[Federal Register Volume 81, Number 139 (Wednesday, July 20, 2016)]
[Notices]
[Pages 47184-47187]
[FR Doc No: 2016-17096]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78326; File No. SR-NYSE-2016-37]

Self-Regulatory Organizations; New York Stock Exchange LLC; Order
Approving Proposed Rule Change Removing From Its Rules Certain Internal
Procedures Regarding the Use of Fine Income

July 14, 2016.

I. Introduction

    On May 13, 2016, New York Stock Exchange LLC (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities
Exchange Act of 1934 (``Act''),\2\ and Rule 19b-4 thereunder,\3\ a
proposed rule change to remove internal procedures regarding the use of
fine income, as described below. The proposed rule change was published
for comment in the Federal Register on May 31, 2016.\4\ The Commission
received one comment letter on the proposed rule change \5\ and a
response to the comment letter from the Exchange.\6\ This order
approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ See Securities Exchange Act Release No. 77899 (May 24,
2016), 81 FR 34393 (``Notice'').
    \5\ See letter from Michael Walsh, Attorney, received by the
Commission on June 7, 2016 (``Walsh Letter'').
    \6\ See letter from Martha Redding, Associate General Counsel
and Assistant Secretary, NYSE, to Brent J. Fields, Secretary,
Commission, dated June 16, 2016 (``NYSE Response Letter'').
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II. Description of the Proposal

    NYSE proposes to remove as Exchange rules internal procedures
regarding the use of fine income, which were approved by the Commission
in 2007 (``Fine Income Procedures'' or ``Procedures'') \7\ in
connection with the 2006 merger between New York Stock Exchange, Inc.
and Archipelago Holdings, Inc. (``Archipelago Merger'').\8\ The
Exchange explains that, at that time, it had delegated certain of its
regulatory functions to its then subsidiary, NYSE Regulation, Inc.
(``NYSE Regulation'') \9\ pursuant to a delegation agreement
(``Delegation Agreement'').\10\ As a result, as originally approved,
the Fine Income Procedures referred to actions to be taken by NYSE
Regulation and NYSE Regulation's board of directors (``NYSE Regulation
Board''). However, following termination of the Delegation Agreement,
the Regulatory Oversight Committee (``ROC'') of the Exchange's board of
directors (``Board'') assumed responsibility for providing independent
oversight of the regulatory function of the Exchange.\11\ The Exchange
explains that, in addition to the restrictions in the Fine Income
Procedures, Section 4.05 of the Exchange's Operating Agreement
(``Section 4.05'') contains limitations on the use of regulatory assets
and income, including fine income.\12\ Specifically, Section 4.05
prohibits the Exchange from: (i) Using any regulatory assets or any
regulatory fees, fines or penalties collected by its regulatory staff
for commercial purposes; or (ii) distributing such assets, fees, fines
or penalties to NYSE Group, Inc. (``NYSE Group''), i.e., the member of
New York Stock Exchange LLC, or any other entity.\13\
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    \7\ See Securities Exchange Act Release No. 55216 (January 31,
2007), 72 FR 5779 (February 7, 2007) (``Order Approving the Fine
Income Procedures'').
    \8\ The Exchange states that the Archipelago Merger had the
effect of ``demutualizing'' New York Stock Exchange, Inc. by
separating equity ownership from trading privileges, and converting
it to a for-profit entity. See Notice, supra note 4, at 34394 n.5
(citing Securities Exchange Act Release No. 53382 (February 27,
2006), 71 FR 11251, 11254 (March 6, 2006) (``Merger Approval
Order'')).
    \9\ See Notice, supra note 4, at 34394. The Exchange states
that, as approved, the Fine Income Procedures provide that fines
would play no role in the annual NYSE Regulation budget process and
that the use of fine income by NYSE Regulation would be subject to
specific review and approval by the NYSE Regulation Board. See id.;
see also Securities Exchange Act Release No. 55003 (December 22,
2006), 71 FR 78497, 78498 (December 29, 2006) (``Fine Income
Procedures Proposing Release''). The Exchange notes that, in
approving the Fine Income Procedures, the Commission expressed that
the Fine Income Procedures would ``guard against the possibility
that fines may be assessed to respond to budgetary needs rather than
to serve a disciplinary purpose.'' See Order Approving the Fine
Income Procedures, supra note 7, at 5780.
    \10\ The Delegation Agreement terminated as of February 16,
2016. See Notice, supra note 4, at 34394; see also Securities
Exchange Act Release No. 75991 (September 28, 2015), 80 FR 59837,
59839 (October 2, 2015) (``NYSE Approval Order'').
    \11\ See Notice, supra note 4, at 34394.
    \12\ See id.; see also Ninth Amended and Restated Operating
Agreement of New York Stock Exchange LLC (``Operating Agreement''),
Art. IV, Sec. 4.05; NYSE Approval Order, supra note 10, at 59839.
    \13\ See Operating Agreement, Art. IV, Sec. 4.05; see also NYSE
Approval Order, supra note 10, at 59839.
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    The Exchange proposes to delete the Fine Income Procedures, noting
that the Exchange would continue to remain subject to the restrictions
of Section 4.05, which, coupled with the Operating Agreement provisions
governing the ROC,\14\ the Exchange believes are sufficient to address
concerns about its power to fine member organizations and the proper
use of such funds.\15\ The

Exchange also believes that limitations on the use of such funds are
not the most effective way to assure the proper exercise by Exchange
regulatory staff of the Exchange's power to fine member organizations;
in fact, the Exchange states that ``usage limitations on fine income do
not provide oversight of regulatory performance.'' \16\ Rather, the
Exchange believes that the responsibility to assure proper exercise by
its regulatory staff of the Exchange's power to fine member
organizations more properly lies with the ROC, which is responsible for
overseeing the Exchange's regulatory and self-regulatory organization
responsibilities and assessing its regulatory performance.\17\
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    \14\ The Exchange explains that ``the ROC is specifically
charged with reviewing the regulatory budget of the Exchange and
inquiring into the adequacy of resources available in the budget for
regulatory activities.'' See Notice, supra note 4, at 34395 (citing
Operating Agreement, Art. II, Sec. 2.03(h)(ii)).
    \15\ See Notice, supra note 4, at 34395.
    \16\ Id.
    \17\ Id. (citing the Operating Agreement, Art. II, Sec.
2.03(h)(ii)).
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    Moreover, the Exchange believes that its disciplinary procedures,
and specifically the appellate process contained therein, serve as ``a
powerful check on the improper exercise by Exchange regulatory staff of
the power to fine members and member organizations.''\18\ The Exchange
notes that in the event of an adverse hearing panel determination,
members first have the opportunity to appeal the decision to a Board
committee comprised of independent directors and individuals associated
with member organizations of the Exchange (``Committee for Review'' or
``CFR''), which recommends a disposition to the Board, and then can
appeal the decision to the Commission, whose decision in turn can be
challenged in federal court.\19\
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    \18\ See id. at 34395.
    \19\ Id.
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    In support of its position that the protections in Section 4.05 are
sufficient to ensure the proper use by the Exchange of fine income, the
Exchange states that Section 4.05 is in fact ``wider in scope than the
Fine Income Procedures,'' explaining that ``because Section 4.05
encompasses all regulatory assets and income, not just fines, it
ensures the proper use by the Exchange of a broader range of regulatory
funds, by prohibiting their use for commercial purposes or
distributions.'' \20\ The Exchange adds that Section 4.05 also guards
against the possibility that other regulatory income, such as
examination, access, registration, qualification, arbitration, dispute
resolution and regulatory fees, or regulatory assets could be used or
assessed to respond to the Exchange's budgetary needs.\21\
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    \20\ Id.
    \21\ Id.
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    The Exchange also believes that the circumstances that led to the
creation of the Fine Income Procedures no longer exist.\22\ The
Exchange states that when the Fine Income Procedures were adopted, a
predecessor to Section 4.05 was in effect that directly bound the
Exchange but not the entity--NYSE Regulation--actually performing the
Exchange's regulatory functions at the time.\23\ Following NYSE's
reintegration of its regulatory functions and the corresponding
termination of the Delegation Agreement, the Exchange itself is the
entity that fines member organizations and is directly subject to the
limits of Section 4.05.\24\ Accordingly, the Exchange believes that
removing the Fine Income Procedures and relying on Section 4.05, as
well as the provisions governing the ROC,\25\ would provide adequate
protections against the use of regulatory assets, or assessment of
regulatory income, to respond to budgetary needs.\26\
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    \22\ Id.
    \23\ Id. The Exchange notes that the Commission, when approving
the Archipelago Merger, stated in the approval order that while
``NYSE Regulation had the obligation under the Delegation Agreement
to assure compliance with the rules of the Exchange, . . . the Fine
Income Procedures provided a more direct commitment by NYSE
Regulation to ensure the proper exercise of NYSE Regulation's power
to fine member organizations and the proper use by NYSE Regulation
of fines collected.'' Id. (citing the Merger Approval Order).
    \24\ See Notice, supra note 4, at 34394; see also NYSE Approval
Order, supra note 10.
    \25\ See Operating Agreement, Art. II, Sec. 2.03(h)(ii).
    \26\ See Notice, supra note 4, at 34395.
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    Furthermore, NYSE explains that the proposed change would have the
benefit of bringing the Exchange's restrictions on the use of
regulatory assets and income into greater conformity with those of its
affiliates, NYSE MKT LLC and NYSE Arca, Inc., and would be consistent
with limitations on the use of regulatory assets and income of other
self-regulatory organizations (``SROs'').\27\ The Exchange surveyed the
rules of other SROs and found that no other SRO limits the use of fine
income to extra-budgetary use or subjects the use of fine income to
specific review and approval by a regulatory oversight committee or any
other body. \28\ Rather, the Exchange found that other SROs'
limitations on the use of regulatory funds are largely similar to
Section 4.05, by generally limiting the use of regulatory funds to the
funding of an SRO's legal, regulatory and (in some cases) surveillance
operations, and prohibiting the SRO from making a distribution to its
member or stockholder, as applicable.\29\ In support of its position,
the Exchange references the limitations on the use of regulatory funds
by NYSE MKT LLC; NYSE Arca, Inc.; BOX Options Exchange LLC;
International Securities Exchange, LLC; ISE Gemini, LLC; ISE Mercury,
LLC; BATS BZX Exchange, Inc.; BATS BYX Exchange, Inc.; BATS EDGX
Exchange, Inc.; EDGA Exchange, Inc.; Miami International Securities
Exchange, LLC; National Stock Exchange, Inc.; NASDAQ Stock Market LLC;
and Boston Stock Exchange, Inc. (n/k/a NASDAQ BX, Inc.).\30\
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    \27\ See id. at 34395-96.
    \28\ See id. at 34396.
    \29\ See id.
    \30\ See id. at 34395-96 nn.18-26 and accompanying text.
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    As noted above, the Commission received one comment letter on the
proposed rule change.\31\ The commenter objects to the proposed rule
change, citing both substantive and procedural bases.\32\ The commenter
enumerates the following specific concerns with the proposal: (1) The
Exchange's proposal is deficient because it does not include a
``redline'' of the rule text to allow interested persons to review the
proposed changes; \33\ (2) the Exchange's argument that the proposed
rule change would bring it closer in line with other SROs' rules is
objectionable because NYSE, as an industry leader, should be held to a
higher standard and ``leading the way for other exchanges;'' \34\ (3)
the Exchange, as an SRO, is both a market participant and a regulator,
and the Fine Income Procedures ``are important because they provide an
objectively justifiable arms-length limitation to separate business
from regulation;'' \35\ (4) the Exchange's argument that its
disciplinary process, including, in particular, the appellate process,
provides safeguards is insufficient and does not provide the same
``checks and balances'' as the Fine Income Procedures do;\36\ (5) the
rule of statutory construction that the ``specific provision prevails
over the general'' makes ``the Fine Income Procedures superior to
Section 4.05;'' \37\ and (6) the Exchange's argument that the
circumstances that led to the Fine Income Procedures no longer exist
fails to explain what circumstances changed and what prevents their
reoccurrence.\38\
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    \31\ See Walsh Letter, supra note 5.
    \32\ See id. at 1.
    \33\ See id.
    \34\ See id. at 1-2.
    \35\ See id. at 2-4.
    \36\ See id. at 4-5.
    \37\ See id. at 5.
    \38\ See id.
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    The Exchange submitted a letter responding to the issues raised by
the

commenter.\39\ With respect to the commenter's assertion that the
proposal was insufficient because the Exchange's proposal omitted a
redline of the rule text, the Exchange explains that the Fine Income
Procedures are internal rules that are not included in its published
rulebook or governing documents, but the content of the rules are set
forth in its proposal.\40\
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    \39\ See NYSE Response Letter, supra note 6.
    \40\ See id. at 3-4. The Commission notes that the Fine Income
Procedures were reproduced in the Notice. See Notice, supra note 4,
at 34394.
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    With respect to the commenter's claim that the Exchange should be
held to a higher standard than other SROs and should not be permitted
to delete the Fine Income Procedures simply because it would bring NYSE
closer in line with the limitations of other SROs, the Exchange
explains that it cited to other SROs' provisions relating to use of
fine income to demonstrate that there are mechanisms other than the
Fine Income Procedures that the Commission has found appropriate for
ensuring that an SRO uses its regulatory funds properly.\41\ The
Exchange contends that ``[j]ust as the Commission found that the
provisions in these other SROs' governing documents were consistent
with the Act, the Exchange believes that the Commission should conclude
that Section 4.05, as an alternative to the Fine Income Procedures, is
consistent with the Act.'' \42\ The Exchange further states that it
would be inappropriate to hold NYSE to a higher standard than other
SROs (as the commenter has urged) because ``[a]s a national securities
exchange, the Exchange is subject to the same obligations and
requirements under the Act as other national securities exchanges.''
\43\ Moreover, the Exchange maintains that to ``hold individual
exchanges to different standards based on their size, economic worth,
leadership or any of the other factors that the comment letter cites
would be contrary to just and equitable principles of trade, would
create impediments to a free and open market and national market
system, and would impede the protection of investors and the public
interest.'' \44\
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    \41\ See id. at 5.
    \42\ Id.
    \43\ Id.
    \44\ Id.
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    Regarding the commenter's statement that the Fine Income Procedures
are a means to ensure the separation of the Exchange's business from
its regulation, the Exchange states that it does not rely on the Fine
Income Procedures to ensure the independence of its self-regulatory
responsibilities and regulatory performance from its business
interests, and instead notes how its corporate structure, including the
required compositions of the Board, ROC, and CFR help to ensure the
independence of its regulatory obligations.\45\ The Exchange also notes
that the Fine Income Procedures are in fact limited in scope and thus
the ROC and Section 4.05 in combination are more effective means in
providing adequate protections against the use of regulatory assets, or
the assessment of regulatory income, to respond to the budgetary needs
of the Exchange.\46\
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    \45\ See id. at 6.
    \46\ See id. at 6-7.
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    With respect to the commenter's statement that the disciplinary
process, and the appellate process in particular, alone does not
provide sufficient safeguards against potential conflicts of interest,
the Exchange disagrees with the commenter's assertion that the Fine
Income Procedures provide a greater check on regulatory misbehavior
than the appellate process.\47\ The Exchange reiterates its view that
the Fine Income Procedures do not provide oversight of regulatory
performance and simply monitor how the resulting fine income is
spent.\48\ In addition, the Exchange describes how its appellate
process provides an independent check on the disciplinary process and
the possibility of improper exercise by Exchange regulatory staff of
the power to fine members and member organizations in light of the
CFR's composition, which requires the inclusion of both independent
directors as well as representatives of Exchange members.\49\
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    \47\ See id. at 7-8.
    \48\ See id.
    \49\ See id. at 8.
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    The Exchange also addresses the commenter's statutory construction
argument that deletion of the ``more specific provision'' (i.e., Fine
Income Procedures) could imply that the conduct prohibited by the Fine
Income Procedures is no longer prohibited. In response, the Exchange
notes that both the Fine Income Procedures and Section 4.05 apply to
the use of fine income. The Exchange notes that, if the Fine Income
Procedures are deleted, Section 4.05 would still apply to the use of
the Exchange's fine income and other regulatory assets.\50\
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    \50\ See id.
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    Finally, the Exchange takes issue with the commenter's assertion
that it did not address ``what circumstances occurred that will not
occur again.'' The Exchange states that the Fine Income Procedures
provided a more direct commitment by NYSE Regulation to ensure the
proper exercise of NYSE Regulation's power to fine member organizations
and the proper use by NYSE Regulation of fines collected.\51\ The
Exchange notes that because the Delegation Agreement is no longer in
effect, it is the Exchange itself that fines member organizations, and
the Exchange is subject to the limitations of Section 4.05.
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    \51\ See id. at 8-9.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule
change is consistent with the Act and the rules and regulations
thereunder applicable to a national securities exchange.\52\ In
particular, the Commission finds that the proposed rule change is
consistent with Section 6(b)(1) of the Act, which requires an exchange
to be so organized and have the capacity to carry out the purposes of
the Act and to comply, and to enforce compliance by its members and
persons associated with its members, with the Act, the rules and
regulations thereunder, and the rules of the exchange.\53\ In addition,
the Commission finds that the proposal is consistent with Section
6(b)(5) of the Act, which requires that the rules of the exchange be
designed, among other things, 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.\54\
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    \52\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
    \53\ 15 U.S.C. 78f(b)(1).
    \54\ 15 U.S.C. 78f(b)(5).
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    As the Exchange notes, it implemented the Fine Income Procedures in
connection with the Archipelago Merger, which had the effect of
demutualizing New York Stock Exchange, Inc. (the predecessor to New
York Stock Exchange LLC) by separating NYSE's equity ownership from
trading privileges and converting it to a for-profit entity.\55\
According to the Exchange, at that time it had delegated certain of its
regulatory functions to its then subsidiary, NYSE Regulation, pursuant
to the Delegation Agreement. In September 2015, the Commission approved
the Exchange's proposal to revise its regulatory structure by amending
various Exchange rules and the Operating Agreement, including to
establish as a committee of the Board a ROC, to be composed of at least
three

members who satisfy the Exchange's independence requirements.\56\ The
Delegation Agreement recently was terminated in connection with the
Exchange's reorganization of its regulatory structure that had resulted
in the creation of the ROC. Because the Fine Income Procedures were
instituted in connection with the delegation of certain of the
Exchange's regulatory functions to NYSE Regulation, the Commission
believes that it is appropriate for the Exchange to remove the
Procedures because NYSE Regulation no longer performs any regulatory
services on behalf of the Exchange. Further, given that the Exchange
has reintegrated its regulatory functions under the oversight of the
ROC, the Commission believes that Section 4.05 should continue to help
ensure that the Exchange does not inappropriately use its regulatory
assets, fees, fines or penalties for commercial purposes or to
distribute such assets, fees, fines or penalties to its direct parent,
NYSE Group, Inc., or to any other entity. Finally, the Commission
believes that creation of the ROC, along with its responsibilities
under Section 2.03(h)(ii) of the Operating Agreement, should help to
ensure the proper oversight of the Exchange's regulatory program,
including the exercise by the Exchange's regulatory staff of its power
to fine member organizations, and the use of regulatory assets, fees,
fines and penalties collected by the Exchange's regulatory staff.
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    \55\ See supra note 8.
    \56\ See NYSE Approval Order, supra note 10.
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    As noted above, the commenter raises several concerns regarding the
Exchange's proposal, including by asserting that the proposal was
insufficient because it did not include rule text indicating the
deletion of the Procedures. The Exchange responds that the Procedures
are available in the Exchange's filing and on the Exchange's Web site.
The Commission believes that, because the Fine Income Procedures were
internal procedures of the Exchange and were not part of the Exchange's
rulebook or governing documents, it was appropriate for the Exchange to
include the Procedures in its Form 19b-4 describing the proposed rule
change, which were published by the Commission as part of the
Notice.\57\
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    \57\ See Notice, supra note 4, at 34394.
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    The commenter remarks that the NYSE should be ``held to a higher
standard'' than other exchanges. In response, the Exchange states that,
as a national securities exchange, treating it differently than any
other national securities exchange based on its size, prominence or any
of the other factors noted in the comment letter, among other things,
would be contrary to just and equitable principles of trade.\58\ The
Commission previously found that Section 4.05 is consistent with the
Act \59\ and continues to believe that it is consistent with the Act,
and that it is substantially similar to requirements relating to the
use of regulatory assets, fees, fines and penalties that were approved
by the Commission with respect to other exchanges, including the
Exchange's affiliates--NYSE MKT LLC and NYSE Arca, Inc.\60\
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    \58\ See NYSE Response Letter, supra note 6, at 5.
    \59\ See NYSE Approval Order, supra note 10, at 59842-43.
    \60\ See Notice, supra note 4, at 34395-96 nn.18-26 and
accompanying text.
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    The commenter also expresses the view that deleting the Fine Income
Procedures would remove rules that serve to separate the Exchange's
business function from its regulatory obligations, and that the
Exchange's disciplinary process did not provide an adequate safeguard
against ``regulator misbehavior.'' The Commission believes that the
Exchange has adopted several measures to ensure the independence of its
regulatory functions including, among other things, creating a ROC,
which is composed entirely of directors of the Exchange who satisfy the
Exchange's independence requirements, and the CFR, which is composed of
Exchange members and directors who satisfy the Exchange's independence
requirements.\61\
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    \61\ See NYSE Approval Order, supra note 10, at 59838-41.
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    The commenter further expresses concern that deleting the Fine
Income Procedures may imply that the conduct banned by the Procedures
no longer is prohibited. The Commission believes, however, that even
with the deletion of the Fine Income Procedures, given the scope of
Section 4.05, the Exchange would continue to be prohibited from using
regulatory assets, fees, fines or penalties for other than regulatory
purposes.
    Finally, the commenter states that Exchange did not adequately
describe why the circumstances that existed at the time the Fine Income
Procedures were adopted no longer exist. The Commission notes that the
Exchange's proposal states that NYSE Regulation no longer performs
regulatory services on behalf of the Exchange.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-NYSE-2016-37) is approved.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\62\
Jill M. Peterson,
Assistant Secretary.
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    \62\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2016-17096 Filed 7-19-16; 8:45 am]
 BILLING CODE 8011-01-P