fine Income Procedures provided a more direct 
commitment by NYSE Regulation to ensure the proper exercise of NYSE 
Regulation's power to fine member organizations and the proper use 
by NYSE Regulation of fines collected.

    Today, because the Delegation Agreement is no longer in effect, the 
same entity that fines member organizations is directly subject to the 
limits of Section 4.05. Accordingly, the Exchange believes that 
removing the Fine Income Procedures and relying on Section 4.05 and the 
provisions governing the ROC would provide adequate protections against 
the concerns cited by the Commission in the Order Approving the Fine 
Income Procedures. Indeed, as pointed out above, Section 4.05 is wider 
in scope than the Fine Income Procedures, and so limits the Exchange's 
use of all regulatory assets and income, not just fine income.
    The proposed change would have the benefit of bringing the 
Exchange's restrictions on the use of regulatory assets and income into 
greater conformity with those of its affiliates NYSE MKT LLC and NYSE 
Arca, Inc. NYSE MKT LLC has substantially the same provision as Section 
4.05 its operating agreement.\18\ The bylaws of NYSE Arca, Inc. also 
preclude the use of regulatory fees and penalties for commercial 
operations or dividends, limiting their use to funding legal, 
regulatory and surveillance operations.\19\
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    \18\ See Eighth Amended and Restated Operating Agreement of NYSE 
MKT LLC, Art. IV, Sec. 4.05 (``The Company shall not use any 
regulatory assets or any regulatory fees, fines or penalties 
collected by Exchange regulatory staff for commercial purposes or 
distribute such assets, fees, fines or penalties to the Member or 
any other entity.'').
    \19\ See Bylaws of NYSE Arca, Inc., Art. II, Sec. 2.06 (``Any 
revenues received by the Exchange from regulatory fees or regulatory 
penalties will be applied to fund the legal, regulatory and 
surveillance operations of the Exchange and will not be used to pay 
dividends. For purposes of this Section, regulatory penalties shall 
include restitution and disgorgement of funds intended for 
customers.'').
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    In addition, removing the Fine Income Procedures from its rules 
would

[[Page 34396]]

make the Exchange's rules more consistent with the limitations on the 
use of regulatory assets and income of other SROs. Indeed, no other SRO 
limits the use of fine income to extra-budgetary use or subjects the 
use of fine income to specific review and approval by a regulatory 
oversight committee or any other body. Rather, other SROs' limitations 
on the use of regulatory funds are generally similar to Section 4.05, 
in that they provide that regulatory funds shall be used to fund the 
relevant SRO's legal, regulatory and (in some cases) surveillance 
operations, and shall not be used to make a distribution to the SRO's 
member or stockholder, as the case may be.
    For example, the limited liability company agreement of the BOX 
Options Exchange (``BOX'') provides that regulatory funds shall be used 
to the [sic] fund legal, regulatory and surveillance operations of BOX, 
and BOX shall not make any distribution to members using regulatory 
funds. BOX defines ``regulatory funds'' to include fees, fines or 
penalties derived from its regulatory operations.\20\ Similarly, the 
limited liability company agreements of International Securities 
Exchange, LLC, and its affiliates ISE Gemini, LLC and ISE Mercury, LLC 
provide that regulatory funds shall not be used for non-regulatory 
purposes, but rather shall be used to fund legal, regulatory and 
surveillance operations, and the SRO shall not make any distribution to 
its member using regulatory funds.\21\
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    \20\ See Box Options Exchange Limited Liability Company 
Agreement, Art. 1, Sec. 1.1 and Art. 8, Sec. 8.1. The definition 
also states that ``Regulatory Funds shall not include revenues 
derived from listing 6 A/72816686.20 [sic] fees, market data 
revenues, transaction revenues or any other aspect of the commercial 
operations of the Exchange or a facility of the Exchange, even if a 
portion of such revenues are used to pay costs associated with the 
regulatory operations of the Exchange.'' Id.
    \21\ Such agreements define ``Regulatory Funds'' to mean ``fees, 
fines or penalties derived from the regulatory operations of the 
Company, provided that Regulatory Funds shall not include revenues 
derived from listing fees, market data revenues, transaction 
revenues or any other aspect of the commercial operations of the 
Company or a facility of the Company, even if a portion of such 
revenues are used to pay costs associated with the regulatory 
operations of the Company.'' See Third Amended and Restated Limited 
Liability Company Agreement of International Securities Exchange, 
LLC, Art. III, Sec. 3.3(ii); Second Amended and Restated Limited 
Liability Company Agreement of ISE Gemini, LLC, Art. III, Sec. 
3.3(ii); and Limited Liability Company Agreement of ISE Mercury, 
LLC, Art. III, Sec. 3.3(ii).
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    Section 4.05 is more restrictive than the provisions of some other 
SROs, whose rules allow the use of regulatory funds for restitution and 
disgorgement of funds intended for customers. For example, the 
governing documents of affiliates BATS BZX Exchange, Inc., BATS BYX 
Exchange, Inc., BATS EDGX Exchange, Inc., and EDGA Exchange, Inc. 
provide that revenues received from fees derived from the regulatory 
function or regulatory penalties may be used to pay restitution and 
disgorgement of funds intended for customers, as well as to fund legal 
and regulatory operations, including surveillance and enforcement 
activities. Such funds may not be used for non-regulatory purposes or 
distributed to the stockholder.\22\ The limited liability company 
agreement of Miami International Securities Exchange, LLC, and bylaws 
of National Stock Exchange, Inc., have similar provisions.\23\
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    \22\ See Fourth Amended and Restated Bylaws of BATS BZX 
Exchange, Inc., Art. X, Sec. 4; Fourth Amended and Restated Bylaws 
of BATS BYX Exchange, Inc., Art. X, Sec. 4; Fifth Amended and 
Restated Bylaws of BATS EDGX Exchange, Inc., Art. X, Sec. 4; and 
Fifth Amended and Restated Bylaws of BATS EDGA Exchange, Inc., Art. 
X, Sec. 4.
    \23\ See Second Amended and Restated Limited Liability Company 
Agreement of Miami International Securities Exchange, LLC, Art. IX, 
Sec. 9.4 (``Any Regulatory Funds will not be used for non-regulatory 
purposes or distributed to the LLC Member, but rather, shall be 
applied to fund the legal and regulatory operations of the Company 
(including surveillance and enforcement activities), or, as the case 
may be, shall be used to pay restitution and disgorgement of funds 
intended for customers.''); Amended and Restated By-laws of National 
Stock Exchange, Inc., [sic] Art. X, Sec. 10.4 (``Any revenues 
received by the Exchange from fees derived from its regulatory 
function or regulatory penalties will not be used to pay dividends 
and shall be applied to fund the legal and regulatory operations of 
the Exchange (including surveillance and enforcement activities), 
or, as the case may be, shall be used to pay restitution and 
disgorgement of funds intended for customers.''); see also Amended 
and Restated By-Laws of Miami International Securities Exchange, 
LLC, Art. IX, Sec. 9.4.
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    The limitations imposed on the NASDAQ Stock Market LLC (``Nasdaq'') 
in its operating agreement are also less restrictive than the 
limitations imposed on the Exchange by Section 4.05. They simply limit 
Nasdaq from making a distribution to its member using regulatory funds. 
``Regulatory funds'' is defined to mean fees, fines, or penalties 
derived from the regulatory operations of Nasdaq.\24\ When the NASDAQ 
OMX Group, Inc. acquired the Boston Stock Exchange (``BSE''), the BSE 
by-laws were amended to include a similar provision that dividends 
could not be paid to the stockholders using regulatory funds, also 
defined as fees, fines, or penalties derived from regulatory 
operations.\25\ The Commission described the provision as ``intended to 
preclude BSE from using its authority to raise regulatory funds for the 
purpose of benefiting its shareholders, or for other non-regulatory 
purposes, such as executive compensation.'' \26\ The Exchange believes 
that Section 4.05, which is more expansive in its scope, meets the same 
goal.
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    \24\ See Second Amended Limited Liability Company Agreement of 
The NASDAQ Stock Market LLC, Sec. 15. The definition of Regulatory 
Funds also states that ```Regulatory Funds' shall not be construed 
to include revenues derived from listing fees, market data revenues, 
transaction revenues, or any other aspect of the commercial 
operations of the Company, even if a portion of such revenues are 
used to pay costs associated with the regulatory operations of the 
Company.'' Id, Sch. A. See also by-laws of NASDAQ BX, Inc., Art. IX, 
Sec. 9.8, and Second Amended Limited Liability Company Agreement of 
NASDAQ PHLX LLC, Sec. 14.
    \25\ See Securities Exchange Act Release No. 58324 (August 7, 
2008), 73 FR 46936 (August 12, 2008) (SR-BSE- 2008-02; SR-BSE-2008-
23; SR-BSE-2008- 25; SR-BSECC-2008-01), at 46942.
    \26\ See Securities Exchange Act Release No. 58324 (August 7, 
2008), 73 FR 46936 (August 12, 2008) (SR-BSE- 2008-02; SR-BSE-2008-
23; SR-BSE-2008- 25; SR-BSECC-2008-01), at 46942.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Exchange Act \27\ in general, and Section 
6(b)(1) \28\ in particular, in that it enables the Exchange to be so 
organized as to have the capacity to be able to carry out the purposes 
of the Exchange Act and to comply, and to enforce compliance by its 
exchange members and persons associated with its exchange members, with 
the provisions of the Exchange Act, the rules and regulations 
thereunder, and the rules of the Exchange. Deletion of the Fine Income 
Procedures would not diminish the Exchange's ability to adequately 
ensure the proper exercise of the Exchange's power to fine member 
organizations and the proper use by the Exchange of the funds collected 
through the disciplinary process.
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    \27\ 15 U.S.C. 78f(b).
    \28\ 15 U.S.C. 78f(b)(1).
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    The Exchange believes that Section 4.05 and the operating agreement 
provisions governing the ROC adequately address the concerns underlying 
adoption of the Fine Income Procedures, rendering the Fine Income 
Procedures superfluous. First, the Fine Income Procedures cannot assure 
the proper exercise by Exchange regulatory staff of the Exchange's 
power to fine member organizations of the Exchange, as usage 
limitations on fine income do not provide oversight of regulatory 
performance. The responsibility more properly lies with the ROC, which 
is responsible for overseeing the Exchange's regulatory and self-
regulatory organization responsibilities and assessing its regulatory 
performance, including reviewing the regulatory budget and inquiring 
into the adequacy of resources available in the budget for regulatory 
activities.\29\ In

[[Page 34397]]

addition, the disciplinary process itself contains a powerful check on 
the improper exercise by Exchange regulatory staff of the power to fine 
members and member organizations, specifically, the appellate process, 
whereby adverse hearing panel determinations can be appealed to the 
Committee for Review, which recommends a disposition to the Board of 
Directors of the Exchange. Final actions of the Exchange can be 
appealed to the Commission, and Commission determinations can be 
challenged in federal court. Second, by setting clear imitations [sic] 
on its use, Section 4.05 is not only sufficient to ensure the proper 
use by the Exchange of fine income but also, because it encompasses all 
regulatory assets and income, ensures the proper use by the Exchange of 
a broader range of regulatory funds, by prohibiting their use for 
commercial purposes or distributions.
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    \29\ See note 14, supra.
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    Finally, the Exchange believes that Section 4.05 and the operating 
agreement provisions governing the ROC would provide adequate 
protections against the assessment of regulatory income, or the use of 
regulatory assets, to respond to budgetary needs. By limiting their 
use, Section 4.05 guards against the possibility that fines may be 
assessed to respond to budgetary needs rather than to serve a 
disciplinary purpose. However, unlike the Fine Income Procedures, 
Section 4.05 also guards against the possibility that other regulatory 
income, such as examination, access, registration, qualification, 
arbitration, dispute resolution and other regulatory fees, or 
regulatory assets, could be used or assessed to respond to budgetary 
needs, by making them unavailable for commercial purposes or 
distributions.
    For the same reasons, the Exchange believes that the proposed 
deletion of the Fine Income Procedures is consistent with Section 
6(b)(4),\30\ which requires that the rules of the exchange provide for 
the equitable allocation of reasonable dues, fees, and other charges 
among the exchange's members and issuers and other persons using its 
facilities, and Section 6(b)(5),\31\ which requires that the rules of 
the exchange be 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. 
As noted, the Exchange believes that the responsibility to assure the 
proper exercise by Exchange regulatory staff of the Exchange's power to 
fine member organizations more properly lies with the ROC, and that, by 
setting clear imitations [sic] on its use, Section 4.05 is not only 
sufficient to ensure the proper use by the Exchange of fine income but 
also, because it encompasses all regulatory assets and income, ensures 
the proper use by the Exchange of a broader range of regulatory funds, 
by prohibiting their use for commercial purposes or distributions. 
Finally, the Exchange believes that Section 4.05 and the operating 
agreement provisions governing the ROC would provide adequate 
protections against the assessment of regulatory income, or the use of 
regulatory assets, to respond to budgetary needs. Section 4.05 not only 
guards against the possibility that fines may be assessed to respond to 
budgetary needs rather than to serve a disciplinary purpose, but also 
guards against the possibility that other regulatory income or 
regulatory assets could be used or assessed in that manner, by making 
them unavailable for commercial purposes or distributions.
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    \30\ 15 U.S.C. 78f(b)(4).
    \31\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed deletion of the Fine Income 
Procedures is consistent with the Exchange's present governance 
structure, centered on a ROC. Today, because the Delegation Agreement 
is no longer in effect, the same entity that fines member organizations 
is directly subject to the limits of Section 4.05. Accordingly, the 
proposed deletion is consistent with ensuring that the Exchange is so 
organized as to have the capacity to be able to carry out the purposes 
of the Exchange Act and to comply, and to enforce compliance by its 
exchange members and persons associated with its exchange members, with 
the provisions of the Exchange Act, the rules and regulations 
thereunder, and the rules of the Exchange.
    The Exchange notes that the proposed change would have the 
additional benefit of making the Exchange's rules more consistent with 
the limitations on the use of regulatory assets and income of other 
SROs and bringing the Exchange's restrictions on the use of regulatory 
assets and income into greater conformity with those of its affiliates 
NYSE MKT LLC and NYSE Arca, Inc. Indeed, no other SRO limits the use of 
fine income to extra-budgetary use or subjects the use of fine income 
to specific review and approval by a regulatory oversight committee or 
any other body.\32\ Rather, other SROs' limitations on the use of 
regulatory funds are generally similar to Section 4.05, in that they 
provide that regulatory funds shall be used to fund the relevant SRO's 
legal, regulatory and (in some cases) surveillance operations, and 
shall not be used to make a distribution to the SRO's member or 
stockholder, as the case may be. In fact, Section 4.05 is more 
restrictive than the provisions of some other SROs, whose rules allow 
the use of regulatory funds for restitution and disgorgement of funds 
intended for customers, or simply limit the SRO from making a 
distribution to its member using regulatory funds.
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    \32\ See notes 20-25 [sic] and accompanying text.
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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 that is not necessary or appropriate 
in furtherance of the purposes of the Exchange Act. The proposed rule 
change is not intended to address competitive issues but rather is 
concerned solely with the administration and functioning of the 
Exchange.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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 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 the 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:

[[Page 34398]]

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-NYSE-2016-37 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-NYSE-2016-37. 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 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 
10:00 a.m. and 3:00 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-NYSE-2016-37, and should be 
submitted on or before June 21, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
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    \33\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-12673 Filed 5-27-16; 8:45 am]
 BILLING CODE 8011-01-P