
[Federal Register Volume 80, Number 11 (Friday, January 16, 2015)]
[Notices]
[Pages 2457-2460]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-00579]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74036; File No. SR-NYSEMKT-2014-97]


Self-Regulatory Organizations; NYSE MKT LLC; Order Approving 
Proposed Rule Change Amending Rules 311--Equities and 313--Equities To 
Add Limited Liability Companies as Eligible Member Organizations and 
Delineate the Information Limited Liability Companies Must Submit to 
the Exchange as Part of the Membership Process; Eliminate the 
Requirement That a Member Corporation Be Created or Organized, and 
Maintain Its Principal Place of Business, in the United States; and 
Make Additional Related Amendments To Update Its Membership Rules

January 12, 2015.

I. Introduction

    On November 12, 2014, NYSE MKT LLC (the ``Exchange'' or ``NYSE 
MKT'') filed with the Securities and Exchange Commission (the 
``Commission'') pursuant to Section 19(b)(1) of the Securities Exchange 
Act of 1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposal 
to amend NYSE MKT Rules 311--Equities (``Rule 311'') and 313--Equities 
(``Rule 313'') to add limited liability companies (``LLCs'') to the 
types of eligible member organizations and delineate the information 
LLCs must submit to the Exchange as part of the membership process; 
eliminate the requirement that a member corporation be created or 
organized, and maintain its principal place of business, in the United 
States; and make additional related amendments to update its membership 
rules. The proposed rule change was published for comment in the 
Federal Register on November 28, 2014.\3\ The Commission received one 
comment on the proposal.\4\ This order approves the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 73671 (Nov. 21, 
2014), 79 FR 70900 (Nov. 28, 2014) (``Notice'').
    \4\ See anonymous comment submitted through the Commission's 
Internet comment form on December 19, 2014.
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II. Description of the Proposal

A. Rule 311

    NYSE MKT Rule 311 governs the formation and approval of member 
organizations. The Exchange proposes to revise Rule 311 to explicitly 
provide for LLCs to apply to become member organizations and eliminate 
the requirement that a member corporation be created or organized, and 
maintain its principal place of business, in the United States.
    The Exchange's membership rules currently provide for member 
organizations to be corporations or partnerships, but have not 
explicitly provided for LLCs.\5\ The Exchange proposes to add LLCs to 
the types of potential member organizations and require LLCs to meet 
the same requirements currently applicable to partnerships and 
corporations set forth in Rule 311(b). As part of the proposed 
revision, the Exchange seeks to add a new section (4) to Rule 311(b) 
requiring every member of an LLC to be a member, principal executive, 
or approved person.\6\ The Exchange also proposes to amend current Rule 
311(b)(6) to reflect that proposed LLC member organizations must, like 
corporations and partnerships, also comply with any additional 
requirements as the rules of the Exchange may prescribe. In addition, 
the Exchange proposes to add new Supplementary Material .16 to Rule 311 
to specify that LLC applicants for Exchange membership are subject to 
Rule 313.24 regarding the submission of copies of proposed or existing 
limited

[[Page 2458]]

liability company documents and other agreements.
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    \5\ Current Rule 311(f) permits the Exchange to approve 
``entities that have characteristics essentially similar to 
corporations, partnerships, or both'' as a member organization ``on 
such terms and conditions as the Exchange may prescribe.''
    \6\ Rule 311(b)(2) and (b)(3) currently impose the same 
requirement on the relevant control persons at corporations and 
partnerships, respectively.
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    The Exchange also proposes to amend Rule 311(f) to eliminate the 
geographic limitation on incorporation and domicile of corporation 
members. The first sentence of Rule 311(f) currently provides that 
every member corporation be a corporation ``created or organized under 
the laws of, and shall maintain its principal place of business in, the 
United States or any State thereof.'' \7\ The Exchange does not believe 
that the Exchange's restriction on whether foreign entities may be a 
member organization is consistent with either federal rules or those of 
other self-regulatory organizations (``SRO''). The Exchange states that 
rules promulgated pursuant to the Act require, under certain 
circumstances, a foreign broker-dealer to register with the 
Commission.\8\ The Exchange also states that other SROs, including the 
Financial Industry Regulatory Authority, Inc. (``FINRA''), do not 
require their members to be domiciled in the United States.\9\
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    \7\ The first sentence of Rule 311(f) also provides that every 
member firm organization shall be a partnership or corporation. This 
statement is redundant to Rule 311(b), which the Exchange is 
amending to add LLCs. Accordingly, the Exchange proposes to delete 
the first sentence of Rule 311(f) in its entirety.
    \8\ See 17 CFR 240.15a-6 and Commission Guide to Broker-Dealer 
Registration, Division of Trading and Markets, available at http://www.sec.gov/divisions/marketreg/bdguide.htm (foreign broker-dealers 
that, from the outside of the United States, induce or attempt to 
induce securities transactions by any person in the United States, 
or that use the means or instrumentalities of interstate commerce in 
the United States for this purpose, must register as broker-dealers 
with the Commission).
    \9\ See, e.g., NASD Membership and Registration Rules (1000 
Series). NASD Rule 1090 imposes specific requirements on members 
that do not maintain an office in the United States responsible for 
preparing and maintaining financial and other reports required to be 
filed with the SEC and the Exchange, which the Exchange proposes to 
import into Rule 313. See infra note 10 and accompanying text. See 
also BATS Exchange, Inc. Rules 2.3, 2.5 and 2.6.
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    The Exchange believes that the current restriction in Rule 311(f) 
puts it at a competitive disadvantage because it restricts foreign 
broker-dealers that are registered with the Commission and are members 
of another SRO from also becoming Exchange member organizations. The 
Exchange notes that its rules already require member organizations to 
meet prerequisites as specified in Rule 2(b). Specifically, regardless 
of corporate form, all member organizations must be registered broker-
dealers that are members of FINRA or another registered securities 
exchange. If a registered broker-dealer transacts business with public 
customers or conducts business on the Floor of the Exchange, such 
member organization must be a member of FINRA.
    The Exchange further notes that a member organization will be 
subject to regulatory examination and jurisdiction for misconduct 
whether or not it is based in the United States. However, for the 
avoidance of doubt, as discussed below, the Exchange proposes to add 
supplementary material to Rule 313 based on NASD Rule 1090 that imposes 
certain requirements on foreign members that do not maintain an office 
in the United States.

B. Rule 313

    NYSE MKT Rule 313 sets forth certain corporate or partnership 
documents that each member organization must submit to enter into and 
continue in NYSE membership. The Rule also sets forth certain 
restrictions on capital withdrawals and distributions applicable to 
member corporations and partnerships. The Exchange proposes to amend 
Rule 313 to delineate the types of documents that LLCs must submit 
that, as noted, mirror the requirements currently in place for member 
corporations and partnerships.
    First, the Exchange proposes to add a subsection (d) to Rule 313 
requiring all articles of organization and operating documents for LLCs 
to be submitted for Exchange approval prior to becoming effective. 
Relatedly, the Exchange proposes to add Supplementary Material .24 
setting forth that existing LLCs must promptly submit certified copies 
(to the extent possible) of articles of organization and operating 
agreements to the Exchange.
    Second, the Exchange proposes to add Supplementary Material .25 
providing restrictions on capital withdrawals by LLC members that are 
substantially the same as those applicable to corporations and 
partnerships. The Supplementary Material would provide that the capital 
contribution of any LLC member may not be withdrawn on less than six 
months' written notice of withdrawal given no sooner than six months 
after such contribution was first made without the prior written 
approval of the Exchange. The Supplementary Material would also specify 
that each member firm shall promptly notify the Exchange of the receipt 
of any notice of withdrawal of any part of a member's capital 
contribution or if any withdrawal is not made because prohibited under 
the provisions of Rule 15c3-1 under the Act.
    Third, the Exchange proposes to add Supplementary Material .26 
providing that LLCs not organized under the laws of New York State must 
subject themselves to the following restrictions: No distributions 
shall be declared or paid that impair the LLC's capital; and no 
distribution of assets shall be made to any member unless the value of 
the LLC's assets remaining after such payment or distribution is at 
least equal to the aggregate of its debts and liabilities, including 
capital. These proposed restrictions are based on existing restrictions 
applicable to member corporations and partnerships.
    In addition, as noted above, the Exchange proposes to add new 
Supplementary Material .27 to Rule 313 specifying the requirements 
applicable to Foreign Member Organizations. The proposed new rule text 
would adopt, without substantive change, paragraphs (a), (b), and (c) 
of NASD Rule 1090 (Foreign Members), which impose specific requirements 
on FINRA members that do not maintain an office in the United States 
responsible for preparing and maintaining financial and other reports 
required to be filed by the SEC and FINRA.\10\ As proposed, foreign 
member organizations that do not maintain an office in the United 
States responsible for preparing and maintaining financial and other 
reports required to be filed with the Commission and the Exchange would 
be required to: (1) Prepare all such reports, and maintain a general 
ledger chart of account and any description thereof, in English and 
U.S. dollars; (2) reimburse the Exchange or its representatives for 
expenses incurred in connection with examinations of the member 
organization to the extent that such expenses exceed the cost of 
examining a member organization located within the continental United 
States in the geographic location most distant from the Exchange's 
principal office or, in such other amount as the Exchange may deem to 
be an equitable allocation of such expenses; and (3) ensure the 
availability of an individual fluent in English and knowledgeable in 
securities and financial matters to assist

[[Page 2459]]

representatives of the Exchange during examinations.
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    \10\ The Exchange is not proposing to adopt a rule similar to 
NASD Rule 1090(d), which requires foreign members to ``utilize, 
either directly or indirectly, the services of a broker/dealer 
registered with the Commission, a bank or a clearing agency 
registered with the Commission located in the United States in 
clearing all transactions involving members of the Association, 
except where both parties to a transaction agree otherwise.'' The 
Exchange agrees with FINRA, which similarly recommended skipping 
paragraph (d) as part of its contemplated adoption of NASD Rule 
1090, that the provision is ``outdated'' and that clearing 
arrangements are better addressed by FINRA Rule 4311 (Carrying 
Agreements). See FINRA Regulatory Notice 13-29 at 27 (Sept. 2013). 
FINRA Rule 4311 governs the requirements applicable to members when 
entering into agreements for the carrying of any customer accounts 
in which securities transactions can be effected.
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    The Exchange also proposes to eliminate certain restrictions, which 
the Exchange considers redundant, on member organizations and 
prospective member organizations organized as partnerships and 
corporations. The Exchange proposes to eliminate the requirement in 
Rule 313.11 that the partnership articles of each member firm provide 
that capital withdrawals by partners cannot be made without the prior 
written approval of the Exchange. Rule 313.11 already requires the 
Exchange's prior written approval for any such capital withdrawals, and 
member organizations need to monitor for and comply with the 
prohibition, including whether particular withdrawals violate net 
capital requirements. The Exchange believes that because Exchange rules 
already govern this behavior, a partnership seeking approval as a 
member organization would not need to amend its partnership articles to 
reflect this existing rule requirement.\11\
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    \11\ See also infra note 12.
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    Further, the Exchange proposes to eliminate the requirement in Rule 
313.20 that prospective member corporations submit an opinion of 
counsel stating, among other things, that the corporation is duly 
organized and existing, that its stock is validly issued and 
outstanding, and that the restrictions and provisions required by the 
Exchange on the transfer, issuance, conversion and redemption of its 
stock have been made legally effective. Corporate members are required 
under the Rule to submit relevant corporate documents, including 
articles of incorporation, that contain the same information required 
in the opinion of counsel. The Exchange represents that requiring a 
legal opinion attesting to facts contained in a corporation's public 
filings is redundant and, given the expense, potentially a disincentive 
to smaller entities applying for Exchange membership.
    Similarly, the Exchange proposes to remove the requirement in Rule 
313.23 that the opinion of counsel submitted to the Exchange at the 
time the corporation applies for approval under Rule 313.20 state the 
extent to which the corporation has made the following prohibitions 
legally effective: The prohibition on declaring or paying a dividend 
that impairs the capital of the corporation and the prohibition on 
distributing assets to any stockholder unless the value of the 
corporate assets remaining after such payment or distribution is at 
least equal to the aggregate of its debts and liabilities, including 
capital. Rule 313.23 would continue to prohibit corporation members 
from declaring or paying dividends or distributing corporate assets 
that impair the corporation's capital, and member corporations would 
not be relieved of the obligation to monitor and enforce these 
prohibitions. The Exchange believes that requiring these 
representations in a separate legal opinion is redundant and serves no 
necessary regulatory or other purpose.\12\
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    \12\ FINRA Rule 4110 (Capital Compliance) contains similar 
prohibitions on capital withdrawals by FINRA members without 
requiring that the prohibitions be reflected in a firm's partnership 
articles or requiring a legal opinion that the member has made the 
prohibitions legally effective. See FINRA Rule 4110(c)(1) (``No 
equity capital of a member may be withdrawn for a period of one year 
from the date such equity capital is contributed, unless otherwise 
permitted by FINRA in writing.'').
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    Finally, the Exchange proposes to make certain miscellaneous 
amendments to Rule 313. Specifically, the Exchange proposes to replace 
outdated references to ``Regulation and Surveillance'' with ``the 
Exchange'' in Rules 313.10 and 313.20.\13\ Similarly, the Exchange 
proposes to replace outdated references to ``photostatic'' copies in 
Rules 313.10 and 313.20 in connection with the submission of documents 
to the Exchange and replace them with ``electronically or mechanically 
reproduced.''
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    \13\ Under Rule 0--Equities, references to the Exchange also 
refer to FINRA staff and FINRA departments acting on behalf of the 
Exchange pursuant to a Regulatory Services Agreement (``RSA''). 
FINRA currently provides member application proceedings services to 
the Exchange pursuant to an RSA.
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    As noted above, the Commission received only one comment on the 
proposed rule change.\14\ The comment expressed the view that the 
proposed rule change was a ``good idea'' but did not elaborate.
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    \14\ See supra note 4.
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III. Discussion and Commission Findings

    After carefully considering the proposal and the one comment 
submitted, the Commission finds that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\15\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\16\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, 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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    \15\ In approving the proposed rule change, the Commission has 
considered the proposed rule change's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \16\ 15 U.S.C. 78f(b)(5).
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    The Commission agrees with the Exchange that adding LLCs to the 
list of eligible member organizations would remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system by expanding the types of organizational forms a member 
organization may take. The Exchange also believes that permitting LLCs 
to become member organizations subject to the same restrictions and 
requirements currently applicable to corporations and partnerships also 
protects investors and the public interest by holding LLCs to the same 
high standards.
    In addition, permitting non-United States-based registered broker-
dealers that are members of FINRA or another registered securities 
exchange and that do not have their principal place of business in the 
United States to become Exchange member organizations would remove 
impediments to and perfect the mechanism of a free and open market by 
removing geographic restrictions on Exchange membership that are not 
required by FINRA or other exchanges. Broadening the Exchange 
membership pool by facilitating the participation of additional 
foreign-based U.S. registered broker-dealers would benefit investors 
and the public interest by increasing market participation and depth at 
the Exchange. Moreover, adoption of specific requirements for foreign 
members that do not maintain an office in the United States based on 
NASD Rule 1090 would further assure that foreign Exchange members, once 
approved, remain subject to regulatory examination and jurisdiction.
    In addition, updating the Exchange's rules to remove requirements 
that the Exchange believes are redundant--that a member firm's 
partnership articles provide that capital withdrawals by partners 
cannot be made without the prior written approval of the Exchange, that 
prospective member corporations submit an opinion of counsel reciting 
facts contained in its public filings, and that certain prohibitions 
have been made legally effective--would remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system by ensuring that potential member organizations, persons subject 
to the Exchange's jurisdiction, regulators, and

[[Page 2460]]

the public could more easily navigate the Exchange's rulebook and 
better understand what obligations attach and when. Further, updating 
the Exchange's rules to remove what the Exchange considers redundant 
requirements also would protect investors as well as the public 
interest by providing transparency and reducing potential confusion 
regarding the Exchange membership process that may result from having 
what the Exchange characterizes as obsolete rules and outdated 
guidelines in the Exchange's rulebook. For the same reasons, updating 
the Exchange's rules to remove requirements that the Exchange considers 
outdated would remove impediments to and perfect the mechanism of a 
free and open market and a national market system and is equally 
designed to protect investors as well as the public interest.
    Based on the foregoing, the Commission finds the proposed rule 
change is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-NYSEMKT-2014-97) be, and 
hereby is, approved.
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    \17\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-00579 Filed 1-15-15; 8:45 am]
BILLING CODE 8011-01-P


