[Federal Register Volume 84, Number 79 (Wednesday, April 24, 2019)]
[Notices]
[Pages 17219-17222]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-08209]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85691; File No. SR-BX-2019-002]


Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing 
of Proposed Rule Change To Reassign Certain Investigation and 
Enforcement Functions Under the Exchange's Authority and Supervision

April 18, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 5, 2019, Nasdaq BX, Inc. (``BX'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``SEC'' or ``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 assume operational responsibility for 
certain investigation and enforcement functions currently performed by 
the Financial Industry Regulatory Authority (``FINRA'') under the 
Exchange's authority and supervision. BX Rule 0150 requires Commission 
approval for this transfer of operational responsibility to BX. BX 
anticipates a phased transition, whereby BX would assume increasing 
responsibility throughout 2019 and into 2020 for investigation and 
enforcement activities

[[Page 17220]]

for certain conduct occurring on the BX market.
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaqbx.cchwallstreet.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 Exchange 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 these 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 aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Section 6 of the Act requires that national securities exchanges 
enforce their members' compliance with federal securities laws and 
rules as well as the exchanges' own rules.\3\ As a self-regulatory 
organization (``SRO''), BX must have a comprehensive regulatory program 
that includes investigation and prosecution of suspicious activity. 
Since its acquisition by The NASDAQ OMX Group, Inc., BX has contracted 
with FINRA through various regulatory services agreements (``RSAs'') to 
perform certain of these regulatory functions on its behalf. However, 
as the Commission has made clear with respect to BX's affiliate, The 
Nasdaq Stock Market LLC (``Nasdaq''), ``the Nasdaq Exchange bears the 
responsibility for self-regulatory conduct and primary liability for 
self-regulatory failures, not the SRO retained to perform regulatory 
functions on the Exchange's behalf.'' \4\
---------------------------------------------------------------------------

    \3\ 15 U.S.C. 78(f).
    \4\ Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550, 3556 (January 23, 2006).
---------------------------------------------------------------------------

    Notwithstanding its use of FINRA, the Exchange has also retained 
operational responsibility for a number of regulatory functions, 
including real-time surveillance, qualification of companies listed on 
Nasdaq and most surveillance related to its affiliated options markets. 
Historically, BX retained operational responsibility in areas where 
BX's expertise regarding its own markets, technology and listed 
companies enhanced regulation. In recognition of this, on September 30, 
2013, the Commission approved BX's proposal to reallocate operational 
responsibility from FINRA to BX for certain equities surveillance 
patterns and related review functions, focused on: (1) Manipulation 
patterns that monitor solely BX activity; and (2) monitoring of 
compliance by member firms with elements of the Commission's Regulation 
M and Nasdaq Rule 4619 compliance.\5\
---------------------------------------------------------------------------

    \5\ Securities Exchange Act Release No. 70568 (September 30, 
2013), 78 FR 62884 (October 22, 2013) (SR-BX-2013-047).
---------------------------------------------------------------------------

    Building on BX's experience and expertise, this proposal reflects a 
natural evolution of BX's proven model to assume and retain operational 
responsibility in areas where its in-depth knowledge of its markets and 
members enhances market regulation. For the reasons outlined below, BX 
now seeks Commission approval to reallocate operational responsibility 
from FINRA to the Exchange's Regulation Department \6\ for certain 
investigation and enforcement activity, namely:
---------------------------------------------------------------------------

    \6\ Under BX Rule 9120(t), the Exchange's Regulation Department 
includes the Exchange's Enforcement Department. The Exchange notes 
that the Staff that comprises the Exchange's Regulation Department 
is the same that comprises the Nasdaq Regulation Department.
---------------------------------------------------------------------------

     Investigation and enforcement responsibilities for conduct 
occurring on The BX Options Market,\7\ and
---------------------------------------------------------------------------

    \7\ As appropriate, the Exchange's Regulation Department will 
coordinate with other SROs to the extent it is investigating 
activity occurring on Non-Nasdaq options markets to ensure no 
regulatory duplication occurs.
---------------------------------------------------------------------------

     Investigation and enforcement responsibilities for conduct 
occurring on BX's equity market only, i.e., not also on non-Nasdaq 
equities markets.\8\
---------------------------------------------------------------------------

    \8\ With respect to the operational responsibilities described 
in both bullet points, Nasdaq Regulation Staff currently performs 
these functions for the Nasdaq PHLX LLC (``Phlx''), Nasdaq ISE, LLC 
(``ISE''), Nasdaq GEMX, LLC (``GEMX''), and Nasdaq MRX, LLC 
(``MRX'') because there is no comparable rule to Rule 0150 on those 
markets.
---------------------------------------------------------------------------

    Currently, under RSAs, FINRA is responsible for, among other 
things, the investigation of matters referred from Nasdaq MarketWatch 
and the Phlx Market Surveillance department.\9\ FINRA is also 
responsible for providing services related to BX's formal disciplinary 
process, including the issuance of Wells Notices, Cautionary Action 
Letters, Complaints, and settlement documents.
---------------------------------------------------------------------------

    \9\ The Phlx Market Surveillance department performs 
surveillance work for all of Nasdaq's options markets (i.e., Nasdaq 
Options, BX Options, Phlx Options, ISE, GEMX, and MRX).
---------------------------------------------------------------------------

    BX now proposes to perform the functions described in the bullet 
points above and is seeking Commission approval to do so. BX believes 
that its expertise in its own market structure coupled with its 
expertise in surveillance activities will enable it to conduct 
investigation and enforcement responsibilities for the Exchange 
effectively, efficiently and with immediacy. In addition, this proposal 
represents an incremental reallocation of operational responsibility 
because Nasdaq Regulation Staff currently performs investigative and 
enforcement work on behalf of Phlx, ISE, GEMX, and MRX, providing it 
with relevant experience to perform these functions for the Exchange as 
well.\10\ Most recently, Phlx filed for immediate effectiveness 
amendments to the Phlx's rules that set forth an investigatory and 
disciplinary process identical in all material respects to the 
investigatory and disciplinary processes of Nasdaq and BX.\11\ The 
amendments also had the effect of granting Phlx's Regulation Department 
investigation and enforcement authority.\12\ BX now seeks Commission 
approval to exercise this same authority for conduct on the Exchange 
that its Staff already exercises for Phlx, ISE, GEMX, and MRX.\13\
---------------------------------------------------------------------------

    \10\ As noted above, because BX is an affiliate of Nasdaq, the 
Staff that comprises the Exchange's Regulation Department is the 
same that comprises the Nasdaq Regulation Department.
    \11\ See Securities Exchange Act Release No. 82143 (November 22, 
2017), 82 FR 56672 (November 29, 2017) (SR-Phlx-2017-92) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Adopt 
Investigatory and Disciplinary Processes Substantially Similar to 
Nasdaq BX, Inc. and The Nasdaq Stock Market LLC for Phlx, which, 
among other things, similarly enabled Phlx's Regulation Department 
to perform these functions).
    \12\ See Securities Exchange Act Release No. 82143 (November 22, 
2017), 82 FR 56672 (November 29, 2017) (SR-Phlx-2017-92) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Adopt 
Investigatory and Disciplinary Processes Substantially Similar to 
Nasdaq BX, Inc. and The Nasdaq Stock Market LLC for Phlx, which, 
among other things, similarly enabled Phlx's Regulation Department 
to perform these functions).
    \13\ In a separate filing Nasdaq also proposed to reallocate 
operational responsibility from FINRA to Nasdaq Regulation for 
investigation and enforcement responsibilities for conduct occurring 
on The Nasdaq Options Market and investigation and enforcement 
responsibilities for conduct occurring on the Nasdaq equity market 
only, i.e., not also on non-Nasdaq equities markets. See SR-Nasdaq-
2019-007. The Commission approved that rule filing on April 3, 2019. 
See Securities and Exchange Act Release No. 34-85505 (Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment No. 2, to Reassign Certain Investigation and Enforcement 
Functions Under the Exchange's Authority and Supervision.)
---------------------------------------------------------------------------

    Notwithstanding this proposal, FINRA will continue to perform 
certain functions, including, among other things: (1) The investigation 
and enforcement of conduct occurring on the BX equity market that also 
relates to

[[Page 17221]]

cross market activity on non-Nasdaq exchanges; (2) the handling of 
contested disciplinary proceedings arising out of BX Regulation-led 
investigation and enforcement activities; \14\ and (3) matters covered 
by agreements to allocate regulatory responsibility under Rule 17d-2 of 
the Act. As with all investigation and enforcement work, all tasks 
delegated to FINRA are subject to BX's supervision and ultimate 
responsibility.
---------------------------------------------------------------------------

    \14\ For example, pursuant to Rule 9216, if at the conclusion of 
a BX Regulation-led investigation, BX Regulation has reason to 
believe that a violation occurred but the Respondent disputes the 
violation and therefore does not execute an Acceptance, Waiver, and 
Consent (``AWC'') letter, or if the Respondent executes the AWC 
letter but the Exchange Review Council, Review Subcommittee or 
FINRA's Office of Disciplinary Affairs does not accept the executed 
letter, the Exchange may decide to pursue formal disciplinary 
proceedings. In such a case, the Exchange would refer the matter to 
FINRA to handle the formal disciplinary proceedings on its behalf. 
FINRA's Office of Hearing Officers will continue to be responsible 
for the administration of the hearing process.
---------------------------------------------------------------------------

    BX Regulation has instituted the requisite infrastructure to 
accommodate the internalization of investigative and enforcement work 
on behalf of the Exchange. Specifically, BX created a new investigation 
and enforcement group to perform the functions covered by this 
proposal, which included hiring additional staff. BX is also leveraging 
its existing staff of experienced analysts, lawyers, programmers, and 
market structure experts to assist, where necessary, with performing 
the new functions covered by this proposal. In addition, BX Regulation 
has developed comprehensive plans covering the transition and has met 
regularly for more than one year to ensure a smooth transition of the 
work and prevent any gaps in regulatory coverage. Finally, BX filed for 
immediate effectiveness amendments to its rules that aligned its 
existing investigatory and disciplinary processes with the 
investigatory and disciplinary processes of Phlx. The amendments also 
granted the Exchange's Enforcement Department with the investigative 
and enforcement authority that it now seeks approval to exercise.\15\
---------------------------------------------------------------------------

    \15\ Securities Exchange Act Release No. 84354 (October 3, 
2018), 83 FR 50723 (October 9, 2018) (SR-BX-2018-042).
---------------------------------------------------------------------------

    BX anticipates a phased transition of investigative and enforcement 
responsibility, whereby BX would assume increasing investigation and 
enforcement responsibility throughout 2019 and into 2020 for the 
conduct occurring on the Exchange.\16\ BX also anticipates 
transitioning certain matters currently pending with FINRA to the 
Exchange's Enforcement Department if the Exchange's Regulation 
Department believes doing so is consistent with ensuring prompt 
resolution of regulatory matters.
---------------------------------------------------------------------------

    \16\ The Exchange notes that the investigatory and disciplinary 
processes and related rules applicable to its Members that FINRA 
currently follows on the Exchange's behalf (i.e., the Series 8000 
and 9000 Rules) will remain the same.
---------------------------------------------------------------------------

    BX Rule 0150 requires that BX obtain Commission approval if 
regulatory functions subject to RSAs in effect at the time BX executed 
the agreement in 2008 are no longer performed by FINRA or an affiliate 
thereof, or by another independent self-regulatory organization. For 
the reasons stated above, BX believes that the reassignment of the 
specified investigation and enforcement responsibility will further its 
regulatory program and benefit investors and the markets. Commission 
approval of the proposal would allow BX to better leverage its 
surveillance, investigation, and enforcement teams; to deliver 
increased efficiencies in the regulation of its market; and to act 
promptly and provide more effective regulation.
    In addition, BX notes that its proposal is consistent with, but 
more limited than, investigation and enforcement work performed by 
other national securities exchanges. For example, in 2015, the SEC 
approved the New York Stock Exchange's (``NYSE'') application whereby 
NYSE amended certain of its disciplinary rules to facilitate the 
reintegration of certain market surveillance, investigation and 
enforcement functions performed on behalf of NYSE by FINRA.\17\ Unlike 
NYSE, however, BX will also continue to rely on FINRA to prosecute 
contested matters before a Hearing Panel.\18\
---------------------------------------------------------------------------

    \17\ See Securities Exchange Act Release No. 75721 (August 18, 
2015), 80 FR 51334 (August 24, 2015) and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1, 
3 and 5, Amending Exchange Disciplinary Rules to Facilitate the 
Reintegration of Certain Regulatory Functions from Financial 
Industry Regulatory Authority, Inc., Securities Exchange Act Release 
No. 76436 (November 13, 2015), 80 FR 72460 (November 19, 2015) (SR-
NYSE-2015-35).
    \18\ See BX Rule 9120(q) (``The term ``Hearing Panel'' means an 
Adjudicator that is constituted under Rule 9231 to conduct a 
disciplinary proceeding governed by the Rule 9200 Series, that is 
constituted under the Rule 9520 Series or the Rule 9550 Series to 
conduct a proceeding, or that is constituted under the Rule 9800 
Series to conduct a temporary cease and desist proceeding.''). See 
also supra note 14.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\19\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\20\ in particular in that it is designed 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. 
In addition, the Exchange believes that the proposal furthers the 
objectives of Section 6(b)(7) of the Act,\21\ in particular, in that 
these changes will continue to provide for fair procedures for the 
disciplining of members and persons associated with members, the denial 
of membership to any person seeking membership therein, the barring of 
any person from becoming associated with a member thereof, and the 
prohibition or limitation by the Exchange of any person with respect to 
access to services offered by the Exchange or a member thereof.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(5).
    \21\ 15 U.S.C. 78f(b)(7).
---------------------------------------------------------------------------

    The Exchange believes that this proposal is in keeping with those 
principles because it leverages BX's extensive operational experience 
and expertise in regulating its markets and marries BX's surveillance 
capabilities with its surveillance, investigation and enforcement 
staff, thereby increasing effectiveness and enabling prompt action. BX 
believes that it can achieve these important objectives because it is 
uniquely positioned to understand conduct on its own markets and take 
timely action when appropriate to investigate potential violations and 
enforce the rules to punish and deter misconduct, hold bad actors 
accountable, and protect investors and market integrity. In this 
regard, the Exchange's surveillance, investigative and enforcement 
teams work together to identify and review potentially violative 
conduct. This results in more effective regulation because it 
facilitates timely and more efficient action. Indeed, the underlying 
driving force for the current proposal is BX's belief that it can 
conduct this regulatory work more effectively and efficiently given its 
technology, structure and in-depth knowledge of its markets and 
members. For these reasons, BX believes it can conduct investigative 
and enforcement functions specified above in a thorough and timely 
manner, thereby promoting the fair and orderly operation of the markets 
and serving the interests of market participants and investors. In so 
doing, BX will fulfill the Commission's mandate that BX's affiliate, 
Nasdaq, bear responsibility for self-regulatory conduct.\22\
---------------------------------------------------------------------------

    \22\ See supra note 4.
---------------------------------------------------------------------------

    BX will continue to refer certain potentially violative conduct to 
FINRA

[[Page 17222]]

for further review, including matters covered by agreements to allocate 
regulatory responsibility under Rule 17d-2 of the Act. Moreover, FINRA 
will continue to have responsibility for, among other things, the 
investigation and enforcement of conduct occurring on the BX equity 
market that also occurs on non-Nasdaq exchanges, as well as the 
handling of contested disciplinary proceedings arising out of BX 
Regulation-led investigation and enforcement activities.\23\ All 
referrals to FINRA remain subject to BX's supervision and ultimate 
responsibility.
---------------------------------------------------------------------------

    \23\ See supra note 14.
---------------------------------------------------------------------------

    BX also believes that the proposal is consistent with the Act 
because, as the Commission has made clear, BX's affiliate, Nasdaq, 
bears the ultimate responsibility for self-regulatory conduct and 
primary liability for self-regulatory failures.\24\ In addition, BX 
notes that its proposal is consistent with, but more limited than, 
investigation and enforcement work performed by NYSE. As noted above, 
the SEC approved NYSE's application to amend certain of its 
disciplinary rules to facilitate the reintegration of certain market 
surveillance, investigation and enforcement functions performed on 
behalf of NYSE by FINRA.\25\ BX believes it would therefore be 
consistent with the Act for BX to perform more limited investigation 
and enforcement work than NYSE.
---------------------------------------------------------------------------

    \24\ See supra note 4.
    \25\ See supra note 17.
---------------------------------------------------------------------------

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. The proposed rule change is not 
intended to address competitive issues but rather to enable the 
Exchange to directly investigate and initiate disciplinary actions for 
the specified conduct discussed above following the integration of 
certain regulatory functions from FINRA.

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 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 such 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 [email protected]. Please include 
File Number SR-BX-2019-002 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-BX-2019-002. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-BX-2019-002 and should be submitted on 
or before May 15, 2019.
---------------------------------------------------------------------------

    \26\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-08209 Filed 4-23-19; 8:45 am]
BILLING CODE 8011-01-P


