Document ID: SEC-2018-1215-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange, LLC
Posted Date: 2018-08-03T04:00Z

[Federal Register Volume 83, Number 150 (Friday, August 3, 2018)]
[Notices]
[Pages 38195-38198]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-16598]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83740; File No. SR-NYSE-2018-33]

Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change To Amend Rule 2 To Remove 
Requirement That a Registered Broker-Dealer Be a Member of the 
Financial Industry Regulatory Authority, Inc. or Another National 
Securities Exchange

July 30, 2018.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on July 25, 2018, 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 Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 2 to remove a requirement that 
a registered broker-dealer be a member of the Financial Industry 
Regulatory Authority, Inc. or another national securities exchange. The 
proposed rule change is available on the Exchange's website 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.

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

1. Purpose
    The Exchange proposes to amend the definition of ``member 
organization'' under Rule 2 (``Member,'' ``Membership,'' ``Membership 
[sic] Firm,'' etc.) to remove a requirement that a registered broker-
dealer seeking to be a member organization be a member of FINRA or 
another national securities exchange. In 2007, the Exchange amended 
Rule 2 to require FINRA membership as part of the consolidation of 
member firm regulatory functions of then NASD and NYSE Regulation, Inc. 
(``NYSE Regulation'') that resulted in a combined self-regulatory 
organization (``SRO'') that is now known as FINRA.\4\ As part of the 
consolidation, NYSE Regulation and NASD sought to harmonize certain of 
their member firm rules. At that time, it was anticipated that the rule 
harmonization would not be completed by the time NASD and NYSE 
Regulation completed their combination. Therefore, the combination 
contemplated a transition period during which FINRA would apply to NYSE 
member organizations

[[Page 38196]]

the member firm rules of the NYSE. A necessary part of this transition 
was for NYSE to require all NYSE member organizations to become FINRA 
members.\5\ Prior to this time, FINRA membership was not a condition to 
become member organizations on the Exchange.
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    \4\ See Securities Exchange Act Release No. 56654 (October 12, 
2007), 72 FR 59129 (October 18, 2007) (SR-NYSE-2007-67).
    \5\ Id.
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    Subsequently, to enable more broker-dealers to become member 
organizations, the Exchange further amended Rule 2 to broaden the 
definition of ``member organization'' to include a registered broker-
dealer that is not a member of FINRA but is a member of another 
national securities exchange.\6\ Rule 2 repeats the requirement in 
Section 15(b)(8) of the Act \7\ that requires member organizations that 
transact business with the public to be a member of FINRA. In addition, 
Rule 2 requires member organizations that conduct business on the Floor 
of the Exchange to be a member of FINRA, which is a requirement unique 
to the Exchange.\8\
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    \6\ See Securities Exchange Act Release No. 60318 (July 16, 
2009), 74 FR 36797 (July 24, 2009) (SR-NYSE-2009-63).
    \7\ 15 U.S.C. 78o(b)(8).
    \8\ Id.
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    On June 14, 2010, the NYSE, NYSE Regulation,\9\ and FINRA entered 
into a Regulatory Services Agreement, whereby FINRA was retained to 
perform the market surveillance and enforcement functions that had 
previously been performed by the NYSE. Pursuant to the Regulatory 
Services Agreement, FINRA had been performing Exchange enforcement-
related regulatory services, including investigating and enforcing 
violations of Exchange rules, and conducting disciplinary proceedings 
arising out of such enforcement actions, including those relating to 
NYSE-only rules and against dual members and non-FINRA members. In 
October 2014, the Exchange announced that, upon expiration of the 
current Regulatory Services Agreement on December 31, 2015, certain 
market surveillance, investigation and enforcement functions performed 
on behalf of the Exchange would be reintegrated. Accordingly, as of 
January 1, 2016, the Exchange began to perform certain of the market 
surveillance, investigation and enforcement functions that FINRA was 
retained to perform in 2010.
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    \9\ See Securities Exchange Act Release No. 62355 (June 22, 
2010), 75 FR 36729 (June 28, 2010) (SR-NYSE-2010-46).
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    As a result of the reintegration of these various regulatory 
functions, the Exchange proposes to make membership more readily 
available to registered broker-dealers that are not FINRA members or 
members of another national securities exchange. As proposed, the term 
``member organization'' under Rule 2(i) would be defined as ``a 
registered broker or dealer (unless exempt pursuant to the Securities 
Exchange Act of 1934) (the `Act'), including sole proprietors, 
partnerships, limited liability partnerships, corporations, and limited 
liability corporations, approved by the Exchange pursuant to Rule 
311.'' This proposed rule text is based in part on NYSE Arca, Inc. 
(``NYSE Arca'') Rule 2.3(a), which similarly provides that membership 
on that exchange ``may be held by any entity which is a registered 
broker or dealer pursuant to Section 15 of the Securities Exchange Act 
of 1934, as amended, including sole proprietors, partnerships, limited 
liability partnerships, corporations, and limited liability 
companies.'' \10\ The Exchange proposes to include a cross reference to 
Rule 311, which is the rule that governs formation and approval of an 
exchange member organization.
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    \10\ See also NYSE Arca Rule 1.1(n).
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    The Exchange believes that the proposed change to the definition of 
``member organization'' can be made without any regulatory impact 
because member organizations will continue to be subject to a 
comprehensive regulatory regime regardless of whether they are a member 
of another SRO or not. As discussed above, the Exchange did not require 
member organizations to also be members of FINRA prior to 2007 and only 
required FINRA membership as part of the combination of NASD and NYSE 
Regulation staff to form FINRA. The Exchange later contracted with 
FINRA to perform certain market surveillance, investigation and 
enforcement functions on behalf of the Exchange.\11\ However, since 
January 1, 2016, the Exchange is once again directly performing certain 
of those previously outsourced regulatory functions. For instance, the 
Exchange surveils and examines member organizations for compliance with 
its own rules and provisions of the federal securities laws governing 
various matters, including sales practices and trading activities and 
practices. The Exchange also investigates and enforces violations of 
Exchange rules and conducts disciplinary proceedings arising out of 
such enforcement actions. FINRA continues to perform, pursuant to a 
Regulatory Services Agreement with the Exchange, investigations and 
enforcement of matters arising from FINRA's cross-market surveillances, 
as well as from its examination of members of the NYSE.
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    \11\ See Securities Exchange Act Release No. 62355 (June 22, 
2010), 75 FR 36729 (June 28, 2010) (SR-NYSE-2010-46).
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    The reasons behind initially requiring FINRA membership no longer 
exist. As it does today, and as was the case prior to 2007, the 
Exchange performs the necessary regulatory oversight of member 
organizations as outlined above. For those member organizations that 
are FINRA members, they will continue to be regulated pursuant to the 
terms of an existing allocation plan pursuant to Rule 17d-2 of the Act 
between FINRA\12\ and the Exchange for compliance with common FINRA and 
Exchange rules. Under the oversight of the NYSE's regulatory unit, 
FINRA will continue to perform certain regulatory services pursuant to 
the Regulatory Services Agreement, including certain membership 
application review services, registration, testing, and continuing 
education services, education and training services, examination 
services, surveillance and investigation services, disciplinary 
services, ancillary regulatory services, and audit services for the 
Exchange.\13\
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    \12\ See Securities Exchange Act Release No. 60409 (July 30, 
2009), 74 FR 39353 (August 6, 2009) (Program for Allocation of 
Regulatory Responsibilities Pursuant to Rule 17d-2; Notice of Filing 
and Order Declaring Effective a Proposed Plan for the Allocation of 
Regulatory Responsibilities Among the Financial Industry Regulatory 
Authority, Inc., New York Stock Exchange LLC, NYSE Regulation, Inc. 
and NYSE Amex LLC). See, e.g., Securities Exchange Act Release Nos. 
78473 (August 3, 2016), 81 FR 52722 (August 9, 2016) (Multiparty 
17d-2 Plan Relating to the Surveillance, Investigation, and 
Enforcement of Insider Trading Rules); and 79928 (February 2, 2017), 
82 FR 9814 (February 8, 2017) (Regulation NMS Multiparty 17d-2 
Plan).
    \13\ The Exchange has also entered into Regulatory Services 
Agreements with FINRA covering member compliance with the Tick Size 
Pilot Program's data collection and reporting requirements as well 
as for investigations and enforcement activities related to insider 
trading.
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    Rule 17d-1 of the Act authorizes the Commission to name a single 
SRO as the Designated Examining Authority (``DEA'') to examine members 
of more than one SRO (``common member'') for compliance with the 
financial responsibility requirements imposed by the Act, or by 
Commission or SRO rules.\14\ The NYSE does not currently act as the as 
the DEA for any member organization. Should the NYSE be assigned by the 
Commission as the DEA for a member organization and,

[[Page 38197]]

therefore be required to examine that member organization for 
compliance with the financial responsibility requirements pursuant to 
Rule 17d-1 of the Act, FINRA will perform those duties on behalf of the 
Exchange pursuant to the same Regulatory Services Agreement and under 
the continued oversight of the NYSE's regulatory unit.\15\
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    \14\ 17 CFR 240.17d-1. Rule 17d-1 does not relieve an SRO from 
its obligation to examine a common member for compliance with its 
own rules and provisions of the federal securities laws governing 
matters other than financial responsibility, including sales 
practices and trading activities and practices, which the Exchange 
will retain and continue to perform.
    \15\ Though FINRA would examine member organizations for which 
NYSE is the DEA on the NYSE's behalf, the NYSE would remain 
responsible under Rule 17d-1 to ensure that FINRA performs those 
regulatory duties in compliance with Act under the Regulatory 
Services Agreement. The Exchange notes that its affiliates, NYSE 
American LLC and NYSE Arca, Inc., have both been named by the 
Commission as DEAs for certain of their members and that FINRA 
examines those members as required by Rule 17d-1 of the Act pursuant 
to a Regulatory Services Agreement. In addition, Cboe Exchange, Inc. 
and Cboe C2 Exchange, Inc. (collectively, ``Cboe'') have also 
entered into Regulatory Services Agreements with FINRA under which 
FINRA performs, among other things, examination functions of Cboe 
members for which Cboe is DEA on Cboe's behalf. See, FINRA Signs 
Regulatory Services Agreement with CBOE and C2, available at http://www.finra.org/newsroom/2014/finra-signs-regulatory-services-agreement-cboe-and-c2, dated December 22, 2014. See also, CBOE and 
C2 Enter into Agreements with FINRA Involving Regulatory Services, 
available at http://ir.cboe.com/press-releases/2014/dec-22-2014, 
dated December 22, 2014. See Regulatory Services, FINRA Exchange 
Solutions, available at http://www.finra.org/industry/regulatory-services for a list of exchanges that FINRA provides examination 
services on behalf of.
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    The Exchange also proposes to make various related changes to the 
rule. Because Section 15(b)(8) of the Act \16\ requires broker-dealers 
that transact with the public to be FINRA members, the Exchange 
proposes to remove this requirement from its definition of member 
organization as redundant. Consistent with the proposed amendment, Rule 
2(i) would also no longer require that a member organization that 
conducts business on the Floor of the Exchange to [sic] be a FINRA 
member. The Exchange also proposes to amend paragraph (ii) of Rule 2 to 
remove references to being a member of FINRA or another national 
securities exchange. These provisions and references to FINRA would no 
longer be necessary in the Exchange's rules since membership in FINRA, 
or another SRO, would no longer be required as a condition to becoming 
a members [sic] organization on the Exchange. Those member 
organizations that transact business with the public would, however, 
continue to be required to be members of FINRA pursuant to Section 
15(b)(8) of the Act.\17\
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    \16\ 15 U.S.C. 78o(b)(8).
    \17\ Id.
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    The definition of ``member organization'' under Rule 2 will 
continue to require a registered broker or dealer to be approved by the 
Exchange and authorized to designate an associated natural person to 
effect transactions on the floor of the Exchange or any facility 
thereof.
    The Exchange proposes to delete the last sentence of Rule 2(i), 
which currently provides that member organizations include a natural 
person so registered, approved and licensed who directly effects 
transactions on the floor of the Exchange or any facility thereof. The 
Exchange does not currently have any natural persons that are member 
organizations of the Exchange, and, therefore, removing this language 
would not impact any current member organizations. The Exchange further 
believes that the addition of the reference to ``sole proprietor'' to 
Rule 2(i) would address any natural persons that seek to be approved as 
a member organization in the future. In addition, removing this 
sentence would also further harmonize the Exchange's membership 
requirements with its affiliate, NYSE Arca.\18\
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    \18\ See supra note 9.
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act,\19\ in general, and furthers the objectives of 
Sections 6(b)(5) of the Act,\20\ in particular, because 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 mechanisms of, 
a free and open market and a national market system and, in general, to 
protect investors and the public interest and because it is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change would remove 
impediments to, and perfect the mechanisms of, a free and open market 
and a national market system and, in general, protect investors and the 
public interest by expanding the number of registered brokers-dealers 
that would be eligible to become NYSE member organizations and trade on 
the Exchange, while maintaining high regulatory standards and a 
comprehensive regulatory regime with respect to such firms. The 
Exchange notes that it did not require member organizations to also be 
members of FINRA prior to 2007. It only subsequently required FINRA 
membership to accommodate a transition period as part of the 
combination of NASD and NYSE Regulation to form FINRA. Since that time, 
the Exchange reintegrated numerous regulatory function performed by 
FINRA.\21\ The reasons behind initially requiring FINRA membership no 
longer exist.
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    \21\ FINRA continues to perform pursuant to a Regulatory 
Services Agreement with the Exchange investigations and enforcement 
of matters arising from FINRA's cross-market surveillances, as well 
as from its examination of members of the NYSE.
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    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices because member 
organization will continue to be subject to a comprehensive, mature, 
and rigorous regulatory program, regardless of whether they are members 
of FINRA or another SRO. As mentioned above, the Exchange will perform 
the necessary regulatory oversight of member organizations, as it did 
prior to 2007. Certain of the Exchange's regulatory obligations with 
respect to member organizations that are FINRA members are allocated to 
FINRA pursuant to the terms of allocation plan under Rule 17d-2 of the 
Act between FINRA and the Exchange.\22\ For those member organizations 
that are not FINRA members, the Exchange will provide for certain of 
its regulatory responsibilities, including, if applicable, DEA 
responsibilities, pursuant to an existing Regulatory Services Agreement 
between the Exchange and FINRA.\23\
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    \22\ See supra note 12.
    \23\ See supra notes 14 and 15 and accompanying text.
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    The proposed rule change would also contribute to perfecting the 
mechanism of a free and open market and a national market system, which 
outcomes are also consistent with the protection of investors and the 
public interest by aligning NYSE membership requirements more closely 
with those of the Exchange's affiliate, NYSE Arca.\24\ In addition, the 
proposed rule change is not without additional precedent. For example, 
the rules of the Cboe do not require membership in FINRA or on another 
SRO to be a Trading Permit Holder on Cboe.\25\ Finally, no federal 
securities law requires that a broker-dealer be a member of more than 
one national securities exchange or SRO

[[Page 38198]]

(e.g., FINRA).\26\ The Exchange's proposal would merely remove the 
requirement under its rules that broker-dealers be members of another 
SRO when they are not otherwise required to do so.
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    \24\ See supra note 9 and accompanying text.
    \25\ See Cboe Rules 3.2 and 3.3.
    \26\ See generally 15 U.S.C. 78o.
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    The proposed rule change would also not unfairly discriminate 
between or among market participants because both current and 
prospective members would be subject to the rule. All member 
organizations would be regulated in the same manner by the Exchange 
should they be a member of another SRO or not.
    For these reasons, the Exchange believes that the proposal is 
consistent with the Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\27\ the Exchange 
believes that the proposed rule change will not impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. The proposed rule change is not designed to have a 
competitive impact because it is not intended to attract additional 
business to the Exchange. It is simply intended to align the definition 
of ``member organization'' with that of its affiliates [sic] and 
similar definitions of other national securities exchanges while 
ensuring the member organizations continue to be subject to 
comprehensive regulatory oversight. This proposal should also move to 
harmonize the membership requirements between the exchange and its 
affiliate NYSE Arca, thereby avoiding potential confusion.\28\
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    \27\ 15 U.S.C. 78f(b)(8).
    \28\ See supra note 9 and accompanying text.
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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:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NYSE-2018-33 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-2018-33. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSE-2018-33 and should be submitted on 
or before August 24, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018-16598 Filed 8-2-18; 8:45 am]
 BILLING CODE 8011-01-P