Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and Rule 19b-4 thereunder, notice is hereby given that on October 10, 2008, The NASDAQ Stock Market LLC (“Nasdaq” or “Exchange”), filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been substantially prepared by Nasdaq. The Exchange has designated the proposed rule change as constituting a “non-controversial” rule change under Rule 19b-4(f)(6) under the Act, which renders the proposal effective upon filing with the Commission. 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 the Substance of the Proposed Rule Change
Nasdaq proposes to amend the Nasdaq Options Market Rules (“NOM Rules”) to eliminate the requirement for separate designations of Senior Registered Options Principal (“SROP”) and Compliance Registered Options Principal (“CROP”), to require a member to integrate the responsibility for supervision of its public customer options business into its overall supervisory and compliance program, and to make certain related changes to the NOM Rules. The rule proposal, which is effective upon filing with the Commission, shall become operative 30 days after filing pursuant to Rule 19b-4(f)(6) of the Act. The text of the proposed rule is available on the Exchange's Web site at http://nasdaqomx.cchwallstreet.com, at the Exchange's principal office, 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, Nasdaq 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. Nasdaq 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
The Exchange proposes to amend the NOM Rules to integrate the responsibility for supervision of a member's public customer options business into its overall supervisory and compliance program. The proposed rule change is substantively similar to recent amendments to the rules of Financial Industry Regulatory Authority (“FINRA”), which were approved by the Commission. As part of these changes, the Exchange proposes to eliminate the requirement that a firm must designate a SROP and CROP to be responsible for the overall supervision and compliance programs, respectively, for a member's public customer options activities. Nasdaq believes that the supervisory and compliance function of a member's public customer options activities would be better integrated into the matrix of a firm's overall supervisory and compliance functions rather than separately vested in a SROP and CROP.
The Exchange does not believe that eliminating the SROP and CROP requirements would lead to a reduction in supervision, as firms have an obligation to designate an appropriately registered principal(s) to supervise their public customer options activities pursuant to Nasdaq Rule 3010, which requires Nasdaq members to comply with NASD Rule 3010  as if such Rule were part of Nasdaq's Rules. In this regard, the Exchange proposes to amend NOM Rules Chapter II, Section 2(g)(1) to delete the reference to the SROP and CROP and to clarify that if a person is engaged in the supervision of options and security futures sales practices, including a person designated pursuant to NASD Rule 3010(a)(2), then such person must be registered as a Registered Options and Security Futures Principal. The Exchange believes that the proposed rule change would provide firms greater flexibility to incorporate supervision into existing, firm-wide supervisory structures.
The proposed rule change also makes two technical changes. First, all references to “Options Principal” would be changed to “Registered Options and Security Futures Principal” to reflect the correct title of such principals, consistent with the other NOM Rules. Second, all references to “put and call” would be deleted before options, and “options” will mean all types of options.
In addition, the proposed rule change would amend NOM Rules Chapter XI in several respects. First, Section 7, paragraph (f), which relates to the opening of accounts, would be amended to delete the reference to the SROP and CROP and require that a specific Registered Options and Security Futures Principal(s) be designated to be responsible for approving customer accounts that do not meet the specific criteria and standards for writing uncovered short option transactions and for maintaining written records of the reasons for every account so approved. The proposed rule change would allow members the flexibility to assign this responsibility, which currently rests with the SROP and/or CROP, to a specific Registered Options and Security Futures Principal.
Second, references to the SROP and CROP would be deleted and a new paragraph (a) would be inserted into Section 8, which relates to supervision of accounts. The new paragraph (a) would make clear that a member that conducts a public customer options business must ensure its written supervisory system policies and procedures pursuant to NASD Rules 3010, 3012, and 3013 adequately address its public customer options business. Although the proposed rule change would eliminate entirely the positions and titles of the SROP and CROP, a member would still be required pursuant to NASD Rule 3010(a)(2) to designate “an appropriately registered principal(s) with authority to carry out the supervisory responsibilities of the member for each type of business in which it engages for which registration as a broker/dealer is required,” which would include designating an Options Principal to supervise a member's public customer options activities.
Third, Nasdaq proposes amending Section 10, which relates to discretionary accounts, to eliminate references to the CROP and SROP, and Start Printed Page 64378require that a specific Registered Options and Security Futures Principal(s) be designated to be responsible for the review of the acceptance of discretionary accounts. Under the proposed rule change, each firm would be required to have a Registered Options and Security Futures Principal other than the Registered Options and Security Futures Principal who accepted the account review the acceptance of each discretionary account to determine that the Registered Options and Security Futures Principal accepting the account had a reasonable basis for believing that the customer was able to understand and bear the risk of the strategies or transactions proposed. The firm must maintain a record of the basis for such determination. In addition, the proposed rule change would eliminate the requirement in paragraph (a)(ii) that discretionary options orders be approved and initialed on the day of entry by the branch office manager or other Options Principal, or confirmed within a reasonable time by an Options Principal if the branch office manager is not an Options Principal. Under the proposed rule change, discretionary orders would be required to receive frequent appropriate supervisory review by a Registered Options and Security Futures Principal who is not exercising discretionary authority (instead of a CROP) and be reviewed in accordance with a member's written supervisory procedures. The proposed rule change would ensure that supervisory responsibilities are assigned to specific Registered Options and Security Futures Principal-qualified individuals, thereby enhancing the quality of supervision.
Proposed NOM Rules Chapter XI, Section 10(e) would allow a participant to exercise time and price discretion on orders for the purchase or sale of a definite number of options contracts in a specified security. The Exchange proposes to limit the duration of this discretionary authority to the day it is granted, absent written authorization to the contrary. Additionally, the proposed rule would require any exercise of time and price discretion to be reflected on the customer order ticket. The proposed one-day limitation would not apply to time and price discretion exercised for orders affected with or for an institutional account (as defined in the NOM Rules) pursuant to valid Good-Till Cancelled instructions issued on a “not held” basis.
The Exchange believes that investors will receive greater protection by clarifying the time such discretionary orders remain pending.
Nasdaq also proposes to add NOM Rules Chapter XI, Section 10(f), which requires any participant that does not utilize computerized surveillance tools for the frequent and appropriate review of discretionary account activity to establish and implement procedures to require Registered Options and Security Futures-qualified individuals who have been designated to review discretionary accounts to approve and initial each discretionary order on the day entered. The Exchange believes that any member that does not use computerized tools for the frequent and adequate surveillance of options discretionary account activity should continue to be required to perform the daily manual review of discretionary orders.
2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with the provisions of Section 6 of the Act, in general, and with Section 6(b)(5) of the Act, in particular, in that the proposal is 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. The Exchange believes that the supervisory and compliance function of a member's public customer options activities would be better integrated into the matrix of a firm's overall supervisory and compliance functions rather than separately vested in a SROP and CROP.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others
No written comments were solicited nor were any received with respect to the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
The Exchange has designated the proposed rule change as one that does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate. Therefore, the foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act  and Rule 19b-4(f)(6) thereunder.
At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.
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:
- Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
- Send an e-mail to email@example.com. Please include File Number SR-NASDAQ-2008-081 on the subject line.
- Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2008-081. This file number should be included on the subject line if e-mail 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).Start Printed Page 64379
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 inspection and copying in the Commission's Public Reference Room, 100 F Street, NW., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of Nasdaq.
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 Number SR-NASDAQ-2008-081 and should be submitted on or before November 19, 2008.Start Signature
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
4. Securities Exchange Act Release No. 57775 (May 5, 2008), 73 FR 26453 (May 9, 2008) (SR-FINRA-2007-035) (approval order)Back to Citation
5. NASD Rule 3010 sets forth member firms' responsibilities with respect to supervision.Back to Citation
6. NASD Rule 3010(a)(2) requires that members designate “an appropriately registered principal(s) with authority to carry out the supervisory responsibilities of the member for each type of business in which it engages for which registration as a broker/dealer is required.”Back to Citation
10.17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) requires a self-regulatory organization to provide the Commission with written notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as the Commission may designate. The Exchange had satisfied the five business-day pre-filing requirement. Back to Citation
[FR Doc. E8-25810 Filed 10-28-08; 8:45 am]
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