Document ID: SEC-2016-0617-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE MKT, LLC
Posted Date: 2016-04-12T04:00Z

[Federal Register Volume 81, Number 70 (Tuesday, April 12, 2016)]
[Notices]
[Pages 21636-21639]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-08300]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77536; File No. SR-NYSEMKT-2016-26]

Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of 
Proposed Rule Change Amending the Eighth Amended and Restated Operating 
Agreement of the Exchange

April 6, 2016.
    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 March 29, 2016, NYSE MKT LLC (the ``Exchange'' or ``NYSE 
MKT'') 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 the Eighth Amended and Restated 
Operating Agreement of the Exchange (``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. 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.

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 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'').
Process for Nominating Non-Affiliated Directors
    Pursuant to the Operating Agreement, at least 20% of the Board of 
Directors of the Exchange (``Board'') is made up of ``Non-Affiliated 
Directors'' (commonly referred to as ``fair representation 
directors'').\4\ Pursuant to 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, 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 Member Organizations endorse a 
petition candidate for Non-Affiliate Director, pursuant to Section 
2.03(a)(iv) the ICE NGC makes the determination of whether the person 
is eligible.\5\ 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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    \4\ Pursuant to Section 2.03(a) of the Operating Agreement, Non-
Affiliate Directors are persons who are not members of the board of 
directors of Intercontinental Exchange, Inc. (``ICE''). A person may 
not be a Non-Affiliate Director unless he or she is free of any 
statutory disqualification, as defined in Section 3(a)(39) of the 
Exchange Act. Non-Affiliate Directors need not be independent.
    \5\ 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 Exchange's 
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 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, whomever emerges from 
the petition process. The ICE NGC does not have any discretion. 
Removing this unnecessary step would make the NYSE MKT process more 
efficient.
    The Exchange believes that having the Exchange determine whether 
persons endorsed to be petition candidates are eligible also would be 
more efficient, as it would not require action from the ICE NGC, 
thereby removing the possibility

[[Page 21637]]

of any delay in the process. The proposed change would be consistent 
with the petition process of the Nasdaq Stock Market LLC, in which the 
exchange determines the eligibility of proposed nominees.\6\
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    \6\ 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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    The Exchange believes that the proposed changes will make its 
process more consistent with the process by which its affiliate, NYSE 
Arca, Inc. (``NYSE Arca''), designates its fair representation 
directors, in which the ICE NGC plays no role.\7\
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    \7\ See Article III, Section 3.02 of the NYSE Arca Bylaws and 
NYSE Arca Rule 3.2(b)(2). Similarly, the board of directors of The 
NASDAQ OMX Group, Inc., the sole member of the Nasdaq Stock Market 
LLC, plays no role in nominating or determining the eligibility of 
Member Representative Directors. See By-Laws of the Nasdaq Stock 
Market LLC, Art. II, Sec. 1.
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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. As proposed, the process would be as follows. 
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 it had previously recommended. If there were petition 
candidates, the Exchange would make the eligibility determination of 
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.
    The Exchange would make a conforming change to Section 2.03(h)(i) 
to state that the DCRC ``will be responsible for nominating Non-
Affiliate Director Candidates.'' Currently, the provision states that 
the DCRC ``will be responsible for recommending Non-Affiliated Director 
Candidates to the ICE NGC.''
Elimination of a Category of DCRC Membership
    As noted above, the Operating Agreement requires that the DCRC 
include representatives from each of 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.''\8\
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    \8\ 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 (``REMM'') 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.\9\ The rules relating to this category 
of proprietary floor trader were eliminated shortly after the American 
Stock Exchange LLC was acquired by the NYSE.\10\ In addition, NYSE MKT 
Rule 114, which governed REMMs, was deleted as obsolete in 2012.\11\ 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, and so the Exchange proposes to delete references 
to it as obsolete. The changes would make Section 2.03(h)(i) more 
consistent with the categories of members of the Committee for Review 
in Section 2.03(h)(iii).\12\
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    \9\ See 17 CFR 240.11a1-5; Division of Market Regulation, United 
States Securities and Exchange Commission, Market 2000: An 
Examination of Current Equity Market Developments (January 1994) 
(``Market 2000''), at A V-7, available at https://www.sec.gov/divisions/marketreg/market2000.pdf. This class of proprietary 
traders were known as Registered Competitive Market Makers 
(``RCMM'') on the NYSE.
    \10\ 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).
    \11\ See Securities Exchange Act Release No. 68306 (November 28, 
2012), 77 FR 71846 (December 4, 2012) (SR-NYSEMKT-2012-68).
    \12\ See Securities Exchange Act Release No. 77008 (February 1, 
2016), 81 FR 6311 (February 5, 2016) (SR-NYSEMKT-2015-106).
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References to Designated Market Makers
    In 2008, the Exchange adopted rules, based on NYSE rules, that 
transformed specialists in the Exchange's equity market into DMMs.\13\ 
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.''\14\ 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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    \13\ See Securities Exchange Act Release Nos. 58705 (Oct. 1, 
2008), 73 FR 58995 (Oct. 8. 2008) (SR-Amex-2008-63) (approval order) 
and 59022 (Nov. 26, 2008), 73 FR 73683 (Dec. 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, 64381 (October 29, 2008) (SR-NYSE-
2008-46) (approving rule change to create NYSE New Market Model 
Pilot).
    \14\ 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 in Section 2.03(h)(iii), which refers to both DMMs and 
specialists.\15\
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    \15\ See note 12, supra.
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    Finally, the Exchange proposes to make technical and conforming 
changes to the recitals and signature page of the Operating Agreement.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Exchange Act \16\ in general, and with Section 
6(b)(1) \17\ in particular, in that it enables the Exchange to be so 
organized as to have

[[Page 21638]]

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.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(1).
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    The proposed change would remove the requirement that the ICE NGC 
nominate the candidates for Non-Affiliated Directors and have the DCRC 
nominate the candidates for Non-Affiliated Director directly. This 
proposed change would remove an unnecessary step in the process of 
nominating candidates for Non-Affiliated Directors and increase 
efficiency. In addition, the proposed change would remove the 
requirement that the ICE NGC make the determination whether persons 
endorsed to be petition candidates are eligible to be Non-Affiliated 
Directors, and have the Exchange make such determination instead. By 
not requiring action from the ICE NGC, the possibility of any resulting 
delay in the process is removed. For these reasons, the Exchange 
believes that the proposed rule change would contribute to the orderly 
operation of the Exchange and would enable the Exchange to be so 
organized as to have the capacity to carry out the purposes of the 
Exchange Act and comply and enforce compliance with the provisions of 
the Exchange Act by its members and persons associated with its 
members. The Exchange therefore believes that approval of the proposed 
is consistent with Section 6(b)(1) of the Act.
    The Exchange believes that amending the Operating Agreement to 
remove the requirement that the DCRC include representatives from the 
fourth category of members would remove a reference to an obsolete 
category, thereby reducing potential confusion that may result from 
retaining obsolete references in the Exchange's Operating Agreement. 
The Exchange believes that eliminating such obsolete references would 
not be inconsistent with the public interest and the protection of 
investors because investors will not be harmed and in fact would 
benefit from increased transparency, thereby reducing potential 
confusion. Removing such obsolete references will also further the goal 
of transparency and add clarity to the Exchange's rules.
    The Exchange believes that adding references to DMMs 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. The proposed 
addition of a reference to DMMs in Section 2.02 will 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) further the goals of Section 6(b)(3) of 
ensuring fair representation of an exchange's members in the selection 
of its directors and administration of its affairs by including both 
types of market makers in the categories of individuals that shall be 
represented on the DCRC.
    The Exchange also believes that this filing furthers the objectives 
of Section 6(b)(5) of the Exchange Act \18\ because the proposed rule 
change would be consistent with and facilitate a governance and 
regulatory structure that 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.
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    \18\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that having the DCRC nominate the candidates 
for Non-Affiliated Director would remove impediments to and perfect a 
national market system because the proposed rule change would remove an 
unnecessary step in the process for nominating candidates for Non-
Affiliated Directors and would remove the ICE NGC from making the 
determination whether persons endorsed to be petition candidates are 
eligible to be Non-Affiliated Directors. By not requiring action from 
the ICE NGC, the possibility of any resulting delay in the process is 
removed. The Exchange believes that the proposed rule change is 
therefore consistent with and facilitates a governance and regulatory 
structure that furthers the objectives of Section 6(b)(5) of the Act.

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 and its board of directors.

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 rule-comments@sec.gov. Please include 
File Number SR-NYSEMKT-2016-26 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-NYSEMKT-2016-26. 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

[[Page 21639]]

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 
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; 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-NYSEMKT-2016-26, and should be submitted on or before 
May 3, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-08300 Filed 4-11-16; 8:45 am]
 BILLING CODE 8011-01-P