Document ID: SEC-2016-0930-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE MKT, LLC
Posted Date: 2016-06-01T04:00Z

[Federal Register Volume 81, Number 105 (Wednesday, June 1, 2016)]
[Notices]
[Pages 35092-35094]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-12787]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77901; File No. SR-NYSEMKT-2016-26]

Self-Regulatory Organizations; NYSE MKT LLC; Order Approving a 
Proposed Rule Change, as Modified by Amendment No.1 Thereto, To Amend 
the Eighth Amended and Restated Operating Agreement of the Exchange

May 25, 2016.

I. Introduction

    On March 29, 2016, NYSE MKT LLC (``Exchange'' or ``NYSE MKT'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
amend the Eighth Amended and Restated Operating Agreement of the 
Exchange (``Operating Agreement''). The proposed rule change was 
published for comment in the Federal Register on April 12, 2016.\3\ The 
Commission received no comments in response to the Notice. On May 19, 
2016, the Exchange filed Amendment No. 1 to the proposal.\4\ This order 
approves the proposed rule change, as modified by Amendment No. 1 
thereto.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 77536 (April 6, 2016), 
81 FR 21636 (``Notice'').
    \4\ Amendment No. 1 is a technical amendment to retain the 
initial reference to ``DCRC Candidates'' in Section 2.03(a)(iii) of 
the Operating Agreement rather than to delete it. Because Amendment 
No. 1 to the proposed rule change does not materially alter the 
substance of the proposed rule change or raise unique or novel 
regulatory issues, Amendment No. 1 is not subject to notice and 
comment.
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II. Description of the Proposal

    The Exchange proposes to amend the Operating Agreement to (1) 
change the process for nominating non-affiliated directors; (2) remove 
a reference to an obsolete category of member; and (3) add references 
to Designated Market Makers (``DMMs'').

A. Process for Nominating Non-Affiliated Directors

    Pursuant to the Operating Agreement, at least 20 percent of the 
Exchange's Board of Directors (``Board'') is made up of ``Non-
Affiliated Directors'' (commonly referred to as ``fair representation 
directors'').\5\ Pursuant to

[[Page 35093]]

Section 2.03(a) of the Operating Agreement, the nominating and 
governance committee (``NGC'') of the board of directors of ICE, the 
indirect parent of the Exchange, nominates the candidates for Non-
Affiliated Directors, who are then elected by NYSE Group, Inc. (``NYSE 
Group'') as the sole member of the Exchange. The Exchange proposes to 
amend Section 2.03(a) to have the Director Candidate Recommendation 
Committee (``DCRC'') of the Exchange assume the role currently played 
by the ICE NGC and to make a conforming change to Section 2.03(h)(i). 
In addition, if the Exchange's Member Organizations endorse a Petition 
Candidate \6\ for Non-Affiliated Director pursuant to Section 
2.03(a)(iv) of the Operating Agreement, the ICE NGC makes the 
determination of whether the person is eligible.\7\ The Exchange 
proposes to amend Section 2.03(a)(iv) to have the Exchange make such 
determination instead of the ICE NGC.
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    \5\ Pursuant to Section 2.03(a) of the Operating Agreement, Non-
Affiliated Directors are persons who are not members of the Board of 
Directors of Intercontinental Exchange, Inc. (``ICE''). A person may 
not be a Non-Affiliated Director unless he or she is free of any 
statutory disqualification, as defined in Section 3(a)(39) of the 
Act, 15 U.S.C. 78c(a)(39), Non-Affiliated Directors need not be 
independent.
    \6\ See Section 2.03(a)(iv) of the Operating Agreement.
    \7\ Pursuant to Section 2.02 of the Operating Agreement, 
``Member Organizations'' refers to members and member organizations, 
as defined in NYSE MKT Rules 18 and 24, respectively.
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    Currently, the nomination by the ICE NGC is the final step in the 
process for electing a Non-Affiliated Director. First, the DCRC 
recommends a candidate, whose name then is announced to the Member 
Organizations. The Member Organizations may propose alternate 
candidates by petition. If there are no Petition Candidates, the DCRC 
recommends its candidate to the ICE NGC. If Petition Candidates are 
proposed, the ICE NGC makes the determination of whether the candidates 
are eligible, and then all of the eligible candidates are submitted to 
the Member Organizations for a vote. The DCRC recommends to the ICE NGC 
the candidate receiving the highest number of votes. The ICE NGC is 
obligated to designate the DCRC-recommended candidate as the nominee, 
and NYSE Group is obligated to elect him or her as a Non-Affiliated 
Director.
    The Exchange believes that obligating the ICE NGC to nominate the 
candidates for Non-Affiliated Directors based on the DCRC's unalterable 
recommendation is neither necessary nor meaningful. Pursuant to Section 
2.03(a)(iii), the ICE NGC is obligated to designate whomever the DCRC 
recommends or, if there is a Petition Candidate, whoever emerges from 
the petition process. According to the Exchange, the ICE NGC does not 
have any discretion. The Exchange believes that removing this step 
would make the NYSE MKT process with respect to the nomination of Non-
Affiliated Directors more efficient. Moreover, the Exchange believes 
that having the Exchange determine whether persons endorsed to be 
Petition Candidates are eligible to serve as Non-Affiliated Directors 
also would be more efficient, as it would not require action by the ICE 
NGC, thereby potentially removing the possibility of any delay in the 
process. The Exchange further states that the proposed change would be 
consistent with the petition process of the Nasdaq Stock Market LLC in 
which that exchange determines the eligibility of proposed nominees.\8\
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    \8\ See By-Laws of the Nasdaq Stock Market LLC, Art. II, Sec. 
1(b) (``The Company may require any proposed nominee to furnish such 
other information as it may reasonably require to determine the 
eligibility of such proposed nominee to serve as a Member 
Representative Director.'').
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    Accordingly, the Exchange proposes to revise Section 2.03(a)(iii)-
(v) of the Operating Agreement to amend the process for electing Non-
Affiliated Directors. First, as is currently the case, the DCRC would 
recommend a candidate, whose name would be announced to the Member 
Organizations, and the Member Organizations could propose alternate 
candidates by petition. Second, if there were no Petition Candidates, 
the DCRC would nominate the candidate whom it had previously 
recommended. If there were Petition Candidates, the Exchange would make 
the eligibility determination regarding Petition Candidates; all 
eligible candidates would be submitted to the Member Organizations for 
a vote; and the DCRC would nominate the candidate receiving the highest 
number of votes. Finally, NYSE Group would be obligated to elect the 
DCRC-nominated candidate as a Non-Affiliated Director.
    In addition, the Exchange would make a conforming change to Section 
2.03(h)(i) to state that the DCRC ``will be responsible for nominating 
Non-Affiliated Director Candidates.'' Currently, the provision states 
that the DCRC ``will be responsible for recommending Non-Affiliated 
Director Candidates to the ICE NGC.''

B. Elimination of a Category of DCRC Membership

    The Operating Agreement requires that the DCRC include 
representatives from each of the four categories of Exchange members. 
The Exchange proposes to amend Section 2.03(h)(i) of the Operating 
Agreement to eliminate from the DCRC representatives of the fourth 
category, which relates to individuals who are ``associated with a 
Member Organization and spend a majority of their time on the trading 
floor of the [Exchange] and have as a substantial part of their 
business the execution of transactions on the trading floor of the 
[Exchange] for their own account or the account of their Member 
Organization, but are not registered as a specialist.'' \9\
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    \9\ Representatives from the following three categories would 
continue to be included on the DCRC: (1) Member organizations that 
engage in a business involving substantial direct contact with 
securities customers (commonly referred to as ``upstairs firms''); 
(2) specialists; and (3) floor brokers. The Exchange proposes to add 
DMMs to category (2), as discussed below. See note 15, infra, and 
accompanying text.
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    This fourth category describes a class of proprietary traders known 
as Registered Equity Market Makers (``REMMs'') on the former American 
Stock Exchange LLC, a predecessor of the Exchange. REMMs were floor 
traders who engaged in on-floor proprietary trading, subject to certain 
requirements intended to have these members effectively function like 
market makers, pursuant to the exemption for market makers in Section 
11(a)(1)(A) of the Exchange Act.\10\ The rules relating to this 
category of proprietary floor trader were eliminated shortly after the 
American Stock Exchange LLC was acquired by the NYSE.\11\ In addition, 
NYSE MKT Rule 114, which governed REMMs, was deleted as obsolete in 
2012.\12\ As a result, there are no Exchange members or member 
organizations that fall under the fourth category specified in Section 
2.03(h)(i) of the Operating Agreement. Thus, the Exchange proposes to 
delete references to this category as obsolete. This change would make 
Section 2.03(h)(i) consistent with the categories of members of the 
Committee for Review, as set forth in Section 2.03(h)(iii).\13\
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    \10\ This class of proprietary traders were known as Registered 
Competitive Market Makers (``RCMM'') on the New York Stock Exchange 
LLC (``NYSE'').
    \11\ See Securities Exchange Act Release No. 58705 (October 1, 
2008), 73 FR 58995, 58996 (October 8, 2008) (SR-Amex-2008-63). The 
NYSE eliminated RCMMs shortly thereafter. See Securities Exchange 
Act Release No. 60356 (July 21, 2009), 74 FR 37281 (July 28, 2009) 
(SR-NYSE-2009-08).
    \12\ See Securities Exchange Act Release No. 68306 (November 28, 
2012), 77 FR 71846 (December 4, 2012) (SR-NYSEMKT-2012-68).
    \13\ See Securities Exchange Act Release No. 77008 (February 1, 
2016), 81 FR 6311 (February 5, 2016) (SR-NYSEMKT-2015-106).
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C. References to Designated Market Makers

    In 2008, the Exchange adopted rules, based on NYSE rules, that 
transformed specialists in the Exchange's equity

[[Page 35094]]

market into DMMs.\14\ As a result, market makers on the NYSE MKT equity 
market are called DMMs and on the NYSE Amex Options LLC (``NYSE Amex 
Options'') options market are called specialists.\15\ However, several 
provisions of the Operating Agreement were not updated and refer only 
to specialists. Accordingly, the Exchange proposes to amend Sections 
2.02 and 2.03(h)(i) to add references to DMMs.
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    \14\ See Securities Exchange Act Release Nos. 58705 (October 1, 
2008), 73 FR 58995 (October 8. 2008) (SR-Amex-2008-63) (approval 
order) and 59022 (November 26, 2008), 73 FR 73683 (December 3, 2008) 
(SR-NYSEALTR-2008-10) (amending equity rules to conform to NYSE New 
Market Model Pilot rules). See also Securities Exchange Act Release 
No. 58845 (October 24, 2008), 73 FR 64379 (October 29, 2008) (SR-
NYSE-2008-46) (approving rule change to create NYSE New Market Model 
Pilot).
    \15\ The Exchange operates a marketplace for trading options 
through NYSE Amex Options, a facility of the Exchange. See Rule 2--
Equities (i) & (j) (defining DMM) and Rule 927NY (defining 
specialist).
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    Section 2.02 of the Operating Agreement provides that the Board has 
general supervision over Member Organizations and over approved persons 
in connection with their conduct with or affecting Member 
Organizations. Section 2.02 further provides that the Board ``may 
disapprove of any member acting as a specialist or odd lot dealer.'' 
The Exchange proposes to add ``designated market maker (as defined in 
Rule 2 of the Company Rules) (`DMM')'' after ``specialist'' in Section 
2.02.
    Section 2.03(h)(i) sets out the categories of individuals that 
shall be represented on the DCRC. The Exchange proposes to add ``or 
DMM'' to the references to ``specialist'' in categories (ii) and (iii), 
so that they reference both types of market makers. The changes would 
be consistent with the categories of members of the Committee for 
Review set forth in Section 2.03(h)(iii), which refers to both DMMs and 
specialists.\16\
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    \16\ See note 13, supra, and accompanying text.
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    Finally, the Exchange proposes to make technical and conforming 
changes to the recitals and signature page of the Operating Agreement.

III. Discussion and Commission's Findings

    The Commission finds that the proposed rule change, as modified by 
Amendment No. 1, is consistent with the requirements of Section 6 of 
the Act \17\ and the rules and regulations thereunder applicable to a 
national securities exchange.\18\
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    \17\ 15 U.S.C. 78f.
    \18\ The Commission has also considered the proposed rule's 
impact on efficiency, competition, and capital formation. See 15 
U.S.C. 78c(f).
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    The Commission finds that the proposed rule change is consistent 
with Section 6(b)(1),\19\ which requires, among other things, that a 
national securities exchange be so organized and have the capacity to 
carry out the purposes of the Act, and to comply, and to enforce 
compliance by its members and persons associated with its members, with 
the provisions of the Act, the rules and regulation thereunder, and the 
rules of the exchange. In addition, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(3) of the Act,\20\ 
which requires, among other things, that the rules of a national 
securities exchange assure a fair representation of its members in the 
selection of its directors and administration of its affairs.
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    \19\ 15 U.S.C. 78f(b)(1).
    \20\ 15 U.S.C. 78f(b)(3).
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    The proposed rule change would remove the requirement that the ICE 
NGC nominate the candidates for Non-Affiliated Directors and instead 
have the DCRC nominate the candidates for Non-Affiliated Director 
directly.\21\ Because the ICE NGC currently is required to nominate the 
candidate recommended to it by the DCRC, this proposed change would 
remove an additional step in the process of nominating candidates for 
Non-Affiliated Director positions and thus may improve the efficiency 
of the nomination process.
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    \21\ The Commission notes that the DCRC is appointed by the 
Board. See Section 2.03(h)(i) of the Operating Agreement.
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    In addition, the proposed rule change would remove the requirement 
that the ICE NGC make the determination of whether persons endorsed to 
be Petition Candidates are eligible to be a Non-Affiliated Director, 
and would have the Exchange make such determination instead. The 
proposed process would maintain an independent review of the 
eligibility of any Petition Candidates, while avoiding the potential 
conflict of interest that could arise if, for example, the DCRC were to 
be responsible for both proposing and nominating candidates and making 
eligibility determinations of Petition Candidates proposed by Member 
Organizations. The Commission previously considered and approved rules 
of another exchange that similarly provide for that exchange to 
determine the eligibility of proposed Petition Candidates.\22\
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    \22\ See supra note 8. See generally Securities Exchange Act 
Release Nos. 56876 (November 30, 2007), 72 FR 70357 (December 11. 
2007) (SR-NASDAQ-2007-068) (approving process for electing Member 
Representative Directors).
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    Further, eliminating the requirement that the DCRC include 
representatives from the fourth category of members described above 
(formerly REMMs) would remove a reference to an obsolete category of 
member from the Operating Agreement. The Commission finds that 
eliminating such an obsolete reference would add clarity to the 
Exchange's rules and be consistent with the public interest and the 
protection of investors.
    Finally, the proposed addition of references to DMMs in Section 
2.02 and 2.03(h)(i) of the Operating Agreement would more accurately 
reflect that specialists in the Exchange's equity market are now 
referred to as DMMs and also would make these sections consistent with 
Section 2.03(h)(iii) (categories of members of the Committee for 
Review), which refers to both DMMs and specialists. The proposed 
addition of a reference to DMMs in Section 2.02 would clarify that the 
Board has general supervision over all Member Organizations, including 
the ability to disapprove of any member acting as a DMM, as well as a 
specialist or odd lot dealer. The proposed addition of references to 
DMMs in Section 2.03(h)(i) would clarify that DMMs, as well as 
specialists, are categories of individuals that would be represented on 
the DCRC.
    The Commission finds that the foregoing revisions to the Operating 
Agreement are consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-NYSEMKT-2016-26), as 
modified by Amendment No. 1 thereto, be, and it hereby is, approved.
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    \23\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-12787 Filed 5-31-16; 8:45 am]
BILLING CODE 8011-01-P