
[Federal Register Volume 76, Number 154 (Wednesday, August 10, 2011)]
[Notices]
[Pages 49520-49522]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-20244]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65035; File No. SR-CHX-2011-20]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change To Impose Certain Requirements 
on Exchange-Registered Institutional Broker Firms That Operate a 
Separate Non-Institutional Broker Unit Within the Firm

August 4, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on July 26, 2011, Chicago Stock Exchange, Inc. (``Exchange'' or 
``CHX'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the Exchange. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to add a rule to impose certain requirements 
on Exchange-registered Institutional Broker firms which operate a 
separate, non-Institutional Broker unit within the firm. The text of 
this proposed rule change is available on the Exchange's Web site at 
(http://www.chx.com), at the Exchange's Office of the Secretary and in 
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 CHX included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received regarding the proposal. The text of 
these statements may be examined at the places specified in Item IV 
below. The CHX 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
    The Exchange is proposing to add Rule 5 to Article 17 to permit 
Exchange-registered Institutional Broker (``Institutional Broker'') 
firms to establish and operate a separate, non-Institutional Broker 
unit within the firm. The Exchange proposes to add information barrier 
requirements for Institutional Brokers that wish to operate a separate 
unit within the larger firm to conduct business otherwise than as an 
Institutional Broker. By this proposal, the Exchange believes that it 
will enable existing and new Institutional Broker firms to engage in 
trading activities through the non-Institutional Broker unit in a 
manner which better delineates the activity occurring on and off the 
Exchange.
    CHX-registered Institutional Brokers are an elective sub-category 
of Exchange Participants requiring registration with the Exchange and 
are subject to the obligations of Article 17 of the CHX rules, in 
addition to the other provisions of Exchange rules. Institutional 
Broker firms typically provide order handling and execution services 
for other broker-dealers or institutional clients, and are the 
successors to the floor brokers under the Exchange's previous floor-
based, auction trading model.\3\ The Commission's order approving the 
Exchange's New Trading Model noted, ``Institutional brokers would be 
deemed to be participants operating on the Exchange, although they 
would not effect transactions from a physical trading floor (since the 
Exchange will no longer have a physical trading floor) and could trade 
from any location. A customer order would be deemed to be on the 
Exchange when received by an institutional broker, but would not have 
priority in the Matching System until it is entered into the system.'' 
\4\ Although an Institutional Broker is deemed to be operating on the 
Exchange, the CHX is proposing to allow a separate unit within the 
larger Institutional Broker firm to execute orders otherwise than on 
the Exchange.\5\
---------------------------------------------------------------------------

    \3\ The Exchange replaced its traditional auction marketplace 
with its New Trading Model beginning in 2006. See Securities 
Exchange Act Rel. No. 34-54550 (Sept. 29, 2006), 71 FR 59563 (Oct. 
10, 2006) (SR-CHX-2006-05).
    \4\ Id., Section II.C. Institutional Brokers.
    \5\ See email from James Ongena, Vice President, Associate 
General Counsel, CHX, to Christopher Chow, Special Counsel, 
Commission, dated August 3, 2011.
---------------------------------------------------------------------------

    New Rule 5 proposes to establish new conditions for an 
Institutional Broker

[[Page 49521]]

firm that wishes to include another unit of the firm (the ``non-
Institutional Broker unit'') to conduct business otherwise than as an 
Institutional Broker, including the handling and execution of orders on 
the CHX, in other trading centers or in the over-the-counter (``OTC'') 
marketplace. The non-Institutional Broker unit would not be considered 
as part of the facilities of the Exchange and its trading activity 
would be treated the same as any other order sending Participant which 
is not registered as an Institutional Broker. Since the non-
Institutional Broker unit will be acting as an order entry unit of the 
firm, it will be generally subject to the strictures of the Exchange's 
rules, except as to Articles 16 and 17 which pertain to Market Makers 
and Institutional Brokers, respectively, on an exclusive basis. For 
purposes of applying the Exchange's Schedule of Fees and Assessments, 
the activity of a non-Institutional Broker unit would not be considered 
as Institutional Broker activity. A multi-unit Institutional Broker 
firm would be required to establish and maintain information barriers 
between the Institutional Broker unit and non-Institutional Broker 
unit. Such information barriers will be required to be reasonably 
designed to prevent the Institutional Broker unit from having knowledge 
of unexecuted customer orders in possession of the non-Institutional 
Broker unit and likewise prevent the non-Institutional Broker unit from 
having knowledge of unexecuted customer orders in the possession of the 
Institutional Broker unit. The Institutional Broker unit may, however, 
transmit an order to the non-Institutional Broker unit of the firm for 
purposes of handling and executing the order, and the non-Institutional 
Broker unit may likewise transmit an order to the Institutional Broker 
unit.
    Through this filing, the Exchange proposes that Institutional 
Broker firms which wish to operate a non-Institutional Broker unit 
would be required to create and maintain adequate information barrier 
procedures. At the time an Institutional Broker firm wished to set up a 
non-Institutional Broker unit within the firm, it would be required to 
submit to the Exchange its Written Supervisory Procedures (``WSPs'') as 
they pertain to these information barrier procedures. At minimum, the 
WSPs will have to satisfactorily address (1) The manner in which the 
firm will satisfy the requirements of this rule (including the 
compliance and audit procedures it proposes to implement to ensure that 
the information barrier is maintained); (2) identify the names and 
titles of the person or persons responsible for maintenance, 
supervision and surveillance of the procedures; (3) make a commitment 
to provide the Exchange with such information and reports relating to 
its transactions as the Exchange may request; and (4) make a commitment 
to take appropriate remedial action against any person violating this 
rule or the Institutional Broker firm's internal compliance and audit 
procedures, as well as confirming that the firm recognizes that the 
Exchange may take appropriate remedial action for any such violation.
    In addition, the proposed rule provides that the firm's WSPs must 
describe the internal controls that the Institutional Broker firm will 
implement to satisfy each of the conditions stated in the rule, and the 
compliance and audit procedures proposed to implement and ensure that 
the controls are maintained. If the Exchange determined that the 
organizational structure and the compliance and audit procedures 
proposed by the Institutional Broker firm are acceptable, the Exchange 
would so inform the Institutional Broker firm, in writing. Unless the 
Exchange found that an Institutional Broker firm's information barrier 
procedures were acceptable, an Institutional Broker firm may not 
conduct business other than on the Exchange.
    The Exchange believes that the provisions regarding the information 
barrier procedures of new Rule 5 are sufficient to address the issues 
presented by the operation of a non-Institutional Broker unit within a 
firm which is an Exchange-registered Institutional Broker. The CHX 
understands that the non-Institutional Broker unit of such firms will 
largely function in a similar manner to other order sending firms which 
are not registered with the Exchange as an Institutional Broker or 
Market Maker pursuant to our rules. To the extent that the non-
Institutional Broker wished to act as a Market Maker on the Exchange, 
it would have to comply with the more stringent information barrier 
procedures under Article 16, Rule 9 (Limitation on Dealings).\6\ The 
Exchange believes that the information barrier procedures of proposed 
Rule 5 are adequate to provide a meaningful separation of the 
Institutional Broker and non-Institutional Broker units in order to 
ensure that the latter can fairly be treated as not being part of the 
Exchange's trading facilities.\7\
---------------------------------------------------------------------------

    \6\ Because market makers normally trade as principal, either 
against other customer orders of the firm or other, unaffiliated 
market participants, the heightened potential for conflicts of 
interest in their transactions requires a stricter separation 
between the market making and non-market making units of a single 
firm. For example, under Article 16, Rule 9, the information barrier 
procedures of market making unit must address the potential use or 
misuse of post-trade clearing information to compromise the 
information barrier. While Institutional Broker firms do trade from 
time-to-time as principal, they normally handle orders as agent for 
their customers. To the extent that a particular Institutional 
Broker firm conducts a significant amount of its business as 
principal, the Exchange will require that its information barrier 
procedures specifically address that activity in a manner which is 
reasonably designed to address any conflicts of interest. The 
Exchange currently conducts surveillance of the principal trading 
activity of Institutional Broker firms for compliance with our 
rules, such as the prohibition on trading ahead contained in Article 
9, Rule 17. Since the principal purpose of creating a non-
Institutional Broker unit is to have it considered to be not ``on 
the Exchange,'' the Exchange believes that proposed standards for 
information barrier procedures as set forth in new Rule 5 are 
adequate to address those concerns.
    \7\ The Exchange represents that it will implement as of the 
time this proposal is approved adequate oversight processes which 
are reasonably designed to ensure compliance by our Participants 
with the requirements of the provisions of this proposal.
---------------------------------------------------------------------------

    Finally, the Exchange is proposing an Interpretation and Policy to 
define the elements of an adequate information barrier procedure for 
purposes of new Rule 5. Proposed Interpretation and Policy .01 defines 
an ``information barrier'' is an organizational structure in which the 
Institutional Broker functions are conducted in a physical location 
separate from the locations in which the non-Institutional Broker 
activities are conducted. The Institutional Broker and non-
Institutional Broker units should not use trading or order management 
systems which permit them to share information about orders or 
transactions being handled by each respective unit. However, upon 
request and not on his or her own initiative, an Institutional Broker 
Representative may furnish to persons at the same firm or an affiliated 
firm (``affiliated persons''), the same sort of market information that 
the Institutional Broker would make available in the normal course of 
its Institutional Broker activity to any other person. The 
Institutional Broker Representative must provide such information to 
affiliated persons in the same manner that he or she would make such 
information available to a non-affiliated person. An individual person 
may not simultaneously act as an Institutional Broker Representative 
and as a representative of the non-Institutional Broker unit. The 
Exchange believes that the information barrier requirements as set 
forth in the proposed Interpretation and Policy are reasonable and 
appropriate given the nature of the relationship between the

[[Page 49522]]

Institutional Broker and non-Institutional Broker units. The CHX 
further believes that the articulation of these standards in the 
proposed Interpretation and Policy will provide clarity and direction 
to interested Institutional Brokers in creating their information 
barrier procedures.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act in general,\8\ and furthers the objectives 
of Section 6(b)(5) in particular,\9\ in that it is designed to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transaction in 
securities, to remove impediments and perfect the mechanisms of a free 
and open market, and, in general, to protect investors and the public 
interest by setting forth the rules and principles governing the 
trading activity of Institutional Brokers. By permitting an 
Institutional Broker firm to operate a separate non-Institutional 
Broker unit within the larger firm subject to the new information 
barrier requirements, the proposed new Rule 5 would provide protection 
to the customers of such firms. Rather than routing orders which were 
directed to the OTC marketplace to a third-party broker-dealer for 
execution, the proposed non-Institutional Broker unit of the firm could 
handle and execute such orders. The Exchange believes that this 
handling could reduce the possibility for errors in transmission from 
one firm to another, as well as eliminate potential costs imposed by 
the third-party broker-dealer which might have to be borne by the order 
sender or the Institutional Broker firm. The creation and maintenance 
of adequate information barrier procedures, which are subject to the 
review, approval and inspection of the Exchange, should help ensure 
that the Institutional Broker and non-Institutional Broker units are in 
fact being operated separately, and that treatment of the non-
Institutional Broker unit as not being part of the facilities of the 
Exchange is appropriate.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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 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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) As the Commission may 
designate up to 90 days of such date 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 e-mail to rule-comments@sec.gov. Please include 
File No. SR-CHX-2011-20 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-CHX-2011-20. 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 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 
a.m. and 3 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-CHX-2011-20 and should be 
submitted on or before August 31, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20244 Filed 8-9-11; 8:45 am]
BILLING CODE 8011-01-P


