
[Federal Register Volume 81, Number 214 (Friday, November 4, 2016)]
[Notices]
[Pages 76975-76977]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-26646]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79200]


Order Granting a Limited Exemption From Rule 102 of Regulation M 
Concerning NASDAQ Stock Market LLC's New Product Support Incentives 
Pursuant to Regulation M Rule 102(e)

October 31, 2016.
    On September 23, 2016, NASDAQ Stock Market LLC (``Exchange'' or 
``NASDAQ'') filed with the Securities and Exchange Commission 
(``Commission'') a proposal to amend NASDAQ Rule 7014(f) to, among 
other things, change their Lead Market Maker Program (now renamed the 
``Designated Liquidity Provider (``DLP'') Program'') to include a new 
rebate, the New Product Support Incentive (``NPSI'').\1\ Under the 
NPSI, the Exchange will pay a higher rebate to market makers that act 
as DLPs in newly launched exchange-traded products (``ETPs'') that meet 
certain conditions.\2\ The proposal became effective upon filing 
pursuant to Section 19(b)(3)(A)(ii) of the Securities Exchange Act of 
1934, as amended (``Exchange Act'').\3\
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    \1\ Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change to Amend Nasdaq's Fees at Rule 7014(f), Exchange Act 
Release No. 78912 (Sep. 23, 2016); 81 FR 67019 (Sep. 29, 2016) 
(``NPSI Release'').
    \2\ ETPs eligible to be qualified securities for the DLP Program 
are exchange-traded funds or index-linked securities listed on 
NASDAQ pursuant to NASDAQ Rules 5705 (Exchange Traded Funds: 
Portfolio Depository Receipts and Index Fund Shares), 5710 
(Securities Linked to the Performance of Indexes and Commodities, 
Including Currencies), 5720 (Trust Issued Receipts), 5735 (Managed 
Fund Shares), or 5745 (NextShares). In addition, the ETPs must have 
at least one DLP. Further, to qualify for the NPSI, the DLP must be 
at the national best bid or offer at least 20% of the time on 
average in the assigned ETP, the ETP must have a three-month ADV of 
less than 500,000, and the ETP must be less than 36 months old. See 
NASDAQ Rule 7014(f)(1) and (4). Collectively, securities for which 
rebates under the NPSI are made are referred to in this order as 
``NPSI Securities.''
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii). See also NPSI Release.
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    Specifically, the Exchange will pay an NPSI rebate to a DLP of 
$0.0070 per executed share in the first year from the ETP's launch, on 
a decreasing scale until the NPSI is phased out as the ETP ages, 
terminating three years from the ETP's launch.\4\ In contrast, the 
largest rebate that a DLP can collect under the DLP Program's ``Basic 
Rebate'' for a non-NPSI ETP is $0.0047 per executed share.\5\ NASDAQ 
represents that the NPSI is designed for the purpose of incentivizing 
DLPs to support trading in newly launched ETPs.\6\
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    \4\ NASDAQ Rule 7014(f)(5)(B). The rebate decreases to $0.0065 
per executed share in the second year and $0.0055 per executed share 
in the third. After the third year, no rebate is paid under the 
NPSI. These rebates collectively are referred to in this order as 
``NPSI Rebates.''
    \5\ See NASDAQ Rule 7014(f)(4)-(5)(A). In addition to the Basic 
Rebate and NPSI, a DLP in qualifying ETPs can also receive the 
``Additional Tape C ETP Incentive,'' which provides $0.0003 to 
$0.0005 per executed share, depending on how many ETPs the DLP is 
assigned to and other conditions are met. See NASDAQ Rule 
7014(f)(5)(C).
    \6\ NPSI Release.
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    With the implementation of the NPSI, issuers of newly launched ETPs 
that choose to list on NASDAQ are automatically enrolled in the NPSI 
and would indirectly benefit from this liquidity support, which is 
intended to incentivize market makers to engage in more quotation and 
trading activity than might otherwise be undertaken in the absence of 
payments under the NPSI in order to help facilitate the distribution of 
newly launched ETPs. As such, the Commission believes that 
participating in the NPSI could constitute an indirect attempt by the 
issuer to induce a bid for or purchase of a covered security during a 
restricted period potentially in violation of Rule 102 of Regulation 
M.\7\ NASDAQ represents that the NPSI may incentivize DLPs to support 
trading in newly launched ETPs.\8\
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    \7\ 17 CFR 242.102. The Commission notes in this regard the 
focus of the NPSI on newly launched ETPs. Cf. Order Instituting 
Proceedings to Determine Whether to Approve or Disapprove Proposed 
Rule Changes Relating to Market Maker Incentive Programs for Certain 
Exchange-Traded Products, Exchange Act Release No. 67411 (Jul. 11, 
2012), 77 FR 42052 (Jul. 17, 2012) (regarding the similar NASDAQ 
Market Quality Program (``MQP''), stating that ``[t]he Commission 
believes that issuer payments made under the SRO Proposals would 
constitute an indirect attempt by the issuer of a covered security 
to induce a purchase or bid in a covered security during a 
restricted period in violation of Rule 102'' and noting that ``under 
the NASDAQ Proposal, the issuer payments would `be used for the 
purpose of incentivizing one or more Market Makers in the MQP 
Security,' which could induce bids or purchases for the issuer's 
security during a restricted period'').
    \8\ NPSI Release.
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    The Commission has provided limited, conditional exemptions from 
Rule 102 for issuers to participate in a number of similar programs, 
such as the NASDAQ MQP, which also involved an indirect attempt by the 
issuer to induce a bid for or a purchase of a covered security during a 
restricted period.\9\ Like

[[Page 76976]]

the NPSI, these programs are designed to incentivize market makers to 
make markets in specific securities. The Commission's exemptions for 
these programs are intended to ensure that investors purchasing ETPs 
that are being quoted or traded as a result of incentive payments are 
notified in advance of the potential consequences of such payments on 
the prices and liquidity of such ETPs. The Commission believes that it 
is appropriate to exempt issuers from Rule 102 to permit participation 
in the NPSI with similar disclosure to investors.
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    \9\ See Order Granting a Limited Exemption from Rule 102 of 
Regulation M Concerning the NASDAQ Stock Market LLC Market Quality 
Program Pilot Pursuant to Regulation M Rule 102(e), Exchange Act 
Rel. No. 69196 (Mar. 20, 2013); 78 FR 18410 (Mar. 26, 2013); Order 
Granting a Limited Exemption from Rule 102 of Regulation M 
Concerning the NYSE Arca, Inc.'s Exchange Traded Product Incentive 
Program Pilot Pursuant to Regulation M Rule 102(e), Exchange Act 
Rel. No. 69707 (Jun. 6, 2013); 78 FR 35330 (Jun. 12, 2013); Order 
Granting a Limited Exemption from Rule 102 of Regulation M 
Concerning the NYSE Arca, Inc.'s Crowd Participant Program Pilot, 
Exchange Act Rel. No. 71805 (Mar. 26, 2014); 79 FR 18365 (Apr. 1, 
2014); and Order Granting a Limited Exemption from Rule 102 of 
Regulation M Concerning the BATS Exchange, Inc.'s Pilot Supplemental 
Competitive Liquidity Provider Program, Exchange Act Rel. No. 72693 
(Jul. 28, 2014); 79 FR 44875 (Aug. 1, 2014).
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    The Commission believes that potential investors in NPSI Securities 
should be provided with sufficient information regarding the potential 
impact of the NPSI on the price and liquidity of the ETPs, particularly 
given the temporary and limited nature of each ETP's enrollment in the 
program. Accordingly, the Commission is granting a limited exemption 
from Rule 102 of Regulation M solely to permit issuers to participate 
indirectly in the NPSI Rebates, subject to certain conditions described 
below.

Rule 102 of Regulation M

    Rule 102 of Regulation M prohibits issuers, selling security 
holders, or any affiliated purchaser of such persons, directly or 
indirectly, from bidding for, purchasing, or attempting to induce any 
person to bid for or purchase a covered security \10\ during the 
applicable restricted period in connection with a distribution of 
securities effected by or on behalf of an issuer or selling security 
holder, except as specifically permitted in the rule.\11\ As mentioned 
above, the Commission believes that issuers participating in the NPSI 
could constitute an indirect attempt to induce a bid for or purchase of 
a covered security during the applicable restricted period. 
Accordingly, absent exemptive relief, issuers of NPSI Securities 
(``NPSI Issuers'') that list on NASDAQ while the NPSI is in effect may 
violate Rule 102.
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    \10\ Covered security is defined as any security that is the 
subject of a distribution, or any reference security. 17 CFR 
242.100(b).
    \11\ 17 CFR 242.102(a).
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    On the basis of the conditions set out below, which in general are 
designed to help inform investors about the potential impact of the 
NPSI to potential investors of NPSI Securities, the Commission finds 
that it is appropriate in the public interest, and is consistent with 
the protection of investors, to grant a limited exemption from Rule 102 
of Regulation M solely to permit NPSI Issuers to list NPSI Securities 
on NASDAQ while the NPSI is in effect and thus, to participate 
indirectly in the payment of the NPSI Rebates to DLPs.\12\
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    \12\ Rule 102(e) allows the Commission to grant an exemption 
from the provision of Rule 102, either unconditionally or on 
specified terms and conditions, to any transaction or class of 
transactions, or to any security or class of securities.
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    This limited exemption is conditioned on the NPSI Issuer, or 
sponsor if applicable, making specific disclosures, as set forth below. 
The disclosures are designed to alert potential investors that the 
trading market for NPSI Securities may be affected by these payments. 
Specifically, these disclosures are designed to inform potential 
investors about the potential impact of the NPSI on the natural market 
forces of supply and demand prior to making an investment decision in 
these newly launched securities products. These disclosures are 
expected to promote greater investor protection by helping to ensure 
that investors adequately informed as to this potential impact. We also 
note that, to the extent that information about the NPSI is material, 
disclosure of this kind may already be required by the federal 
securities laws.

Conclusion

    It is therefore ordered, pursuant to Rule 102(e) of Regulation M, 
that NPSI Issuers are hereby exempted from Rule 102 of Regulation M 
solely to permit NPSI Issuers to participate in the NPSI as set forth 
in NASDAQ Rule 7014(f), subject to the condition that the NPSI Issuer 
(or the sponsor, if applicable) shall make the following disclosures in 
a press release, as well as prominently and continuously on its Web 
site, for each specific ETP that it intends to list, or has listed, on 
NASDAQ:
    (1) At the beginning of the restricted period, as defined in Rule 
100 of Regulation M,\13\ for the NPSI Security, the following 
disclosure shall be continuously provided until the disclosure in (2) 
below is required: ``[Specific ETP name] intends to list on NASDAQ on 
or around [anticipated date]. Once listed, [Specific ETP] is 
automatically eligible for NASDAQ's New Product Support Incentives 
Rebate (``NPSI Rebate''), which is a payment made to certain market 
makers depending on how actively they quote and trade [Specific ETP]. 
Market makers quoting and trading [Specific ETP] on NASDAQ will receive 
such payments for up to three years from the launch date for [Specific 
ETP] if they meet the requirements for such payments.'';
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    \13\ 17 CFR 242.100(b).
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    (2) Immediately after launch, or immediately at the beginning of 
the period in which a market maker's trading activity can qualify for 
an NPSI Rebate in an NPSI Security, as applicable, the following 
disclosure shall be continuously maintained and updated until 
termination of the NPSI Rebate, and shall, as necessary, be 
supplemented with the disclosure in (3) below: ``The [Specific ETP 
name] is listed on NASDAQ. As such, it is enrolled in NASDAQ's New 
Product Support Incentives Rebate (``NPSI Rebate''), which is a payment 
made to certain market makers depending on how actively they quote and 
trade [Specific ETP]. The [Specific ETP] has participated in the NPSI 
Rebate since [date], and will no longer be eligible to participate in 
the program on [date], which is three years from the launch date 
(unless the program is terminated or modified before then or if 
[Specific ETP] becomes too liquid to participate in the NPSI before 
then). Certain market makers quoting and trading [Specific ETP] on 
NASDAQ will be eligible to receive NPSI Rebates until that date, 
unless, again, the program is terminated or modified before then or if 
[Specific ETP] becomes too liquid to participate in the NPSI before 
then. The payment of the NPSI Rebates is intended to help provide 
liquidity support for newly launched exchange-traded products by 
generating more quotes and trading than might otherwise exist absent 
these payments. Investors should be aware that when these payments 
cease, there may be an adverse impact on the price and liquidity of 
[Specific ETP], which could adversely impact a purchaser's subsequent 
sale of the security.''; and
    (3) No less than 30 days before the expected termination date, or 
as soon as practicable after the NPSI Issuer becomes aware or should 
become aware that the NPSI Security will no longer be eligible to 
participate in the NPSI and before the end of such eligibility, the 
following disclosure shall be added to the disclosure required in (2) 
above: ``UPDATE: [Specific ETP] is expected to no longer qualify for 
the NPSI rebates on [or around] [date]. This may impact the price or 
liquidity of [Specific ETP], which could adversely impact a

[[Page 76977]]

purchaser's subsequent sale of the security.''
    This exemptive relief shall terminate upon the event of any 
material change to the NPSI, including a change to the types of 
securities permitted to participate in the program or to the terms or 
amount of the payments made pursuant to the NPSI.\14\ Further, this 
exemptive relief is subject to modification or revocation at any time 
the Commission determines that such action is necessary or appropriate 
in furtherance of the purposes of the Exchange Act. This exemptive 
relief is limited solely to the issuer's indirect participation in the 
payment of the NPSI Rebates as set forth in NASDAQ Rule 7014(f)(5)(B) 
for an NPSI Security, and does not extend to any other activities of 
the issuer, any other security of the issuer or sponsor, or any other 
issuers.\15\ In addition, persons relying on this exemption are 
directed to the anti-fraud and anti-manipulation provisions of the 
Exchange Act, particularly Sections 9(a) and 10(b), and Rule 10b-5 
thereunder. Responsibility for compliance with these and any other 
applicable provisions of the federal securities laws must rest with the 
persons relying on this exemption. This order does not represent 
Commission views with respect to any other question that the proposed 
activities may raise, including, but not limited to the adequacy of the 
disclosure required by federal securities laws and rules, and the 
applicability of other federal or state laws and rules to, the proposed 
activities.
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    \14\ Accordingly, we expect NASDAQ to contact staff in the 
Office of Trading Practices in the Division of Trading and Markets 
before making any material change to the NPSI.
    \15\ Other activities, such as ETF redemptions, are not covered 
by this exemptive relief.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(6).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-26646 Filed 11-3-16; 8:45 am]
 BILLING CODE 8011-01-P


