[Federal Register Volume 81, Number 27 (Wednesday, February 10, 2016)]
[Notices]
[Pages 7173-7179]
[FR Doc No: 2016-02602]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77049; File No. SR-CBOE-2016-005]

Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change Relating to
Professionals

February 4, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''), and Rule 19b-4 thereunder, notice is hereby given that
on January 27, 2016, Chicago Board Options Exchange, Incorporated (the
``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items I, II, and III 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.

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange proposes to amend Interpretation and Policy .01 to
Rule 1.1(ggg) relating to Professionals. The text of the proposed rule
change is provided below.
    (Additions are italicized; deletions are [bracketed])
* * * * *
    Chicago Board Options Exchange, Incorporated Rules
* * * * *
    CHAPTER I Definitions
    Rule 1.1. Definitions
    When used in these Rules, unless the context otherwise requires:
    (a) Any term defined in the Bylaws and not otherwise defined in
this Chapter shall have the meaning assigned to such term in the
Bylaws.
    (b)--(fff) No change.
    Professional
    (ggg) The term ``Professional'' means any person or entity that (i)
is not a broker or dealer in securities, and (ii) places more than 390
orders in listed options per day on average during a calendar month for
its own beneficial account(s). A Professional will be treated in the
same manner as a broker or dealer in securities for purposes of Rules
6.2A, 6.2B, 6.8C, 6.9, 6.13A, 6.13B, 6.25, 6.45, 6.45A (except for
Interpretation and Policy .02), 6.45B (except for Interpretation and
Policy .02), 6.53C(c)(ii), 6.53C(d)(v), subparagraphs (b) and (c) under
Interpretation and Policy .06 to Rule 6.53C, 6.74 (except Professional
orders may be considered public customer orders subject to facilitation
under paragraphs (b) and (d)), 6.74A, 6.74B, 8.13, 8.15B, 8.87, 24.19,
43.1, 44.4, 44.14. The Professional designation is not available in
Hybrid 3.0 classes. All Professional orders shall be marked with the
appropriate origin code as determined by the Exchange.
    . . . Interpretations and Policies:
    .01 [For purposes of this Rule 1.1(ggg), an order which is placed
for the beneficial account(s) of a person or entity that is not a
broker or dealer in securities that is broken into multiple parts by a
broker or dealer or by an algorithm housed at a broker or dealer or by
an algorithm licensed from a broker or dealer, but which is housed with
the customer in order to achieve a specific execution strategy
including, for example, a basket trade, program trade, portfolio trade,
basis trade, or benchmark hedge, constitutes a single order and shall
be counted as one order.] Except as noted below, each order of any
order type counts as one order for Professional order counting
purposes.
    (a) Complex Orders:
    (1) A complex order comprised of four (4) legs or fewer counts as a
single order;
    (2) A complex order comprised of five (5) legs or more counts as
multiple orders with each option leg counting as its own separate
order;
    (b) ``Parent''/``Child'' Orders:
    (1) Same Side and Same Series: A ``parent'' order that is placed
for the beneficial account(s) of a person or entity that is not a
broker or dealer in securities that is broken into multiple ``child''
orders on the same side (buy/sell) and series as the ``parent'' order
by a broker or dealer, or by an algorithm housed at a broker or dealer
or by an algorithm licensed from a broker or dealer, but which is
housed with the customer, counts as one order even if the ``child''
orders are routed across multiple exchanges.
    (2) Both Sides and/or Multiple Series: A ``parent'' order
(including a strategy order) that is broken into multiple ``child''
orders on both sides (buy/sell) of a series and/or multiple series
counts as multiple orders, with each ``child'' order counting as a new
and separate order.
    (c) Cancel/Replace:
    (1) Except as provided in paragraph (c)(2) below, any order that
cancels and replaces an existing order counts as a separate order (or
multiple new orders in the case of a complex order comprised of five
(5) legs or more).
    (2) Same Side and Same Series: An order that cancels and replaces
any ``child'' order resulting from a ``parent'' order that is placed
for the beneficial account(s) of a person or entity that is not a
broker, or dealer in securities that is broken into multiple ``child''
orders on the same side (buy/sell) and series as the ``parent'' order
by a broker or dealer, by an algorithm housed at a broker or dealer, or
by an algorithm licensed from a broker or dealer, but which is housed
with the customer, does not count as a new order.
    (3) Both Sides and/or Multiple Series: An order that cancels and
replaces any ``child'' order resulting from a ``parent'' order
(including a strategy order) that generates ``child'' orders on both
sides (buy/sell) of a series and/or in multiple series counts as a new
order.
    (4) Pegged Orders: Notwithstanding the provisions of paragraph
(c)(2) above, an order that cancels and replaces any ``child'' order
resulting from a ``parent'' order being ``pegged'' to the BBO or NBBO
or that cancels and replaces any ``child'' order pursuant to an
algorithm that uses BBO or NBBO in the calculation of ``child'' orders
and attempts to move with or follow the BBO or NBBO of a series counts
as a new order each time the order cancels and replaces in order to
attempt to move with or follow the BBO or NBBO.
* * * * *
    The text of the proposed rule change is also available on the
Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, 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
    The Exchange proposes to amend Interpretation and Policy .01 to
Rule 1.1(ggg) (Professional) relating to Professionals. Specifically,
the

Exchange proposes to delete current Interpretation and Policy .01 to
Rule 1.1(ggg) and adopt new Interpretation and Policy .01 to Rule
1.1(ggg), setting forth amended standards for calculating average daily
order submissions for Professional order counting purposes. The
Exchange believes that the proposed rule change would provide
additional clarity in the Rules and serve to promote the purposes for
which the Exchange originally adopted Rule 1.1(ggg) relating to
Professionals.
Background
    In general, ``public customers'' are granted certain marketplace
advantages over other market participants, including Market-Makers,
brokers and dealers of securities, and industry ``Professionals'' on
most U.S. options exchanges. The U.S. options exchanges, including
CBOE, have adopted materially similar definitions of the term
``Professional,'' \1\ which commonly refers to persons or entities that
are not a brokers or dealers in securities and who or which place more
than 390 orders in listed options per day on average during a calendar
month for their own beneficial account(s).\2\ Various exchanges adopted
similar Professional rules for many of the same reasons, including, but
not limited to the desire to create more competitive marketplaces and
attract retail order flow.\3\ In addition, as several of the exchanges
noted in their original Professional rule filings, their beliefs that
disparate Professional rules and a lack of uniformity in the
application of such rules across the options markets would not promote
the best regulation and may, in fact, encourage regulatory
arbitrage.\4\
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    \1\ Some U.S. options exchanges refer to ``Professionals'' as
``Professional Customers'' or non-``Priority Customers.'' Compare
BATS Exchange, Inc. (``BZX'') Rule 16.1(a)(45) (Professional); BOX
Options Exchange LLC (``BOX'') Rule 100(a)(50) (Professional); CBOE
Rule 1.1(ggg) (Professional); C2 Rule 1.1; BX Chapter I, Sec. 1(49)
(Professional); NASDAQ OMX PHLX LLC (``PHLX'') Rule 1000(b)(14)
(Professional); Nasdaq Options Market (``NOM'') Chapter I, Sec.
1(a)(48) (Professional); with ISE Rule 100(a)(37A) (Priority
Customer); Gemini Rule 100(a)(37A) (Priority Customer); Miami
International Securities Exchange LLC (``MIAX'') Rule 100 (Priority
Customer); NYSE MKT LLC (``NYSE MKT'') Rule 900.2NY(18A)
(Professional Customer); NYSE Arca, Inc. (``Arca'') Rule 6.1A(4A)
(Professional Customer).
    \2\ See, e.g., BZX Rule 16.1(a)(45); BOX Rule 100(a)(50); CBOE
Rule 1.1(ggg); C2 Rule 1.1; BX Chapter I, Sec. 1(49); PHLX Rule
1000(b)(14); NOM Chapter I, Sec. 1(a)(48); see also ISE Rule
100(a)(37A) (Priority Customer); Gemini Rule 100(a)(37A) (Priority
Customer); MIAX Rule 100 (Priority Customer); NYSE MKT Rule
900.2NY(18A) (Professional Customer); Arca Rule 6.1A(4A)
(Professional Customer).
    \3\ See, e.g., Securities Exchange Act Release No. 60931
(November 4, 2009), 74 FR 58355, 58356 (November 12, 2009) (Notice
of Filing of Proposed Rule Change, as Modified by Amendment No. 1,
Related to Professional Orders) (SR-CBOE 2009-078); Securities
Exchange Act Release No. 59287 (January 23, 2009), 74 FR 5694, 5694
(January 30, 2009) (Notice of Filing of Amendment No. 2 and Order
Granting Accelerated Approval of the Proposed Rule Change, as
Modified by Amendment Nos. 1 and 2 Thereto, Relating to Professional
Account Holders) (SR-ISE-2006-026); Securities Exchange Act Release
No. 61802 (March 30, 2010), 75 FR 17193, 17194 (April 5, 2010)
(Notice of Filing of Amendment No. 2 and Order Granting Accelerated
Approval of the Proposed Rule Change, as Modified by Amendment No. 2
Thereto, Relating to Professional Orders) (SR-PHLX-2010-005);
Securities Exchange Act Release No. 61629 (March 2, 2010), 75 FR
10851, 10851 (March 9, 2010) (Notice of Filing of Proposed Rule
Change Relating to the Designation of a ``Professional Customer'')
(SR-NYSEMKT-2010-018).
    \4\ See, e.g., Securities and Exchange Act Release No. 62724
(August 16, 2010), 75 FR 51509 (August 20, 2010) (Notice of Filing
of a Proposed Rule Change by the NASDAQ Stock Market LLC To Adopt a
Definition of Professional and Require That All Professional Orders
Be Appropriately Marked) (SR-NASDAQ-2010-099); Securities and
Exchange Act Release No. 65500 (October 6, 2011), 76 FR 63686
(October 13, 2011) (Notice of Filing and Immediate Effectiveness of
Proposed Rule Change To Adopt a Definition of Professional and
Require That All Professional Orders Be Appropriately Marked) (SR-
BATS-2011-041); Securities Exchange Act Release No. 65036 (August 4,
2011), 76 FR 49517, 49518 (August 10, 2011) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change To Adopt a
Definition of ``Professional'' and Require That Professional Orders
Be Appropriately Marked by BOX Options Participants) (SR-BX-2011-
049); Securities Exchange Act Release No. 60931 (November 4, 2009),
74 FR 58355, 58357 (November 12, 2009) (Notice of Filing of Proposed
Rule Change, as Modified by Amendment No. 1, Related to Professional
Orders) (SR-CBOE 2009-078); see also Securities Exchange Act Release
73628 (November 18, 2014), 79 FR 69958, 69960 (November 24, 2014)
(Notice of Filing and Immediate Effectiveness of a Proposed Rule
Change Relating to Professional Orders) (SR-CBOE-2014-085).
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    Similar to other U.S. options exchanges, the Exchange grants
``public customers'' certain marketplace advantages over other market
participants pursuant to the Exchange's Fees Schedule \5\ and the
Rules.\6\ In general, public customers receive allocation and execution
priority above equally priced competing interests of Market-Makers,
broker-dealers, and other market participants. In addition, customer
orders are generally exempt from transaction fees and certain Exchange
surcharges. Similar to other U.S. options exchanges, the Exchange
affords these marketplace advantages to public customers based on
various business- and regulatory-related objectives, including, for
example, to attract retail order flow to the Exchange and to provide
competitive pricing.
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    \5\ See, e.g., Fees Schedule (Options Transaction Fees).
    \6\ See, e.g., Rules 6.45A (Priority and Allocation of Equity
Option Trades on the CBOE Hybrid System), 6.45B (Priority and
Allocation of Trades in Index Options and Options on ETFs on the
CBOE Hybrid System).
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    Prior to 2009, the Exchange designated all orders as either
customer orders or non-customer orders based solely on whether or not
the order was placed for the account of a registered securities broker
or dealer. As non-broker-dealer investors gained more access to
electronic trading platforms, analytics technology, and market data
services previously available only to securities brokers and dealers,
the distinction between public customers and non-customers became less
effective in promoting the intended purposes of the Exchange's customer
priority rules because certain customers were more similarly situated
to broker-dealers. As the Exchange noted at the time, the Exchange no
longer believed that the definitions of customer and non-customer
properly distinguished between the kind of nonprofessional retail
investors that the order priority rules and fee exemptions were
intended to benefit and non-broker-dealer professional traders with
access to advanced market data information and sophisticated trading
platforms that were not intended to benefit from those rules and
exemptions.\7\ Furthermore, the Exchange believed that distinguishing
solely between registered broker-dealers and non-broker-dealers with
respect to order priority and fee exemptions was inconsistent with
principles of fair competition and inappropriate in the marketplace
given professional traders' access to the same trading tools and market
data services as broker-dealers while taking advantage of the same
order priority and fee exemptions as retail investors. Accordingly, in
2009, the Exchange adopted a definition of ``Professional'' under Rule
1.1(ggg) to further distinguish different types of orders placed on the
Exchange.\8\
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    \7\ See Securities Exchange Act Release No. 60931 (November 4,
2009), 74 FR 58355, 58356 (November 12, 2009) (Notice of Filing of
Proposed Rule Change, as Modified by Amendment No. 1, Related to
Professional Orders) (SR-CBOE 2009-078).
    \8\ Notably, the Exchange's Professional order rule was
materially based upon a similar proposal by the International
Securities Exchange, LLC (``ISE'') as set forth in SR-ISE-2006-026.
See id. at 58356, note 6.
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    Under Rule 1.1(ggg), a Professional is defined as a person or
entity that is not a securities broker or dealer that places more than
390 listed options orders per day on average during a calendar month
for its own beneficial account(s). As discussed above, in large part,
the Exchange's Professional order rules were adopted to distinguish
non-broker dealer individuals and entities that have access to
information and technology

that enable them to professionally trade listed options in a manner
similar to brokers or dealers in securities from retail investors for
order priority and/or transaction fees purposes. In general,
Professionals are treated as brokers or dealers in securities under the
Exchange's rules, including, but not limited to with respect to order
priority and fees.\9\ Rule 1.1(ggg) is substantially similar to the
Professional order rules of other exchanges and was materially based
upon the preexistent Professional order rules of other exchanges.\10\
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    \9\ See Rule 1.1(ggg). Notably, however, Professional orders are
treated as public customer orders pursuant to certain rules, such as
if the order is held by a broker and the broker crosses it with a
facilitation order on the floor.
    \10\ See Securities Exchange Act Release No. 60931 (November 4,
2009), 74 FR 58355, 58356 (November 12, 2009) (Notice of Filing of
Proposed Rule Change, as Modified by Amendment No. 1, Related to
Professional Orders) (SR-CBOE 2009-078); see, e.g., ISE Rule
100(a)(31A).
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    After adopting Rule 1.1(ggg), the Exchange issued a Regulatory
Circular, interpreting Rule 1.1(ggg).\11\ In particular, with respect
to the counting of single original orders that are then broken up into
multiple orders to achieve a specific execution strategy, the Exchange
interpreted Rule 1.1(ggg) to allow such orders to be counted as one
single order for Professional order counting purposes.\12\ Over time,
however, the Exchange began to receive more and more questions as to
what constitutes an ``order'' for Professional order counting purposes,
including, but not limited to questions about how to count certain
types of strategy orders and how to count ``child'' orders generated as
part of specific ``parent'' execution strategies.
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    \11\ See Regulatory Circular RG09-148 (Professional Orders).
    \12\ See id. at Question 14.
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    In November 2014, in response to these questions, the Exchange
clarified its Professional order rule by adopting Interpretation and
Policy .01 to Rule 1.1(ggg). Specifically, the Exchange codified its
interpretation that, for Professional order counting purposes,
``parent'' orders that are placed on a single ticket and entered for
the beneficial account(s) of a person or entity that is not a broker or
dealer in securities and that are broken into multiple parts by a
broker or dealer, or by an algorithm housed at a broker or dealer, or
by an algorithm licensed from a broker or dealer that is housed with
the customer in order to achieve a specific execution strategy,
including, but not limited to basket trades, program trades, portfolio
trades, basis trades, and benchmark hedges, should count as one single
order for Professional order counting purposes. This interpretation was
a clarification in the Rules based on the Exchange's past
interpretations of Rule 1.1(ggg) and similar interpretations set forth
in a previously issued ISE/ISE Gemini, LLC (``Gemini'') Joint
Regulatory Information Circular.\13\
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    \13\ See ISE Regulatory Information Circular 2014-007/Gemini
Regulatory Information Circular 2014-011 (Priority Customer Orders
and Professional Orders (FAQ)).
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    The Exchange's adoption of Interpretation and Policy .01 to Rule
1.1(ggg), however, has not clarified the Exchange's Professional rule
completely. The advent of new multi-leg spread products and the
proliferation of the use of complex orders and algorithmic execution
strategies by both institutional and retail market participants
continue to raise questions as to what constitutes an ``order'' for
Professional order counting purposes. For example, do multi-leg spread
orders (which on the Exchange may be up to 12 legs) or strategy orders
such as volatility orders constitute a single order or multiple orders
for Professional order counting purposes? The Exchange's Professional
rule does not fully address these issues and there is no common
interpretation across the U.S. options markets. In fact, CBOE is the
only U.S. options exchange to have adopted any interpretation of how
certain types of orders should be counted under its Professional rule.
The Exchange believes that additional clarity is needed regarding the
application of Rule 1.1(ggg). Accordingly, the Exchange is proposing to
amend Interpretation and Policy .01 to Rule 1.1(ggg) to address how
various new execution and order strategies should be treated under the
Exchange's Professional rule.
    Moreover, the Exchange believes that a new Interpretation and
Policy would better serve to accomplish the Exchange's stated goals for
its Professional rule. Under current Interpretation and Policy .01 to
Rule 1.1(ggg) many market participants using sophisticated execution
strategies and trading algorithms who would typically be considered
professional traders are not identified under the Exchange's
Professional rule. The Exchange believes that these types of market
participants have access to technology and market information akin to
broker-dealers. The Exchange also believes that a new Interpretation
and Policy to Rule 1.1(ggg) is warranted to ensure that public
customers are afforded the marketplace advantages that they are
intended to be afforded over other types of market participants on the
Exchange.
    The Exchange notes that despite the adoption of materially similar
Professional rules across the markets, exchanges' interpretations of
their respective Professional rules vary. Although Professionals are
similarly defined by exchanges as non-broker-dealer persons or entities
that place more than 390 orders in listed options for their own
beneficial account(s) per day on average during a calendar month, there
is no consistent definition across the markets as to what constitutes
an ``order'' for Professional order counting purposes. While several
options exchanges, including CBOE, have attempted to clarify their
interpretations of their Professional rules through regulatory and
information notices and circulars,\14\ many of the options exchanges
have not issued any guidance regarding the application of their
Professional rules. Furthermore, where exchanges have issued such
interpretive guidance, those interpretations have not necessarily been
consistent.\15\ As a result, the Exchange believes that the rather than
helping to promote the best regulation and discourage regulatory
arbitrage, the Professional rules have become a basis of intermarket
competition. As noted above, CBOE is the only U.S. options exchange
that has adopted interpretive guidance regarding its Professional rule
in its rules.
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    \14\ See Regulatory Circular RG09-148 (Professional Orders); ISE
Regulatory Information Circular 2014-007/Gemini Regulatory
Information Circular 2014-011 (Priority Customer Orders and
Professional Orders (FAQ)); MIAX Regulatory Circular 2014-69
(Priority Customer and Professional Interest Order Summary); NYSE
Joint Regulatory Bulletin, NYSE Acra RBO-15-03, NYSE Amex RBO-15-06)
(Professional Customer Orders); BOX Regulatory Circular RC-2015-21
(Professional Orders).
    \15\ Compare NYSE Joint Regulatory Bulletin, NYSE Acra RBO-15-
03, NYSE Amex RBO-15-06) (Professional Customer Orders) with
Interpretation and Policy .01 to Rule 1.1(ggg); Regulatory Circular
RG09-148 (Professional Orders); ISE Regulatory Information Circular
2014-007/Gemini Regulatory Information Circular 2014-011 (Priority
Customer Orders and Professional Orders (FAQ)); and ISE Regulatory
Information Circular 2009-179 (Priority Customer Orders and
Professional Orders (FAQ)).
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    The Exchange believes that a new set of standards and a more
detailed counting regime than the Exchange's current Professional order
rules provide would allow the Exchange to better compete for order flow
and help ensure deeper levels of liquidity on the Exchange. The
Exchange also believes that the proposed rule change would help to
remove impediments to and help perfect the mechanism of a free and open
market and a national market system by increasing competition in the
marketplace. Accordingly, the Exchange proposes to amend the Rules by
deleting

current Interpretation and Policy .01 to Rule 1.1(ggg) and, in its
place, adopt a new Interpretation and Policy with respect to
Professional order counting.
Proposal
    The Exchange proposes to delete current Interpretation and Policy
.01 to Rule 1.1(ggg) and replace it with a new Interpretation and
Policy setting forth a more detailed counting regime for calculating
average daily orders for Professional order counting purposes.
Specifically, the Exchange's proposed Interpretation and Policy would
make clear how to count complex orders, ``parent/child'' orders that
are broken into multiple orders, and ``cancel/replace'' orders for
Professional order counting purposes.
    Under the Exchange's proposed Interpretation and Policy .01 to Rule
1.1(ggg), all orders would count as one single order for Professional
counting purposes, unless otherwise specified under the Rules. Proposed
Interpretation and Policy .01 to Rule 1.1(ggg) would provide that
except as noted below, each order of any order type counts as one order
for Professional order counting purposes. Paragraph (a) of proposed
Interpretation and Policy .01 to Rule 1.1(ggg) would discuss complex
orders. Under paragraph (a)(1) of proposed Interpretation and Policy
.01 to Rule 1.1(ggg), a complex order comprised of four (4) legs or
fewer would count as a single order. Conversely, paragraph (a)(2) of
proposed Interpretation and Policy .01 to Rule 1.1(ggg) would provide
that a complex order comprised of five (5) legs or more counts as
multiple orders with each option leg counting as its own separate
order. The Exchange believes the distinction between complex orders
with up to four legs from those with five or more legs is appropriate
in light of the purposes for which Rule 1.1(ggg) was adopted. In
particular, the Exchange notes that multi-leg complex order strategies
with five or more legs are more complex in nature and thus, more likely
to be used by professional traders than traditional two, three, and
four leg complex order strategies such as the strangle, straddle,
butterfly, collar, and condor strategies, which are oftentimes used by
retail investors. Thus, the types of complex orders traditionally
placed by retail investors would continue to count as only one order
while the more complex strategy orders that are typically used by
professional traders would count as multiple orders for Professional
order counting purposes.
    Paragraph (b) of proposed Interpretation and Policy .01 to Rule
1.1(ggg) would provide details relating to the counting of ``parent/
child'' orders. Under paragraph (b)(1) of proposed Interpretation and
Policy .01 to Rule 1.1(ggg), a ``parent'' order that is placed for the
beneficial account(s) of a person or entity that is not a broker or
dealer in securities that is broken into multiple ``child'' orders on
the same side (buy/sell) and series as the ``parent'' order by a broker
or dealer, or by an algorithm housed at a broker or dealer or by an
algorithm licensed from a broker or dealer, but which is housed with
the customer, counts as one order even if the ``child'' orders are
routed across multiple exchanges. Essentially, this paragraph would
describe how orders placed for public customers, which are ``worked''
by a broker in order to receive best execution should be counted for
Professional order counting purposes. Paragraph (b)(1) of proposed
Interpretation and Policy .01 to Rule 1.1(ggg) would permit larger
``parent'' orders (which may be simple orders or complex orders
consisting of up to four legs), to be broken into multiple smaller
orders on the same side (buy/sell) and in the same series (or complex
orders consisting of up to four legs) in order to attempt to achieve
best execution for the overall order.
    For example, if a customer were to enter an order to buy 1,000 XYZ
$5 January calls at a limit price of $1, which the customer's broker
then broke into four separate orders to buy 250 XYZ $5 January calls at
a limit price of $1 in order to achieve a better execution, the four
``child'' orders would still only count as one order for Professional
order counting purposes (whether or not the four separate orders were
sent to the same or different exchanges for execution).\16\ Similarly,
in the case of a complex order, if a customer were to enter an order to
buy 1,000 XYZ $5 January(sell)/March(buy) calendar spreads (with a 1:1
ratio on the legs), at a net debit limit price of $0.20, which the
customer's broker then broke into four separate orders to buy 250 XYZ
$5 January/March calendar spreads (each with a 1:1 ratio on the legs),
each at a net debit limit price of $0.20, the four ``child'' orders
would still only count as one order for Professional order counting
purposes (whether or not the four separate orders were sent to the same
or different exchanges for execution).
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    \16\ Notably, however, if the customer herself were to enter the
same four identical orders to buy 250 XYZ $5 January calls at a
limit price of $1 prior to sending the orders, those orders would
count as four separate orders for Professional order counting
purposes because the orders would not have been broken into multiple
``child'' orders on the same side (buy/sell) and series as the
``parent'' order by a broker or dealer, or by an algorithm housed at
a broker or dealer or by an algorithm licensed from a broker or
dealer, but which is housed with the customer.
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    Conversely, under paragraph (b)(2) of proposed Interpretation and
Policy .01 to Rule 1.1(ggg), a ``parent'' order (including a strategy
order) \17\ that is broken into multiple ``child'' orders on both sides
(buy/sell) of a series \18\ and/or multiple series counts as multiple
orders, with each ``child'' order counting as a new and separate order.
Accordingly, under this provision, strategy orders, which are most
often used by sophisticated traders best characterized as
``Professionals,'' would count as multiple orders for each child order
entered as part of the overall strategy. For example, if a customer
were to enter a volatility order \19\ or ``vega'' order \20\ with her
broker by

which multiple ``child'' orders were then sent to the Exchange across
multiple series in a particular option class, each order entered would
count as a separate order for Professional order counting purposes.
Likewise, if the customer instructed her broker to buy a variety of
calls across various option classes as part of a basket trade, each
order entered by the broker in order to obtain the positions making up
the basket would count as a separate order for Professional counting
purposes.\21\
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    \17\ For purposes of this proposed Interpretation and Policy,
the term ``strategy order'' is intended to mean an execution
strategy, trading instruction, or algorithm whereby multiple
``child'' orders on both sides of a series and/or multiple series
are generated prior to being sent to any or multiple U.S. options
exchange(s).
    \18\ The Exchange recognizes that with respect to customers and,
in particular, the counting of customer orders for Professional
purposes, paragraphs (b)(2) and (c)(3) of proposed Interpretation
and Policy .01 to Rule 1.1(ggg) contain language that is somewhat
redundant and superfluous. Because non-professional customers may
not simultaneously or nearly simultaneously enter multiple limit
orders to buy and sell the same security (i.e. act as Market-Makers)
(see Rule 6.8C), a ``parent'' customer order that is broken into
multiple ``child'' orders on both sides (buy/sell) must necessarily
be placed across multiple series. Accordingly, when considered in
conjunction with the prohibitions in Rule 6.8C, the operation of
paragraphs (b)(2) and (c)(3) of proposed Interpretation and Policy
.01 to Rule 1.1(ggg) would be the same even if the proposed rule
were only applied to ``child'' orders placed in multiple series. The
Exchange, however, has determined to include references to ``both
sides (buy/sell) of a series'' in the text of proposed
Interpretation and Policy .01 to Rule 1.1(ggg) to reinforce the
concepts underlying the Exchange's proposed Professional order
counting structure.
    \19\ A ``volatility'' or ``volatility-type'' order may be
characterized as an order instruction or combination to buy/sell
contracts at a specific implied volatility rather than at a specific
price or premium. Because implied volatility is a key determinant of
the premium on an option, some traders may wish to take positions in
specific contract months in an effort to take advantage of perceived
changes in implied volatility arising before, during, or after
earnings or in a certain company when specific or broad market
volatility is predicted to change. In certain cases, depending on
where a customer's account is housed or the trading capabilities of
the participant involved, an options trader may trade and position
for movements in the price of the option based on implied volatility
using a ``volatility'' or ``volatility-type'' order or trading
instruction by setting a limit for the volatility level they are
willing to pay or receive. In such cases, premiums may be calculated
in percentage terms rather than premiums.
    \20\ An option's vega is a measure of the impact of changes in
the underlying volatility on the option price. Specifically, the
vega of an option expresses the change in the price of the option
for every 1% change in underlying volatility.
    \21\ Notably, with respect to the types of ``parent'' orders
(including strategy orders) described in paragraph (b)(2) to
proposed Interpretation and Policy .01 to Rule 1.1(ggg), such orders
would be received only as multiple ``child'' orders the U.S. options
exchange receiving such orders. The ``parent'' order would be broken
apart before being sent by the participant to the exchange(s) as
multiple ``child'' orders. See supra at note 19.
---------------------------------------------------------------------------

    The Exchange believes that the distinctions between ``parent'' and
``child'' orders in paragraph (b) to proposed Rule 1.1(ggg) are
appropriate. The Exchange notes that paragraph (b) to proposed
Interpretation and Policy .01 to Rule 1.1(ggg) is not aimed at
capturing orders that are being ``worked'' or broken into multiple
orders to avoid showing large orders to the market in an effort to
elude front-running and to achieve best execution as is typically done
by brokers on behalf of retail clients. Rather, paragraph (b) to
proposed Interpretation and Policy .01 to Rule 1.1(ggg) is aimed at
identifying ``child'' orders of ``parent'' orders generated by
algorithms that are typically used by sophisticated traders to
continuously update their orders in concert with market updates in
order to keep their overall trading strategies in balance. The Exchange
believes that these types of ``parent/child'' orders typically used by
sophisticated traders should count as multiple orders.
    Paragraph (c) of proposed Interpretation and Policy .01 to Rule
1.1(ggg), would discuss the counting of orders that are cancelled and
replaced. Similar to the distinctions drawn in paragraph (b) of
proposed Interpretation and Policy .01 to Rule 1.1(ggg), paragraph (c)
of proposed Interpretation and Policy .01 to Rule 1.1(ggg) would
essentially separate orders that are cancelled and replaced as part of
an overall strategy from those that are cancelled and replaced by a
broker that is ``working'' the order to achieve best execution or
attempting to time the market. Specifically, paragraph (c)(1) of
proposed Interpretation and Policy .01 to Rule 1.1(ggg) would provide
that except as otherwise provided in the rule (and specifically as
provided under paragraph (c)(2) to proposed Interpretation and Policy
.01 to Rule 1.1(ggg)), any order that cancels and replaces an existing
order counts as a separate order (or multiple new orders in the case of
a complex order comprised of five (5) legs or more). For example, if a
trader were to enter a non-marketable limit order to buy an option
contract at a certain net debit price, cancel the order in response to
market movements, and then reenter the same order once it became
marketable, those orders would count as two separate orders for
Professional order counting purposes even though the terms of both
orders were the same.
    Paragraph (c)(2) of proposed Interpretation and Policy .01 to Rule
1.1(ggg) would specify the exception to paragraph (c)(1) of proposed
Interpretation and Policy .01 to Rule 1.1(ggg) and would provide that
an order that cancels and replaces any ``child'' order resulting from a
``parent'' order that is placed for the beneficial account(s) of a
person or entity that is not a broker, or dealer in securities that is
broken into multiple ``child'' orders on the same side (buy/sell) and
series as the ``parent'' order by a broker or dealer, by an algorithm
housed at a broker or dealer, or by an algorithm licensed from a broker
or dealer, but which is housed with the customer, would not count as a
new order. For example, if a customer were to enter an order with her
broker to buy 10,000 XYZ $5 January calls at a limit price of $1, which
the customer's broker then entered, but could not fill and then
cancelled to avoid having to rest the order in the book as part of a
strategy to obtain a better execution for the customer and then
resubmitted the remainder of the order, which would be considered a
``child'' of the ``parent'' order, once it became marketable, such
orders would only count as one order for Professional order counting
purposes. Again, similar to paragraph (b) of proposed Interpretation
and Policy .01 to Rule 1.1(ggg), the Exchange notes that paragraph (c)
to proposed Interpretation and Policy .01 to Rule 1.1(ggg) is not aimed
at capturing orders that are being ``worked'' or being cancelled and
replaced to avoid showing large orders to the market in an effort to
elude front-running and to achieve best execution as is typically done
by brokers on behalf of retail clients. Rather, paragraph (c) to
proposed Interpretation and Policy .01 to Rule 1.1(ggg) is aimed at
identifying ``child'' orders of ``parent'' orders generated by
algorithms that are typically used by sophisticated traders to
continuously update their orders in concert with market updates in
order to keep their overall trading strategies in balance. The Exchange
believes that paragraph (c)(2) to proposed Interpretation and Policy
.01 to Rule 1.1(ggg) is consistent with these goals.
    Accordingly, consistent with paragraph (c)(1) of proposed
Interpretation and Policy .01 to Rule 1.1(ggg), under paragraph (c)(3)
of proposed Interpretation and Policy .01 to Rule 1.1(ggg), an order
that cancels and replaces any ``child'' order resulting from a
``parent'' order (including a strategy order) that generates ``child''
orders on both sides (buy/sell) of a series and/or in multiple series
would count as a new order. For example, if an investor were to seek to
make a trade (or series of trades) to take a long vega position at a
certain percentage limit on a basket of options, the investor may need
to cancel and replace several of the ``child'' orders entered to
achieve the overall execution strategy several times to account for
updates in the prices of the underlyings. In such a case, each
``child'' order placed to keep the overall execution strategy in place
would count as a new and separate order even if the particular
``child'' order were being used to replace a slightly different
``child'' order that was previously being used to keep the same overall
execution strategy in place. The Exchange believes that the
distinctions between cancel/replace orders in paragraph (c) to proposed
Rule 1.1(ggg) are appropriate as such orders are typically generated by
algorithms used by sophisticated traders to keep strategy orders
continuously in line with updates in the markets. As such, the Exchange
believes that in most cases, cancel/replace orders should count as
multiple orders.
    Finally, paragraph (c)(4) of proposed Interpretation and Policy .01
to Rule 1.1(ggg) would codify the Exchange's ``pegged'' order
interpretation in the text of the Rules. Paragraph (c)(4) of proposed
Interpretation and Policy .01 to Rule 1.1(ggg) would provide that
notwithstanding the provisions of paragraph (c)(2) above, an order that
cancels and replaces any ``child'' order resulting from a ``parent''
order being ``pegged'' to the Exchange's best bid or offer (``BBO'') or
national best bid or offer (``NBBO'') or that cancels and replaces any
``child'' order pursuant to an algorithm that uses BBO or NBBO in the
calculation of ``child'' orders and attempts to move with or follow the
BBO or NBBO of a series would count as a new order each time the order
cancels and replaces in order to attempt to move with or follow the BBO
or NBBO. This interpretation is similar to the Exchange's current
interpretation of

its Professional order rules, but adds clarifying language to the
Exchange's current interpretation and the Rules.\22\ The Exchange
believes that paragraph (c)(4) is appropriate to make clear that
``pegged'' strategy orders that are typically used by sophisticated
traders should be counted as multiple orders even though such orders
may cancel/replace orders in on the same side (buy/sell) of the market
in a single series in order to achieve an overall order strategy.
---------------------------------------------------------------------------

    \22\ See CBOE Regulatory Circular RG09-148 (Professional Orders)
at Question 12.
---------------------------------------------------------------------------

    Under current Rule 1.1(ggg), in order to properly represent orders
entered on the Exchange according to the Professional order rules,
Trading Permit Holders (``TPHs'') are required to indicate whether
public customer orders are ``Professional'' orders.\23\ This
requirement will remain the same. To comply with this requirement, TPHs
are required to review their customers' activity on at least a
quarterly basis to determine whether orders that are not for the
account of a broker or dealer should be represented as customer orders
or Professional orders.\24\ Orders for any customer that had an average
of more than 390 orders per day during any month of a calendar quarter
must be represented as Professional orders for the next calendar
quarter. TPHs are required to conduct a quarterly review and make any
appropriate changes to the way in which they are representing orders
within five days after the end of each calendar quarter. While TPHs
only will be required to review their accounts on a quarterly basis, if
during a quarter the Exchange identifies a customer for which orders
are being represented as public customer orders but that has averaged
more than 390 orders per day during a month, the Exchange will notify
the TPH and the TPH will be required to change the manner in which it
is representing the customer's orders within five days. Because Rule
1.1(ggg) only requires that TPHs conduct a look-back to determine
whether their customers are averaging more than 390 orders per day at
the end of each calendar quarter, the Exchange proposes an effective
date of April 1, 2016 for proposed Interpretation and Policy .01 to
Rule 1.1(ggg) to ensure that all orders during the next quarterly
review will be counted in the same manner and that proposed
Interpretation and Policy .01 to Rule 1.1(ggg) will not be applied
retroactively.
---------------------------------------------------------------------------

    \23\ See Securities Exchange Act Release No. 60931 (November 4,
2009), 74 FR 58355 (November 12, 2009) (Notice of Filing of Proposed
Rule Change, as Modified by Amendment No. 1, Related to Professional
Orders) (SR-CBOE 2009-078).
    \24\ See id.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\25\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \26\ requirements that the rules
of an exchange be designed to prevent fraudulent and manipulative acts
and practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
Additionally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \27\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78f(b).
    \26\ 15 U.S.C. 78f(b)(5).
    \27\ Id.
---------------------------------------------------------------------------

    In particular, the Exchange believes that proposed Interpretation
and Policy .01 to Rule 1.1(ggg) provides a more conservative order
counting regime for Professional order counting purposes that would
identify more traders as Professionals to which the Exchange's
definition of Professional was designed to apply and create a better
competitive balance for all participants on the Exchange, consistent
with the Act. As the options markets have evolved to become more
electronic and more competitive, the Exchange believes that the
distinction between registered broker-dealers and professional traders
who are currently treated as public customers has become increasingly
blurred. More and more, the category of public customer today includes
sophisticated algorithmic traders including former market makers and
hedge funds that trade with a frequency resembling that of broker-
dealers. The Exchange believes that it is reasonable under the Act to
treat those customers who meet the high level of trading activity
established in the proposal differently than customers who do not meet
that threshold and are more typical retail investors to ensure that
professional traders do not take advantage of priority and fee benefits
intended for public customers.
    The Exchange notes that it is not unfair to differentiate between
different types of investors in order to achieve certain marketplace
balances. The Rules currently differentiate between public customers,
broker-dealers, Market-Makers, Designated Primary Market-Makers
(``DPMs'') and the like. These differentiations have been recognized to
be consistent with the Act. The Exchange does not believe that the
current rules of CBOE and other exchanges that accord priority to all
public customers over broker-dealers are unfairly discriminatory. Nor
does the Exchange believe that it is unfairly discriminatory to accord
priority to only those customers who on average do not place more than
one order per minute (390 per day) under the counting regime that the
Exchange proposes. The Exchange believes that such differentiations
drive competition in the marketplace and are within the business
judgment of the Exchange. Accordingly, the Exchange also believes that
its proposal is consistent with the requirement of Section 6(b)(8) of
the Act that the rules of an exchange not impose an unnecessary or
inappropriate burden upon competition in that it treats persons who
should be deemed Professionals, but who may not be under current
Interpretation and Policy .01 to Rule 1.1(ggg) in a manner so that they
do not receive special priority benefits.
    Furthermore, the Exchange believes that the proposed rule change
will protect investors and the public interest by helping to assure
that retail customers continue to receive the appropriate marketplace
advantages in the CBOE marketplace as intended, while furthering
competition among marketplace professionals by treating them in the
same manner as other similarly situated market participants. The
Exchange believes that it is consistent with Section 6(b)(5) of the Act
not to afford market participants with similar access to information
and technology as that of brokers and dealers of securities with
marketplace advantages over such marketplace competitors. The Exchange
also believes that the proposed Interpretation and Policy would help to
remove burdens on competition and promote a more competitive
marketplace by affording certain marketplace advantages only to those
for whom they are intended. Finally, the Exchange believes that the
proposed rule change sets forth a more detailed and clear regulatory
regime with respect to calculating average daily order entry for
Professional order

counting purposes. The Exchange believes that this additional clarity
and detail will eliminate confusion among market participants, which is
in the interests of all investors and the general public.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. As discussed above, the
Exchange does not believe that the current rules of CBOE and other
exchanges that accord priority to all public customers over broker-
dealers are unfairly discriminatory. Nor does the Exchange believe that
it is unfairly discriminatory to accord priority to only those
customers who on average do not place more than one order per minute
(390 per day) under the counting regime that the Exchange proposes. The
Exchange believes that its proposal does not impose an undue burden on
competition. The Exchange notes that one of the purposes of the
Professional rules is to help ensure fairness in the marketplace and
promote competition among all market participants. The Exchange
believes that proposed Interpretation and Policy .01 to Rule 1.1(ggg)
would help establish more competition among market participants and
promote the purposes for which the Exchange's Professional rule was
originally adopted. The Exchange does not believe that the Act requires
it to provide the same incentives and discounts to all market
participants equally, so as long as the exchange does not unfairly
discriminate among participants with regard to access to exchange
systems. The Exchange believes that here, that is clearly the case.
    Rather than burden competition, the Exchange believes that the
proposed rule change promotes competition by ensuring that retail
investors continue to receive the appropriate marketplace advantages in
the CBOE marketplace as intended, while furthering competition among
marketplace professionals by treating them in the same manner under the
Rules as other similarly situated market participants by ensuring that
market participants with similar access to information and technology
(i.e. Professionals and broker-dealers), receive similar treatment
under the Rules while retail investors receive the benefits of order
priority and fee waivers that are intended to apply to public
customers.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others

    The Exchange neither solicited nor received written comments on the
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange 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_ADDRESS>Please include
File No. SR-CBOE-2016-005 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 No. SR-CBOE-2016-005. 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 Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing will also be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File No. SR-CBOE-2016-005 and should be
submitted on or before March 2, 2016.
---------------------------------------------------------------------------

    \28\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-02602 Filed 2-9-16; 8:45 am]
 BILLING CODE 8011-01-P


[Federal Register Volume 87, Number 56 (Wednesday, March 23, 2022)]
[Notices]
[Pages 16518-16521]
[FR Doc No: 2022-06091]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94450; File No. SR-NASDAQ-2021-099]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order
Approving Proposed Rule Change To Amend Nasdaq Rule 5815(d)(4)
Regarding the Use of a Hearings Panel Monitor Following a Compliance
Determination by a Nasdaq Listings Qualification Hearings Panel

March 17, 2022.

I. Introduction

    On December 10, 2021, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend Nasdaq Rule 5815(d)(4) regarding the use
of a Hearings Panel Monitor following a compliance determination by a
Nasdaq Listings Qualification Hearings Panel. The proposed rule change
was published for comment in the Federal Register on December 21,
2021.\3\ On February 3, 2022, the Commission extended the time period
within which to approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings to determine whether to
approve or disapprove the proposed rule change.\4\ The Commission
received no comments on the proposed rule change. This order approves
the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 93789 (December 15,
2021), 86 FR 72293 (``Notice'').
    \4\ See Securities Exchange Act Release No. 94145, 87 FR 7521
(February 9, 2022) (extending the time period to March 21, 2022).
---------------------------------------------------------------------------

II. Description of the Proposal

    The Nasdaq Rule 5300, 5400, and 5500 series set forth the initial
listing requirements for a Company \5\ seeking to list, as well as
continued listing requirements that apply to a Company once listed on,
the Nasdaq Global Select Market, Nasdaq Global Market and Nasdaq
Capital Market, respectively. The Nasdaq Rule 5800 series contains the
rules and procedures applicable to a Company that does not meet the
listing standards outlined in the Nasdaq Rule 5000 series and thus is
``deficient'' with respect to a listing standard.\6\ In this
circumstance, staff from the Listings Qualifications Department \7\
(``Staff'') will issue a notification informing the Company of the
deficiency. According to Nasdaq, where allowed by Nasdaq's rules,
Staff's notification may provide for a cure or compliance period or
allow the company to submit a plan of compliance for Staff to
review.\8\ Companies that do not regain compliance within any time
frame permitted by Staff under a plan of compliance,\9\ that do not
regain compliance within the specified cure or compliance period,\10\
or that has a deficiency type that unless appealed subjects the Company
to immediate suspension and delisting \11\ will be issued a Staff
Delisting Determination \12\ and may request that a Hearings Panel \13\
(``Hearings Panel'') review such determination. If it deems
appropriate, the Hearings Panel may grant an exception (``exception'')
to the continued listing standard with respect to the deficiency.\14\
However, where a

Company has previously been deficient with a listing standard but has
regained compliance pursuant to an exception granted by the Hearings
Panel, under certain circumstances, Nasdaq states that its rules do not
allow a Company the opportunity to submit a plan to regain compliance
or provide for a cure or compliance period in the event that the
Company incurs another deficiency within one year of the prior
deficiency. In these circumstances, Nasdaq Rules 5815(d)(4)(A) or (B)
would apply.\15\
---------------------------------------------------------------------------

    \5\ The term ``Company'' means the issuer of a security listed
or applying to list on Nasdaq. See Nasdaq Rule 5005(a)(6).
    \6\ For purposes of this filing, Nasdaq's rules identify
deficiencies for which an already listed Company may submit a plan
of compliance (Nasdaq Rule 5815(c)(2)); and deficiencies for which
the Nasdaq Rules provide a specified cure or compliance period
(Nasdaq Rule 5815(c)(3)). While the Rule 5800 rule series also
addresses denials of listing for not meeting listing standards, the
rule proposal considered herein concerns Companies that are already
listed and fail to meet the continued listing standards.
    \7\ The term ``Staff'' refers to the employees of the Listing
Qualifications Department. See Nasdaq Rule 5805(g). The ``Listing
Qualifications Department'' is the department of Nasdaq responsible
for Company compliance with quantitative and qualitative listing
standards and determining eligibility for initial and continued
listing of a Company's securities. See Nasdaq Rule 5805(f).
    \8\ See Notice, supra note 3, at 72293.
    \9\ See Rule 5810(c)(2)(E).
    \10\ See Rule 5810(c)(3).
    \11\ See Rule 5810(c)(1).
    \12\ A ``Staff Delisting Determination'' or ``Delisting
Determination'' is a written determination by the Listing
Qualifications Department to delist a listed Company's securities
for failure to meet a continued listing standard. See Nasdaq Rule
5805(h).
    \13\ The ``Hearings Panel'' is an independent panel made up of
at least two persons who are not employees or otherwise affiliated
with Nasdaq or its affiliates, and who have been authorized by the
Nasdaq Board of Directors. See Nasdaq Rule 5805(d).
    \14\ Pursuant to Nasdaq Rule 5815(c)(1)(A), when the Hearings
Panel review is of a deficiency related to continued listing
standards, the Hearings Panel may, where it deems appropriate grant
an exception to the continued listing standards for a period not to
exceed 180 days from the date of the Staff Delisting Determination
with respect to the deficiency for which the exception is granted.
See Nasdaq Rule 5815(c)(1)(A).
    \15\ See Notice, supra note 3, at 72293.
---------------------------------------------------------------------------

    According to the Exchange, both Nasdaq Rules 5815(d)(4)(A) and (B)
set forth the process by which Staff will issue a Staff Delisting
Determination for a Company that fails to maintain compliance with one
or more listing standards within one year of having regained compliance
pursuant to an exception granted by a Hearings Panel.\16\ Currently,
Nasdaq Rule 5815(d)(4)(A), entitled ``Hearings Panel Monitor,''
provides, in part, that a Hearings Panel has discretion to monitor a
Company (i.e., subject the Company to a ``Hearings Panel Monitor'') for
a period of up to one year after the date the Company regains
compliance with a listing standard if it concludes that there is a
likelihood that such Company will fail to maintain compliance with one
or more listing standards during that period (including requirements
with which the Company was not previously deficient). During this one-
year period in which the Company is under a Hearings Panel Monitor,
Staff will monitor the Company to confirm compliance with all listing
standards. If Staff identifies a deficiency with any listing standard
for a Company being monitored under Nasdaq Rule 5815(d)(4)(A), Nasdaq
states that Staff may not provide the Company with a cure or compliance
period, nor the opportunity to submit a plan to regain compliance with
the deficiency; instead, Staff will issue a Staff Delisting
Determination for the Company.
---------------------------------------------------------------------------

    \16\ See Notice, supra note 3, at 72293.
---------------------------------------------------------------------------

    Nasdaq Rule 5815(d)(4)(B) currently states ``[i]f a Hearings Panel
has not opted to monitor a Company that has regained compliance with
the listing standards requiring the Company to maintain certain levels
of stockholders' equity, to timely file periodic reports, or with the
bid price requirement where the Company was ineligible for a compliance
period under Rule 5810(c)(3)(A)(iii) or (iv) and within one-year of the
date the Company regained compliance with such listing standard, the
Listing Qualifications Department finds the Company again out of
compliance with the requirement that was the subject of the exception,
then, notwithstanding Rule 5810(c)(2), the Listing Qualifications
Department will not allow the Company to provide it with a plan of
compliance or grant additional time for the Company to regain
compliance. Rather, the Listing Qualifications Department will promptly
issue a Staff Delisting Determination, and the Company may request
review by a Hearings Panel. The Hearings Panel will consider the
Company's compliance history when rendering its Decision.'' \17\
According to the Exchange, while entitled ``No Hearings Panel
Monitor'', paragraph (B) of Nasdaq Rule 5815(d)(4) amounts to what is
in effect a mandatory Hearings Panel Monitor.\18\
---------------------------------------------------------------------------

    \17\ Nasdaq states that this provision limits the grounds for an
immediate Delisting Determination to a recurrence of the initial
deficiency in the three enumerated areas in the rule that gave rise
to the previous hearing before the Hearings Panel. See Notice, supra
note 3, at 72293-4.
    \18\ See Id. at 72294. The Exchange added that it is not aware
of the reason for the original language in Nasdaq Rule 5815(d)(4)(B)
stating the rule would not call for a Panel Monitor. Id. at n. 6.
---------------------------------------------------------------------------

    The Exchange has proposed to clarify Nasdaq Rule 5815(d)(4) in
several ways. First, the Exchange proposes to clarify that the use of a
Hearings Panel Monitor is discretionary if a Company qualifies for
monitoring under Nasdaq Rule 5815(d)(4)(A), but the use of a Hearings
Panel Monitor is mandatory if a Company qualifies for monitoring under
Nasdaq Rule 5815(d)(4)(B). Specifically, the Exchange proposes to
modify Nasdaq Rule 5815(d)(4)(A) by adding the word ``Discretionary''
to the heading of Nasdaq Rule 5815(d)(4)(A) to make clear that the
Hearings Panel Monitor under that provision is discretionary, and to
retitle Nasdaq Rule 5815(d)(4)(B) to ``Mandatory Hearings Panel'' to
make clear that a Hearings Panel Monitor under that provision is
mandatory. In addition, the Exchange proposes to further modify Nasdaq
Rule 5815(d)(4)(B) to make explicit the mandatory nature of appointing
a Hearings Panel Monitor by stating in the rule that after having been
granted an exception to the requirement to maintain certain levels of
stockholders' equity, to timely file periodic reports, or with the bid
price requirement where the Company was ineligible for a compliance
period under Nasdaq Rule 5810(c)(3)(A)(iii) or (iv), a ``Hearings Panel
will impose a Hearings Panel Monitor for a period of one year from the
date the company regains compliance'' with those three specific listing
requirements in Rule 5815(d)(4)(B).
    The Exchange proposes to further clarify Nasdaq Rules 5815(d)(4)(A)
and (B) by amending those rules to clearly state that under both
paragraphs (A) and (B) of the rule, if a Company falls out of
compliance with the listing standard deficiency that was the subject of
the exception granted by the Listing Qualifications Department during
the one-year monitoring period, the Company will not be afforded an
applicable cure or compliance period pursuant to Nasdaq Rule
5810(c)(3), nor as currently provided by the rule be permitted to
provide the Listing Qualifications Department with a plan of compliance
under Nasdaq Rule 5810(c)(2). The Exchange represented that while the
original language in both Nasdaq Rule 5815(d)(4)(A) and (B) included
language regarding Staff's inability to afford a Company under a
Hearings Panel Monitor a cure or compliance period, the current rules
do not specifically include a reference to Nasdaq Rule 5810(c)(3)
itself.\19\ The Exchange believes that adding a specific reference to
Nasdaq Rule 5810(c)(3) will remove any potential confusion regarding
this point.\20\
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    \19\ See Notice, supra note 3, at 72294.
    \20\ Id. The rule provisions stating that the Listing
Qualification Department cannot grant additional time for the
Company to regain compliance will remain in Rule 5815(d)(A) and (B).
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    The Exchange also proposes to add a new paragraph (C) to Nasdaq
Rule 5815(d)(4), which will set out the procedures for a Hearings Panel
Monitor that is appointed under either paragraphs (A) or (B) of Nasdaq
Rule 5815(d)(4), in the event the Company receives a Staff Delisting
Determination during the one-year monitoring period. Pursuant to
proposed Nasdaq Rule 5815(d)(4)(C), if a Company receives a Staff
Delisting Determination during the one-year period under paragraph
(d)(4)(A) or (B) of Nasdaq Rule 5815(d)(4), the Company may request
review by a Hearings Panel. Unless subparagraph (C) indicates
otherwise, the hearing will be conducted in accordance with the
procedures outlined in Nasdaq Rule 5815. Upon a request for a hearing
by the Company, the Hearings Department will promptly schedule a new
hearing with the initial Hearings Panel or a newly convened Hearings
Panel if the initial Hearings Panel is unavailable. The hearing may be
oral or written, at the Company's election and the Hearings Panel will
consider the Company's compliance

history when rendering its decision. If the Company does not request
review of the Staff Delisting Determination, then proposed Nasdaq Rule
5815(d)(4)(C) provides that the Company's securities will be suspended.
The Exchange stated that as revised, Nasdaq Rule 5815(d)(4)(C) also
will correct the erroneous inclusion of language in the current rule
which could allow the Hearings Department to promptly schedule a
hearing without first receiving a request for appeal from the
Company.\21\
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    \21\ Id. The Exchange also represents that historically the
Hearings Department has not immediately scheduled a new hearing for
a Company under a Panel Monitor that has received a Delisting
Determination from Staff. According to the Exchange, a new hearing
would not be scheduled until the Company in question had requested
an appeal from the Delisting Determination. The Exchange states that
the proposed rule change will simply codify the existing practice of
the Hearings Department. Id. at n. 7. In addition, the Exchange
described other existing inconsistencies between paragraphs (A) and
(B) of Rule 5815(d)(4), but states that each of the provisions will
apply to both 5815(c)(4)(A) and (B) through the implementation of
proposed Rule 5815(d)(4)(C). See Id. at n. 8.
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III. Discussion and Commission Findings

    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.\22\ In
particular, the Commission finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\23\ 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 foster cooperation
and coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system and, in general, to
protect investors and the public interest, and are not designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers. In addition, the Commission finds that the proposed rule
change is consistent with Section 6(b)(7) of the Act, which requires,
among other things, that the rules of a national securities exchange
provide a fair procedure for the prohibition or limitation by the
exchange of any person with respect to access to services offered by
the exchange.
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    \22\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
    \23\ 15 U.S.C. 78f(b)(5).
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    The Exchange proposes to clarify when a Hearings Panel Monitor is
discretionary or mandatory under paragraphs (A) and (B) of Nasdaq Rule
5815(d)(4) by adding the specific terms ``Discretionary'' and
``Mandatory'' to the title of Nasdaq Rule 5815(d)(4)(A) and (B),
respectively. The Commission notes that Nasdaq Rule 5815(d)(4)(B) is
currently titled ``No Hearings Panel Monitor''; despite this current
title, and the current rule language, the Exchange represented that
``the rule itself actually outlines a process of a mandatory Hearings
Panel Monitor.'' \24\ In this regard, the Commission believes that the
proposed rule change will provide necessary clarity to the rule by
correcting the inaccurate title to the rule, given that Nasdaq has
stated that in effect paragraph (B) sets forth a mandatory Hearings
Panel Monitor process. The Exchange has also proposed to make clear
when a Hearings Panel will be mandatory by stating explicitly in Nasdaq
Rule 5815(d)(4)(B)--but not in Nasdaq Rule 5815(d)(4)(A), which is a
discretionary process--that a Hearings Panel will impose a Hearings
Panel Monitor for a period of one year from the date the Company
regains compliance with the listing standards relating to maintaining
certain levels of stockholders' equity, to timely file periodic
reports, or with the bid price requirement where the Company was
ineligible for a compliance period under Nasdaq Rule 5810(c)(3)(A)(iii)
or (iv), following an exception that was granted by a Hearings Panel.
The Commission believes that these changes to Nasdaq Rule 5815(d)(4)(A)
and (B) will help remove impediments to and perfect the mechanism of a
free and open market and a national market system and protect investors
and the public interest by removing any confusion or ambiguity about
when a Hearings Panel Monitor will be discretionary or mandatory.
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    \24\ See Notice, supra note 3, at 72294.
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    The Exchange also proposes to clarify that if a Company falls out
of compliance with the listing standard deficiency that was the subject
of the exception granted by the Listing Qualifications Department
during the one-year monitoring period under either Nasdaq Rule
5815(d)(4)(A) or (B), the Company will not be afforded an applicable
cure or compliance period pursuant to Nasdaq Rule 5810(c)(3). The
current rule language states that the Company will not be permitted to
provide the Listing Qualifications Department with a plan of compliance
notwithstanding Nasdaq Rule 5810(c)(2) and that the Company cannot be
granted any additional time to regain compliance. While the current
rule does prohibit any extension of time, the Exchange stated that
specifically referencing Rule 5810(c)(3) will avoid any potential
confusion.\25\ The Commission believes that the proposed change should
help to avoid any potential confusion by making clear that a Company
cannot receive any extension of time, including by being afforded an
applicable cure or compliance period pursuant to Nasdaq Rule
5810(c)(3), and as the rule currently states, by submitting a plan of
compliance under Nasdaq 5810(c)(2). Additionally, because the current
text of the rules prohibit any additional time to regain compliance,
the Commission believes that adding an explicit reference to Nasdaq
Rule 5810(c)(3) in Nasdaq Rule 5815(d)(4)(A) and (B) is consistent with
the Act because it will clarify and provide transparency on the
specific provisions in Rule 5810 that are not available to a Company
when a deficiency occurs during the one year monitoring period.
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    \25\ Id.
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    Finally, the Exchange proposed to create a new paragraph (C) to
Nasdaq Rule 5815(d)(4) which will outline how a Company may seek an
appeal of a Staff Delisting Determination. Pursuant to the Rule, if a
Company receives a Staff Delisting Determination during a one-year
Hearings Panel Monitor under Nasdaq Rule 5815 (d)(4)(A) or (B), the
Company may request review by a Hearings Panel. The Hearings Department
will schedule a hearing with the original Hearings Panel or a new
Hearings Panel if the original Hearings Panel is unavailable, the
hearing may be written or oral, and the Hearings Panel will consider
the Company's compliance history when rendering its decision. Nasdaq
Rule 5815(d)(4)(C) also provides that unless specifically addressed in
the Rule, the procedures for requesting and preparing for a review by a
Hearings Panel will continue to be governed by Nasdaq Rule 5815. The
Commission believes that it is consistent with the Act to combine the
procedures that a Company must follow to request a hearing after
receiving a Staff Delisting Determination into one paragraph of Nasdaq
Rule 5815(d)(4). Currently, the procedures for requesting a hearing
following a Staff Delisting Determination are set forth in either or
both paragraphs (A) and (B) of Rule 5815(d)(4). While both paragraphs
address such hearings, the differences in the description of and
procedures for

requesting and conducting such hearings between paragraphs (A) and (B)
could lead to confusion. Therefore, the Commission believes that
providing the same procedures for requesting and conducting a hearing
under Rules 5815(d)(4)(A) and (B) and consolidating these procedures
into proposed paragraph (C) provides transparency and clarity to such
hearings, and thus may help ensure that the Exchange's rules do not
permit unfair discrimination between issuers, and provides a fair
procedure for review of a Staff Delisting Determination, consistent
with the Act.
    As the Commission has previously noted, the development and
enforcement of meaningful listing standards \26\ for an exchange is of
substantial importance to financial markets and the investing public.
Among other things, listing standards provide the means for an exchange
to screen issuers that seek to become listed, and to provide listed
status only to those that are bona fide companies that have or will
have sufficient public float, investor base, and trading interest
likely to generate depth and liquidity sufficient to promote fair and
orderly markets.\27\ Meaningful listing standards also are important
given investor expectations regarding the nature of securities that
have achieved an exchange listing, and the role of an exchange in
overseeing its market and assuring compliance with its listing
standards.\28\ Therefore it is important for exchanges to prevent
companies that are deficient in their listing standards or that do not
meet initial listing standards from remaining or becoming listed on an
exchange. Clarifying the rules and procedures for appeal where a listed
Company has recurrent deficiencies so is under a Hearings Panel Monitor
and cannot avail itself of additional time to demonstrate compliance,
should further investor protection under Section 6(b)(5) of the Act by
helping to eliminate potential confusion about the application of Rule
5815(d)(4), while at the same time ensuring such Companies have a fair
procedure for review consistent with Section 6(b)(7) of the Act.
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    \26\ The Commission notes that this is referring to both initial
and continued listing standards.
    \27\ In addition, once a security has been approved for initial
listing, maintenance criteria allow an exchange to monitor the
status and trading characteristics of that issue to ensure that it
continues to meet the exchange's standards for market depth and
liquidity so that fair and orderly markets can be maintained. See,
e.g., Securities Exchange Act Release Nos. 82627 (Feb. 2, 2018), 3
FR 5650, 5653, n.53 (Feb. 8, 2018) (SR-NYSE-2017-30); 81856 (Oct.
11, 2017), 82 FR 48296, 48298 (Oct. 17, 2017) (SR-NYSE-2017-31);
81079 (July 5, 2017), 82 FR 32022, 32023 (July 11, 2017) (SR-NYSE-
2017-11). The Commission has stated that adequate listing standards,
by promoting fair and orderly markets, are consistent with Section
6(b)(5) of the Act, in that they are, among other things, designed
to prevent fraudulent and manipulative acts and practices, promote
just and equitable principles of trade, and protect investors and
the public interest. See, e.g., Securities Exchange Act Release Nos.
82627 (Feb. 2, 2018), 3 FR 5650, 5653, n.53 (Feb. 8, 2018) (SR-NYSE-
2017-30); 87648 (Dec. 3, 2019), 84 FR 67308, 67314, n.42 (Dec. 9,
2019) (SR-NASDAQ-2019-059); 88716 (Apr. 21, 2020), 85 FR 23393,
23395, n.22 (Apr. 27, 2020) (SR-NASDAQ-2020-001).
    \28\ See, e.g., Securities Exchange Act Release Nos. 65708 (Nov.
8, 2011), 76 FR 70799 (Nov. 15, 2011) (SR-NASDAQ-2011-073) (order
approving a proposal to adopt additional listing requirements for
companies applying to list after consummation of a ``reverse
merger'' with a shell company), and 57785 (May 6, 2008), 73 FR 27597
(May 13, 2008) (SR-NYSE-2018-17) (order approving a proposal to
adopt new initial and continued listing standards to list securities
of special purpose acquisition companies).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\29\ that the proposed rule change (SR-NASDAQ-2021-099) be, and
hereby is, approved.
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    \29\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-06091 Filed 3-22-22; 8:45 am]
BILLING CODE 8011-01-P