
[Federal Register Volume 78, Number 220 (Thursday, November 14, 2013)]
[Notices]
[Pages 68488-68490]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-27240]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70832; File No. SR-NYSEMKT-2013-88]


Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of 
Proposed Rule Change Amending Certain Rules That Address Wash Sales in 
Order To Harmonize the Exchange's Rules With the Rules of New York 
Stock Exchange LLC and the Financial Industry Regulatory Authority

November 7, 2013.
    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 October 29, 2013, 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 and II 
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 certain rules that address wash 
sales in order to harmonize the Exchange's rules with the rules of New 
York Stock Exchange LLC (``NYSE'') and the Financial Industry 
Regulatory Authority (``FINRA''). The text of 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 certain rules that address wash 
sales in order to harmonize the Exchange's rules with the rules of NYSE 
and FINRA.
Background on Harmonization
    On July 30, 2007, FINRA's predecessor, the National Association of 
Securities Dealers, Inc. (``NASD''), and NYSE Regulation, Inc. 
(``NYSER'') consolidated their member firm regulation operations into a 
combined organization, FINRA. Pursuant to Rule 17d-2 under the Act, 
NYSE, NYSER, and FINRA entered into an agreement (the ``Agreement'') to 
reduce regulatory duplication for their members by allocating to FINRA 
certain regulatory responsibilities for certain NYSE rules and rule 
interpretations (``FINRA Incorporated NYSE Rules''). The Exchange 
became a party to the Agreement effective December 15, 2008.\4\
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    \4\ See Securities Exchange Act Release Nos. 56148 (July 26, 
2007), 72 FR 42146 (August 1, 2007) (order approving the Agreement); 
56147 (July 26, 2007), 72 FR 42166 (August 1, 2007) (SR-NASD-2007-
054) (order approving the incorporation of certain NYSE Rules as 
``Common Rules''); and 60409 (July 30, 2009), 74 FR 39353 (August 6, 
2009) (order approving the amended and restated Agreement, adding 
NYSE MKT LLC as a party). Paragraph 2(b) of the Agreement sets forth 
procedures regarding proposed changes by FINRA, NYSE, or NYSE MKT to 
the substance of any of the Common Rules.
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    As part of its effort to reduce regulatory duplication and relieve 
firms that are members of FINRA and NYSE of conflicting or unnecessary 
regulatory burdens, FINRA is now engaged in the process of reviewing 
and amending the NASD and FINRA Incorporated NYSE Rules in order to 
create a consolidated FINRA rulebook.\5\ In furtherance of this 
harmonization process, NYSE recently deleted NYSE Rule 476(a)(8) and 
amended NYSE Rule 6140, both of which address wash sales.\6\ To 
facilitate further the rule harmonization among exchanges, the Exchange 
proposes to make corresponding changes to its wash sale rules for 
equities and options.\7\
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    \5\ FINRA's rulebook currently has three sets of rules: (1) NASD 
Rules, (2) FINRA Incorporated NYSE Rules, and (3) consolidated FINRA 
Rules. The FINRA Incorporated NYSE Rules apply only to those members 
of FINRA that are also members of the NYSE (``Dual Members''), while 
the consolidated FINRA Rules apply to all FINRA members. For more 
information about the FINRA rulebook consolidation process, see 
FINRA Information Notice, March 12, 2008.
    \6\ See Securities Exchange Act Release No. 69751 (June 13, 
2013), 78 FR 36611 (June 18, 2013) (SR-NYSE-2013-29).
    \7\ All references to rules herein are to NYSE MKT rules unless 
otherwise noted.
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Background on Wash Sales Rules
    Since at least 1970, Rule 4 in Part 1 of the General Rules has 
provided that no member or member organization shall execute or cause 
to be executed, or participate in an account for which there is 
executed on the Exchange, the purchase of any security at successively 
higher prices or the sale of any security at successively lower prices 
for the purpose of creating or inducing a false, misleading or 
artificial appearance of activity in such security or for the purpose 
of unduly or improperly influencing the market price of such security 
or for the purpose of making a price which does not reflect the true 
state of the market in such security. Rule 4 applies to both the 
Exchange's equities and options markets.
    When the Exchange was acquired by NYSE Euronext, it adopted the 
text of certain NYSE rules, including NYSE Rule 476. Exchange Rule 
476(a)(8) currently prohibits a member, member organization, principal 
executive, approved person, registered or non-registered employee of a 
member or member organization, or person otherwise subject to the 
jurisdiction of the Exchange from (i) making a fictitious bid, offer, 
or transaction, (ii) giving an order for the purchase or sale of 
securities the execution of which would involve no change of beneficial 
ownership, or (iii) executing such an order with knowledge of its 
character. Because Rule 476 generally governs disciplinary procedural 
matters, Rule 476(a)(8) appears in Section 9A of the Office Rules, and 
as such, by its terms applies to both the Exchange's equities and 
options markets.
    In 2009, the Exchange adopted Rules 6140(a)--Equities and 6140(b)--
Equities,\8\ which are substantially the same as FINRA Rules 6140(a) 
and (b) and NYSE Rules 6140(a) and (b), and also address wash sale 
activity. Rule 6140(a)--Equities is substantially the same as Rule 4 
and provides that no member or member organization may execute or cause 
to be executed or participate in an account for which there are 
executed purchases of any NMS stock as defined in Rule 600(b)(47) of 
SEC Regulation NMS (``designated security'') \9\ at successively higher

[[Page 68489]]

prices, or sales of any such security at successively lower prices, for 
the purpose of creating or inducing a false, misleading or artificial 
appearance of activity in such security or for the purpose of unduly or 
improperly influencing the market price for such security or for the 
purpose of establishing a price that does not reflect the true state of 
the market in such security. Rule 6140(b)--Equities prohibits a member 
or member organization, for the purpose of creating or inducing a false 
or misleading appearance of activity in a designated security or 
creating or inducing a false or misleading appearance with respect to 
the market in such security, from:
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    \8\ See Securities Exchange Act Release No. 59975 (May 26, 
2009), 74 FR 26449 (June 2, 2009) (SR-NYSEALTR-2009-26).
    \9\ Under Rule 600(b)(47), an NMS stock means any national 
market system security other than an option.
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    (1) Executing any transaction in such security which involves no 
change in the beneficial ownership thereof;
    (2) entering any order or orders for the purchase of such security 
with the knowledge that an order or orders of substantially the same 
size, and at substantially the same price, for the sale of any such 
security, has been or will be entered by or for the same or different 
parties; or
    (3) entering any order or orders for the sale of any such security 
with the knowledge that an order or orders of substantially the same 
size, and at substantially the same price, for the purchase of such 
security, has been or will be entered by or for the same or different 
parties.
    The Exchange notes that Rule 476(a)(8), which the NYSE adopted when 
it was operating in a manual on-Floor trading environment, has a 
different scienter standard than Rule 6140--Equities, NYSE Rule 6140, 
FINRA Rule 6140, and Rule 4. These latter rules provide that a market 
participant is prohibited from engaging in wash sales that have the 
purpose of creating or inducing a false or misleading appearance of 
activity in a designated security. The ``purpose'' or scienter 
requirement in Rule 6140--Equities, NYSE Rule 6140, and FINRA Rule 6140 
recognizes that in today's markets there can be certain instances of 
trading activity that may inadvertently and unknowingly result in 
executions with no change in beneficial ownership, for example trades 
entered from an off-Floor participant that experience latency issues 
over which the participant has little or no control, and that such 
conduct should not always be treated as a wash sale violation if the 
market participant did not act with purpose.
    On the other hand, Rule 476(a)(8) prohibits (i) making a fictitious 
bid, offer, or transaction, (ii) giving an order for the purchase or 
sale of securities the execution of which would involve no change of 
beneficial ownership, or (iii) executing such an order with knowledge 
of its character. The second prong can be read as having no scienter 
requirement.\10\ As such, the example given above involving an off-
Floor market participant's algorithmic orders that inadvertently 
execute against themselves due to latency issues could be deemed a 
violation of the second prong of Rule 476(a)(8).
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    \10\ In at least one case involving the Exchange's affiliate, 
NYSE, a hearing panel was divided as to whether scienter is required 
in order to find a violation of the second prong of NYSE Rule 
476(a)(8), which is identical to Rule 476(a)(8), and adjudged the 
respondent not guilty. See In the Matter of X, NYSE Hearing Panel 
Decision 92-163 (October 23, 1992).
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Proposed Rule Change
    The Exchange proposes to amend its wash sale rules to achieve a 
greater level of internal consistency as well as consistency with 
FINRA's and NYSE's rules. The Exchange believes that the proposed rule 
change would promote harmonization, consistency, transparency, and 
clarity with respect to the Exchange's rules and thereby facilitate 
FINRA's enforcement of them.\11\
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    \11\ The Exchange notes that it can bring disciplinary actions 
under Rule 476(a)(8) for conduct that occurred prior to the time the 
rule is deleted. Thus, the proposed rule change would have no impact 
on ongoing disciplinary actions involving violations of Rule 
476(a)(8).
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    First, the Exchange proposes to eliminate Rule 476(a)(8). The 
Exchange believes that the conduct described in that rule should not be 
treated as a wash sale violation in all instances. The Exchange would 
instead utilize Rule 6140--Equities for wash sale disciplinary actions 
in its equities market.
    Second, so that there is no change in the scope of equity market 
participants subject to disciplinary action for wash sales, the 
Exchange proposes to make a conforming amendment to Rules 6140(a)--
Equities and 6140(b)--Equities to provide that the rules apply not only 
to members and member organizations but also to principal executives, 
approved persons, registered or non-registered employees of a member or 
member organization or persons otherwise subject to the jurisdiction of 
the Exchange.
    Finally, the Exchange proposes to delete Rule 4, marking it 
``Reserved,'' and add substantially the same text as Rules 6140(a)--
Equities and 6140(b)--Equities to Rule 995NY as new subparagraphs (e) 
and (f) so that the substance of the wash sale prohibitions in Rules 
6140(a)--Equities and 6140(b)--Equities also applies to trading on the 
Exchange's options market, thereby creating greater consistency in the 
prohibitions against wash sale trading between the Exchange's equities 
and options markets. The references to a ``designated security'' in the 
text of these equities rules would be replaced with ``listed option'' 
in proposed Rule 995NY and similarly references to a ``member'' or 
``member organization'' would be replaced with ``ATP Holder.'' The 
Exchange believes that locating these provisions in the options rules 
will give options market participants better notice of this prohibited 
conduct.\12\
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    \12\ The Exchange also proposes a technical amendment to move a 
definition of a term that is used in Rule 995NY(c) to that 
subparagraph of the rule. Specifically, the definition of the term 
``related instrument'' currently appears at the end of the rule 
following the designation of subparagraph (d) and the text thereof, 
although that term is used in subparagraph (c). As such, the 
Exchange proposes to move the text of the definition of ``related 
instrument'' to Rule 995NY(c).
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    The Exchange believes that the proposed rule change would not 
result in any material diminution of the Exchange's enforcement 
authority or any material change in surveillance of potentially 
violative activity. The Exchange may still bring a disciplinary action 
in appropriate cases where a market participant engages in a 
significant amount of trades without change of beneficial ownership, 
even if such activity does not violate proposed Rule 6140(b)--Equities 
or proposed Rule 995NY(f) per se because the participant did not act 
with ``purpose.'' Such conduct could also give rise to other 
violations, such as a failure to supervise under Rule 342--Equities or 
Rule 922, and the Exchange's affiliate has brought at least one such 
case.\13\ Such conduct could also violate just and equitable principles 
of trade or otherwise constitute unethical activity under Rule 
476(a)(6) or Rule 2010--Equities.\14\
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    \13\ See In the Matter of Goldman Sachs & Co., NYSE Hearing 
Board Decision 12-3 (April 4, 2012) (between January 2009 and at 
least September 2011, member firm violated NYSE Rule 342, which is 
substantially the same as Rule 342--Equities, in its capacity as a 
NYSE Supplemental Liquidity Provider by failing to maintain 
supervisory procedures that were reasonably designed to detect and 
prevent potentially violative wash trading activity).
    \14\ See Calvin David Fox, 56 SE.C. 1371, 1376 (2003) (``With 
respect to a charge that conduct was inconsistent with just and 
equitable principles of trade, we have held that a self-regulatory 
organization need not find that the respondent acted with scienter, 
but must find that the respondent acted in bad faith or 
unethically.''). Rule 2010--Equities is a broad ethical concept that 
covers all unethical business-related conduct. See also In the 
Matter of Merrill Lynch, Pierce, Fenner & Smith Incorporated, NYSE 
Hearing Board Decision 10-13 (May 14, 2010) (firm violated just and 
equitable principles of trade in that it introduced prearranged or 
wash sales in the round-lot portion of a partial round lot order); 
In the Matter of Robert Cutter Matlock, Jr., NYSE Hearing Board 
Decision 06-19 (March 27, 2006) (Exchange need not prove scienter 
for violations of just and equitable principles of trade, but rather 
is required to show the respondent acted in bad faith or 
unethically); In the Matter of Mary Roy Wong, NYSE Hearing Board 
Decision 06-187 (February 13, 2007) (Exchange need not prove 
scienter for violations of just and equitable principles of trade, 
but rather is required to show the respondent acted in bad faith or 
unethically).

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[[Page 68490]]

2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Act,\15\ in general, and furthers the objectives of Section 
6(b)(5),\16\ 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. Specifically, the Exchange 
believes that the proposed rule change supports the objectives of the 
Act by addressing an inconsistency in the scienter requirements between 
Rule 476(a)(8) on the one hand and Rule 4, Rule 6140--Equities, NYSE 
Rule 6140, and FINRA Rule 6140 on the other. Eliminating this 
inconsistency would provide member organizations with better notice of 
prohibited wash sale activities in the Exchange's equities and options 
markets and promote transparency and clarity with respect to the 
Exchange's rules, thereby facilitating FINRA's enforcement of them. The 
proposed rule change also would achieve greater consistency between the 
Exchange's options and equities rules that prohibit wash sale activity. 
Moreover, the proposed rule change would not result in any material 
diminution of the Exchange's overall enforcement authority or any 
material change in surveillance of potentially problematic trading 
activity. The Exchange may still bring a disciplinary action in 
appropriate cases where a market participant engages in a significant 
amount of trades without change of beneficial ownership, even if such 
activity does not violate proposed Rule 6140(b)--Equities or proposed 
Rule 995NY(f) per se because the participant did not act with 
``purpose,'' because such conduct could violate supervision rules, just 
and equitable principles of trade, or other Exchange rules prohibiting 
unethical conduct. As such, the Exchange's rules would continue to 
protect investors and the public interest.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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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 Act. The proposed rule change is 
not intended to address competitive issues, but rather to achieve 
greater consistency both within the Exchange's rules and among 
Exchange, NYSE, and FINRA rules.

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 within such longer period 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 No. SR-NYSEMKT-2013-88 on the subject line.

Paper Comments

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

All submissions should refer to File No. SR-NYSEMKT-2013-88. 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 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 10:00 a.m. and 
3:00 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 No. SR-NYSEMKT-2013-88 and should be 
submitted on or before December 5, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-27240 Filed 11-13-13; 8:45 am]
BILLING CODE 8011-01-P


