June 28, 2013.
On March 13, 2013, the Securities and Exchange Commission (“Commission”) approved a proposed rule change of the NASDAQ Stock Market LLC (“Exchange” or “NASDAQ”) to add new Start Printed Page 40524NASDAQ Rule 5950 (“New Rule 5950”) to establish the Market Quality Program (“MQP” or “Program”).
In connection with the Program, on a voluntary pilot basis, an MQP Company 
may list an eligible MQP Security 
on NASDAQ and in addition to the standard (non-MQP) NASDAQ listing fee, a sponsor may pay a fee (“MQP Fee”) 
that will be used for the purpose of incentivizing one or more market makers participating in the MQP (“MQP Market Makers”) to enhance the market quality of an MQP Security.
Section 11(d)(1) of the Exchange Act 
generally prohibits a broker-dealer from extending or maintaining credit, or arranging for the extension or maintenance of credit, on shares of new issue securities, if the broker-dealer participated in the distribution of the new issue securities within the preceding 30 days. The Commission's view is that shares of open-end investment companies and unit investment trusts registered under the 1940 Act, such as ETF shares, are distributed in a continuous manner, and broker-dealers that sell such securities are therefore participating in the “distribution” of a new issue for purposes of Section 11(d)(1).
The Division of Trading and Markets, acting under delegated authority, granted an exemption from Section 11(d)(1) and Rule 11d1-2 thereunder for broker-dealers that have entered into an agreement with an ETF's distributor to place orders with the distributor to purchase or redeem the ETF's shares (“Broker-Dealer APs”).
The SIA Exemption allows a Broker-Dealer AP to extend or maintain credit, or arrange for the extension or maintenance of credit, to or for customers on the shares of qualifying ETFs subject to the condition that neither the Broker-Dealer AP, nor any natural person associated with the Broker-Dealer AP, directly or indirectly (including through any affiliate of the Broker-Dealer AP), receives from the fund complex any payment, compensation, or other economic incentive to promote or sell the shares of the ETF to persons outside the fund complex, other than non-cash compensation permitted under NASD Rule 2830(l)(5)(A), (B), or (C). This condition is intended to eliminate special incentives that Broker-Dealer APs and their associated persons might otherwise have to “push” ETF shares.
The MQP will permit certain ETFs to voluntarily incur increased listing fees payable to the Exchange. In turn, the Exchange will use the fees to make incentive payments to market makers that improve the liquidity of participating issuers' securities, and thus enhance the market quality for the participating issuers. Incentives payments will be accrued for, among other things, executing purchases and sales on the Exchange. Receipt of the incentive payments by certain broker-dealers will implicate the condition of the SIA Exemption from the new issue lending restriction in Section 11(d)(1) of the Exchange Act discussed above. The Commission's view is that the incentive payments market makers will receive under the proposal are indirect payments from the fund complex to the market maker and that those payments are compensation to promote or sell the shares of the ETF. Therefore, in the absence of an exemption from Section 11(d)(1) and rule 11d1-2 thereunder, an MQP Market Maker that is also a Broker-Dealer AP for an ETF (or an associated person or an affiliate of a Broker-Dealer AP) that receives the incentives will not be able to rely on the SIA Exemption from Section 11(d)(1).
NASDAQ has requested, on behalf of itself and those MQP Market Makers who are broker-dealers (or any associated person or affiliate of such broker-dealers), exemptive, interpretive or no-action relief from the requirements of Section 11(d)(1) of the Exchange Act and Rule 11d1-2 thereunder, in connection with certain payments from the Exchange to certain Market Makers participating in the MQP, as discussed in its letter.
NASDAQ believes that the MQP Credit should not disqualify a Broker-Dealer AP or Non-AP Broker-Dealer from relying on the SIA exemption. Among other things, NASDAQ notes that the MQP Credit is provided only to MQP Market Makers that meet or exceed MQP market quality standards and that it will not act as an incentive for Broker-Dealer APs or Non-AP Broker-Dealers to “push” the MQP Securities. In addition, many features of the MQP seek to improve the quality of the market for MQP Securities, enhance liquidity in participating MQP Securities, and reduce spreads and decrease the effective cost of investing in MQP Securities. NASDAQ notes that the MQP Credit attributable to sales of MQP Securities by an MQP Market Maker is modest at approximately 25% of the total MQP Credit, with the remainder attributable to purchases by the MQP Market Maker and quotes. The Exchange also notes the “the unprecedented transparency of the MQP through a dedicated MQP Web page, will enable investors to understand the MQP and the roles of MQP Companies, MQP Market Makers and the Exchange within the Program.” 
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NASDAQ also believes that the potential market quality improvements of the MQP will be reduced if Broker-Dealers APs and non-AP Broker-Dealers do not receive the requested exemption. NASDAQ asserts that the MQP incentives are designed to encourage market markers to participate in the Program and that it is desirable for as many market participants as possible to participate in the Program. The Commission recognizes that broker-dealers that have to choose between participating in the MQP and having the ability to rely on the SIA Exemption may determine for business reasons that they would prefer to benefit from the SIA Exemption and thus would decline to participate in the MQP.
Therefore, we understand how the absence of an exemption from Section 11(d)(1) could serve to reduce the number of MQP Market Makers in the Program.
The Commission finds that it is appropriate in the public interest, and is consistent with the protection of investors, to grant a limited exemption from Section 11(d)(1) of the Exchange Act and Rule 11d1-2 thereunder to Broker-Dealer APs and Non-AP Broker-Dealers who participate in the MQP. The Program is intended to improve market quality by promoting enhanced liquidity, reduced spreads, and reduced cost of investing in MQP Securities. The Commission believes that granting the exemption will encourage a larger number of MQP Market Makers to participate in the program and that a larger number of MQP Market Makers should create greater potential for the market quality improvements the Program aims for. The Exchange determines to pay an MQP Credit only if an MQP Market Maker maintains a quality market in an MQP Security meeting certain spread and liquidity standards and that MQP payments are not intended to promote the sale of MQP Securities. The Commission believes that the portion of the MQP Credit attributable to sales of MQP Securities—approximately 25% of the MQP Credit, with the remainder attributable to purchases and quotations—may create a modest incentive for MQP Market Makers to promote the sale of MQP Securities, while creating an overall incentive for MQP Market Makers to enhance market quality. The Commission does not believe that this combination of incentives will provide the kind of “share-pushing” incentive with which Congress was concerned when it enacted Section 11(d). The required Web site disclosures 
will also help Market Makers' customers understand the Program's effect on MQP Market Makers' incentives and thus will help investors to make informed decisions despite the potential additional sales pressure Market Makers may assert as a result of the MQP.
It is therefore ordered, that Broker-Dealer APs and Non-AP Broker-Dealers who participate in the MQP, may rely on the SIA Exemption pertaining to Section 11(d)(1) and Rule 11d1-2 thereunder,
subject to the conditions provided in that exemption, notwithstanding that Broker-Dealer APs and Non-AP Broker-Dealers may receive MQP Credits derived in part from the sale of MQP Securities as described in your request.
This exemption expires when the Program terminates, and is subject to modification or revocation at any time the Commission determines that such action is necessary or appropriate in furtherance of the purposes of the Exchange Act. This order does not represent Commission views with respect to any other question that the proposed activities may raise or the applicability of other federal or state laws and rules to the proposed activities.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Kevin M. O'Neill,
[FR Doc. 2013-16075 Filed 7-3-13; 8:45 am]
BILLING CODE 8011-01-P