Document ID: SEC-2009-1711-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2009-12-07T05:00Z

[Federal Register: December 7, 2009 (Volume 74, Number 233)]
[Notices]               
[Page 64114-64116]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07de09-938]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61074; File No. SR-NASDAQ-2009-102]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Clarify the Definition of Material Changes in Business Operations 
Found in the Membership Rules and to Make a Technical Correction

November 30, 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 November 23, 2009, The NASDAQ Stock Market LLC (``Nasdaq'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by Nasdaq. Nasdaq 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 Rule 1011(g)(2) to clarify the definition 
of what Nasdaq considers a ``material change in business operations,'' 
and to delete a superfluous ``and'' from the rule text.
    The text of the proposed rule change is below. Proposed new 
language is in italics and proposed deletions are in brackets.\4\
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    \4\ Changes are marked to the rules of The NASDAQ Stock Market 
LLC found at http://nasdaqomx.cchwallstreet.com.
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1011. Definitions

    Unless otherwise provided, terms used in the Rule 1000 Series shall 
have the meaning as defined in Rule 0120.
    (a)-(f) No change.
    (g) ``material change in business operations''
    The term ``material change in business operations'' includes, but 
is not limited to:
    (1) removing or modifying a membership agreement restriction;
    (2)(A) [market making, underwriting, or ]acting as a dealer for the 
first time; or
    (B) market making for the first time on Nasdaq; provided, however, 
that market making for the first time on Nasdaq will not be considered 
a material change in business operations if the member's market making 
has previously been approved by FINRA under NASD Rule 1017 or NASDAQ 
OMX BX under NASDAQ OMX BX Equity Rule 1017; [and]
    (3) adding business activities that require a higher minimum net 
capital under SEC Rule 15c3-1; and
    (4) adding business activities that would cause a proprietary 
trading firm no longer to meet the definition of that term contained in 
this rule.
    (h)-(o) No change.
* * * * *

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 is proposing to amend Rule 1011(g)(2) to clarify its 
applicability. Rule 1011(g) defines what Nasdaq considers a ``material 
change in business operations.'' Pursuant to Rule 1017(a)(5), a member 
must file an application for approval of any material change in its 
business operations with Nasdaq. Rule 1011(g)(2) includes ``market 
making, underwriting, or acting as a dealer for the first time'' within 
the definition of ``material change in business operations.'' Rule 
1011(g)(2) is intended to require Nasdaq members to undergo an 
assessment and obtain approval pursuant to Rule 1017 if they intend to 
expand their business operations to include market making, 
underwriting, or acting as a dealer. The definition found in Rule 
1011(g)(2) could, however, also be interpreted to include engaging in 
market making for the first time on a market other than Nasdaq, 
notwithstanding that Nasdaq has no regulatory responsibility with 
respect to that business activity.
    Nasdaq's Rule 1011(g)(2) is based on NASD Rule 1011(k)(2), and as 
such, was drafted by NASD \5\ (now known as ``FINRA'') to be broad in 
application given its broad, cross-market regulatory responsibilities. 
In adopting Rule 1011(g)(2), however, Nasdaq did not contemplate that 
the rule would extend to business operations engaged in on

[[Page 64115]]

other markets. Under such an interpretation of the rule, Nasdaq would 
be required to approve a member's planned change in business operations 
that would be conducted solely on another market. For example, a Nasdaq 
member that is not a market maker, yet determines to make markets on a 
market other than Nasdaq would, under this interpretation, technically 
be required to file an application for approval of the market making 
pursuant to Nasdaq Rule 1017, in addition to satisfying the other 
market's market making application and approval process. Under this 
scenario, even though the business activity is not associated with 
Nasdaq, and Nasdaq has no responsibility to oversee the business 
activity, Nasdaq would be required to duplicate the efforts of another 
market and make an independent determination whether the member could 
conduct such business operations on that market. Nasdaq believes that 
this would be an erroneous outcome, and would represent unnecessary 
duplication of regulatory efforts among self-regulatory organizations.
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    \5\ In late July 2007, NASD changed its name to the Financial 
Industry Regulatory Authority (``FINRA''). Accordingly, we use the 
term NASD in this filing only (i) when referring to period of time 
before the name change, and (ii) with respect to rules that are 
still officially designated by FINRA as ``NASD rules.''
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    Nasdaq is proposing to separate market making from the other 
business activities currently found under Rule 1011(g)(2) by creating 
two new subparts to the rule. Proposed new Rule 1011(g)(2)(B) will 
address market making and adds new language to make clear that the rule 
applies only to engaging in market making for the first time on Nasdaq, 
and as a consequence, a Nasdaq member seeking to be designated as a 
market maker for the first time on another market would not be required 
to follow the Rule 1017 process. Nasdaq believes that the proposed rule 
change would not lessen the regulatory oversight of members, since 
market making on another market would fall within the jurisdiction and 
oversight of that market together with the member's designated 
examining authority.\6\
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    \6\ 17 CFR 240.17d-1. Rule 17d-1 authorizes the Commission to 
name a single SRO as the designated examining authority to examine 
common members for compliance with the financial responsibility 
requirements imposed by the Act, or by Commission and SRO rules.
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    In making it clear that market making under Rule 1011(g)(2)(B) 
applies only to such activity ``on Nasdaq,'' Nasdaq is concerned that 
common members of Nasdaq and FINRA, or of Nasdaq and NASDAQ OMX BX 
(``BX''), may misinterpret Rule 1011(g)(2)(B) to require approval 
pursuant to Nasdaq Rule 1017 of market making on Nasdaq for the first 
time when the same business operation had been previously approved by 
FINRA or BX pursuant to their respective Rules 1017. Nasdaq based much 
of its membership rules on those of NASD, with minor modifications in 
some instances resulting from Nasdaq's exchange status. As noted above, 
Nasdaq Rule 1011(g) is virtually identical to NASD Rule 1011(k), except 
for the addition of a fourth material change to business operations to 
reflect a change that results in a loss of proprietary trading firm 
status. Nasdaq Rule 1017 is also substantially similar to NASD Rule 
1017. In a similar regard, the membership rules of BX were based upon 
the membership rules of Nasdaq, and as a consequence, the membership 
rules of BX mirror those of Nasdaq in most respects. Nasdaq notes that 
the underlying review pursuant to either Nasdaq Rule 1017 or BX Rule 
1017, upon which Nasdaq or BX would reference in making a 
determination, is conducted by FINRA.\7\ As such, the process leading 
to a prior approval of market making by either FINRA or BX pursuant to 
their Rules 1017 would follow the same process as if the Nasdaq Rule 
1017 review were conducted.
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    \7\ When conducting a review on behalf of Nasdaq or BX pursuant 
to their respective Rules 1017, FINRA provides a recommendation on 
whether to approve the change in business operations or not.
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    Nasdaq is proposing to add new language to Rule 1011(g)(2)(B) that 
will make it clear that Nasdaq does not consider market making under 
the rule for the first time on Nasdaq to be a material change, if the 
market making has already been approved by either FINRA pursuant to 
NASD Rule 1017, or alternatively by BX pursuant to BX Rule 1017. Nasdaq 
believes that the proposed clarifying language under Nasdaq Rule 
1011(g)(2)(B) recognizing prior approvals of market making under the 
rules of FINRA and BX will serve to avoid confusion over the 
application of the rule in regards to common members. Nasdaq believes 
the proposed changes are consistent Nasdaq's [sic] current practice and 
will avoid unnecessary regulatory duplication.
    Nasdaq is also proposing to delete references to underwriting from 
Rule 1011(g)(2). Underwriting is not conducted on Nasdaq and there is 
no circumstance in which a Nasdaq member could act as an underwriter 
unless that member was also a member of FINRA, and hence subject to 
FINRA's rules and oversight. Nasdaq believes that the [sic] keeping the 
term in Rule 1011(g)(2) serves no purpose and could be misleading. 
Accordingly, Nasdaq is proposing to delete the term from the rule.
    Nasdaq is also proposing to make a minor technical correction to 
the rule by deleting a superfluous ``and'' from the rule text.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\8\ in general and with Section 
6(b)(5) of the Act,\9\ in particular in that it 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 proposed rule change is 
designed to clarify the application of Nasdaq Rule 1011(g)(2) to ensure 
its consistent interpretation, and to avoid extending the Rule 1017 
approval process to non-Nasdaq business operations conducted on other 
exchanges of which the Nasdaq member is also a member. Further, the 
proposed rule change makes clear that Nasdaq recognizes FINRA and BX 
approvals of material changes in business operations, which is based 
upon the similarity of their rules and processes to those of Nasdaq. 
Such recognition will serve to avoid unnecessary regulatory duplication 
among self-regulatory organizations. The proposed rule change also 
makes a minor technical correction to the rule.
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    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq 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.
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

    Because the foregoing proposed rule change 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

[[Page 64116]]

as the Commission may designate, it has become effective pursuant to 
Section 19(b)(3)(A) \10\ of the Act and Rule 19b-4(f)(6) 
thereunder.\11\ 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.
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
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    Nasdaq believes that the proposed rule change does not 
significantly affect the protection of investors or the public interest 
because it merely clarifies the application of an existing rule to 
avoid erroneous interpretation of its applicability, prevents 
unnecessary regulatory duplication among self-regulatory organizations, 
and makes a minor technical correction to the rule.
    Nasdaq requests that the Commission waive the 30-day pre-operative 
waiting period contained in Rule 19b-4(f)(6)(iii).\12\ Nasdaq requests 
this waiver so that these corrections can be immediately operative, 
eliminating any potential confusion caused by the currently unclear 
rule.
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    \12\ 17 CFR 240.19b-4(f)(6)(iii).
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    NASDAQ has requested that the Commission waive the 30-day operative 
delay set forth in Rule 19b-4(f)(6). The Commission notes the proposal 
presents no novel issues and is designed to provide clarity regarding 
the application of an existing rule. For these reasons, the Commission 
believes it is consistent with the protection of investors and the 
public interest to waive the 30-day operative delay, and hereby grants 
such waiver.\13\
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    \13\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule change's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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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-2009-102 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2009-102. 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 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-2009-102 and should be submitted on or before 
December 28, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-29041 Filed 12-4-09; 8:45 am]

BILLING CODE 8011-01-P