[Federal Register Volume 75, Number 160 (Thursday, August 19, 2010)]
[Notices]
[Pages 51295-51305]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-20536]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62716; File No. 10-198]
In the Matter of the Application of BATS Y-Exchange, Inc. for
Registration as a National Securities Exchange Findings, Opinion, and
Order of the Commission
August 13, 2010.
I. Introduction
On October 20, 2009, BATS Y-Exchange, Inc. (``BATS Y Exchange'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``Commission'') a Form 1 application (``Form 1'') under the Securities
Exchange Act of 1934 (``Act''), seeking registration as a national
securities exchange pursuant to Section 6 of the Act.\1\ Notice of the
application was published for comment in the Federal Register on
January 28, 2010.\2\ The Commission received no comments regarding the
BATS Y Exchange Form 1. On July 1, 2010, BATS Y Exchange submitted
Amendment No. 1 to its Form 1.\3\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78f.
\2\ See Securities Exchange Act Release No. 61400 (January 22,
2010), 75 FR 4595 (``Notice'').
\3\ In Amendment No. 1, the Exchange modified its application by
amending or adding the following rules to align the proposed rules
of BATS Y Exchange with the rules of BATS Exchange, Inc. (``BATS
Exchange'') as of the date of the Amendment, due to changes to BATS
Exchange rules filed with and approved by the Commission or filed as
immediately effective, as applicable, since the Form 1 was filed:
Table of Contents; Rule 1.6 (Procedures for Exemptions); Rule 2.5
Interpretation and Policy .02 (Continuing Education Requirements);
Rule 2.5 Interpretation and Policy .03 (Registration Procedures);
Rule 2.5 Interpretation and Policy .04 (Termination of Employment);
Rule 2.6(g) (Application Procedures for Membership or to become an
Associated person of a Member); Rule 2.13 (Fidelity Bonds); Rule
3.22 (Gratuities); Rule 5.5 (Prevention of the Misuse of Material,
Non-Public Information); Rule 11.9(c)(12) (Destination Specific
Order); and Rule 12.13 (Trading Ahead of Research Reports). In
addition, the Exchange modified certain Exhibits to the Form 1 to:
(1) Reflect minor changes to certain corporate documents; (2) update
the Exchange's proposed User's manual and certain administrative
documents; (3) include a representation that the Exchange's parent
corporation will make a capital contribution into the Exchange's
capital account and provide adequate funding of Exchange operations;
(4) update the list of anticipated Exchange officers; (5) indicate
that the Exchange has executed a regulatory services agreement with
the Financial Industry Regulatory Authority (``FINRA'') to conduct
various regulatory services on behalf of the Exchange; and (6)
indicate that the Exchange intends to file with the Commission a
plan setting forth the allocation of certain regulatory
responsibilities between itself and FINRA pursuant to Rule 17d-2 of
the Act for Members of the Exchange that are also members of FINRA.
The changes proposed in Amendment No. 1 either are not material or
are otherwise responsive to the concerns of Commission staff.
---------------------------------------------------------------------------
II. Statutory Standards
Under Sections 6(b) and 19(a) of the Act,\4\ the Commission shall
by order grant a registration as a national securities exchange if it
finds that the exchange is so organized and has the capacity to carry
out the purposes of the Act and can comply, and can enforce compliance
by its members and persons associated with its members, with the
provisions of the Act, the rules and regulations thereunder, and the
rules of the exchange.
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78f(b) and 78s(a).
---------------------------------------------------------------------------
As discussed in greater detail below, the Commission finds that
BATS Y Exchange's application for exchange registration meets the
requirements of the Act and the rules and regulations thereunder.
Further, the Commission finds that the proposed rules of BATS Y
Exchange are consistent with Section 6 of the Act in that, among other
things, they are designed to: (1) Assure fair representation of an
exchange's members in the selection of its directors and administration
of its affairs and provide that, among other things, one or more
directors shall be representative of investors and not be associated
with the exchange, or with a broker or dealer; (2) prevent fraudulent
and manipulative acts and practices, promote just and equitable
principles of trade, foster cooperation and coordination with persons
engaged in regulating, clearing, settling, processing information with
respect to, and facilitating transactions in securities, remove
impediments to and perfect the mechanisms of a free and open market and
a national market system; and (3) protect investors and the public
interest. The Commission also believes that the rules of BATS Y
Exchange are consistent with Section 11A of the Act.\5\ Finally, the
Commission finds that the proposed rules of BATS Y Exchange do not
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.\6\
---------------------------------------------------------------------------
\5\ 15 U.S.C. 78k-1.
\6\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
III. Discussion
A. Corporate Structure
BATS Y Exchange has applied to the Commission to register as a
national securities exchange. BATS Global Markets, Inc. (``BATS Global
Markets''), a Delaware corporation, will wholly own BATS Y Exchange as
well as (1) BATS Exchange, a registered national securities exchange,
and (2) BATS Trading, Inc. (``BATS Trading''), a registered broker-
dealer that currently provides order routing services to BATS Exchange,
and would provide such services to BATS Y Exchange.
1. Self-Regulatory Function of BATS Y Exchange; Relationship Between
BATS Global Markets, Inc. and BATS Y Exchange; Jurisdiction Over BATS
Global Markets, Inc.
Although BATS Global Markets will not itself carry out regulatory
functions, its activities with respect to the operation of BATS Y
Exchange must be consistent with, and not interfere with, the
Exchange's self-regulatory obligations. The proposed BATS Global
Markets corporate documents include certain provisions that are
designed to maintain the independence of the Exchange's self-regulatory
function from BATS Global Markets, enable the Exchange to operate in a
manner that complies with the federal securities laws, including the
objectives of Sections 6(b) and 19(g) of the Act, and facilitate the
ability of the Exchange and the Commission to fulfill their regulatory
and oversight obligations under the Act.\7\
---------------------------------------------------------------------------
\7\ See BATS Global Markets proposed Amended and Restated By-
Laws Article XII and Article XIV, Sections 14.01, 14.02, 14.03,
14.04, 14.05, and 14.06.
---------------------------------------------------------------------------
For example, BATS Global Markets submits to the Commission's
jurisdiction with respect to activities relating to BATS Y Exchange,\8\
and agrees to provide the Commission and BATS Y Exchange with access to
its books and records that are related to the operation or
administration of BATS Y Exchange.\9\ In addition, to the extent they
are related to the operation or administration of BATS Y Exchange, the
books, records, premises, officers, directors, agents, and employees of
BATS Global Markets shall be deemed the books, records, premises,
officers, directors, agents, and employees of BATS Y Exchange for
purposes of, and subject to oversight pursuant to, the Act.\10\ BATS
Global Markets also agrees to keep confidential non-public information
relating to the self-
[[Page 51296]]
regulatory function \11\ of BATS Y Exchange and not to use such
information for any non-regulatory purpose.\12\ In addition, the board
of directors of BATS Global Markets, as well as its officers,
employees, and agents, are required to give due regard to the
preservation of the independence of the Exchange's self-regulatory
function.\13\ Further, BATS Global Markets By-Laws require that any
changes to the BATS Global Markets Certificate of Incorporation and By-
Laws be submitted to the Board of Directors of the Exchange (``Exchange
Board''), and, if such amendment is required to be filed with the
Commission pursuant to Section 19(b) of the Act, such change shall not
be effective until filed with, or filed with and approved by, the
Commission.\14\ The Commission finds that these provisions are
consistent with the Act, and that they will assist the Exchange in
fulfilling its self-regulatory obligations and in administering and
complying with the requirements of the Act.
---------------------------------------------------------------------------
\8\ See BATS Global Markets proposed Amended and Restated By-
Laws Article XIV, Section 14.05.
\9\ See BATS Global Markets proposed Amended and Restated By-
Laws Article XIV, Section 14.03.
\10\ Id.
\11\ This requirement to keep confidential non-public
information relating to the self-regulatory function shall not limit
the Commission's ability to access and examine such information or
limit the ability of directors, officers, or employees of BATS
Global Markets to disclose such information to the Commission. See
BATS Global Markets proposed Amended and Restated By-Laws Article
XIV, Section 14.02.
\12\ See BATS Global Markets proposed Amended and Restated By-
Laws Article XIV, Section 14.02.
\13\ See BATS Global Markets proposed Amended and Restated By-
Laws Article XIV, Section 14.01.
\14\ See BATS Global Markets proposed Amended and Restated
Certificate of Incorporation TWELFTH and BATS Global Markets
proposed Amended and Restated By-Laws Article XII.
---------------------------------------------------------------------------
The Commission also believes that under Section 20(a) of the Act
\15\ any person with a controlling interest in BATS Y Exchange would be
jointly and severally liable with and to the same extent that BATS Y
Exchange is liable under any provision of the Act, unless the
controlling person acted in good faith and did not directly or
indirectly induce the act or acts constituting the violation or cause
of action. In addition, Section 20(e) of the Act \16\ creates aiding
and abetting liability for any person who knowingly provides
substantial assistance to another person in violation of any provision
of the Act or rule thereunder. Further, Section 21C of the Act \17\
authorizes the Commission to enter a cease-and-desist order against any
person who has been ``a cause of'' a violation of any provision of the
Act through an act or omission that the person knew or should have
known would contribute to the violation. These provisions are
applicable to BATS Global Markets' dealings with BATS Y Exchange.
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78t(a).
\16\ 15 U.S.C. 78t(e).
\17\ 15 U.S.C. 78u-3.
---------------------------------------------------------------------------
2. Ownership and Voting Limitations; Changes in Control of BATS Y
Exchange
The BATS Global Markets proposed Amended and Restated Certificate
of Incorporation includes restrictions on the ability to own and vote
shares of capital stock of BATS Global Markets.\18\ These limitations
are designed to prevent any shareholder from exercising undue control
over the operation of BATS Y Exchange and to assure that the Exchange
and the Commission are able to carry out their regulatory obligations
under the Act.
---------------------------------------------------------------------------
\18\ These provisions are generally consistent with ownership
and voting limits approved by the Commission for other SROs. See
e.g., Securities Exchange Act Release Nos. 61698 (March 12, 2010),
75 FR 13151 (March 18, 2010) (order granting the exchange
registration of EDGX Exchange, Inc. and EDGA Exchange, Inc.) (``EDGX
and EDGA Exchange Order''); 58375 (August 18, 2008), 73 FR 49498
(August 21, 2008) (File No. 10-182) (order granting the exchange
registration of BATS Exchange, Inc.) (``BATS Exchange Order'');
53963 (June 8, 2006), 71 FR 34660 (June 15, 2006) (File No. SR-NSX-
2006-03) (``NSX Demutualization Order''); 51149 (February 8, 2005),
70 FR 7531 (February 14, 2005) (File No. SR-CHX-2004-26) (``CHX
Demutualization Order''); and 49098 (January 16, 2004), 69 FR 3974
(January 27, 2004) (File No. SR-Phlx-2003-73) (``Phlx
Demutualization Order'').
---------------------------------------------------------------------------
Generally, no person, either alone or together with its related
persons,\19\ may beneficially own more than forty percent of any class
of capital stock of BATS Global Markets.\20\ The BATS Global Markets
proposed Amended and Restated Certificate of Incorporation prohibits
BATS Y Exchange members, either alone or together with their related
persons, from beneficially owning more than twenty percent of shares of
any class of capital stock of BATS Global Markets.\21\ If any
stockholder violates these ownership limits, BATS Global Markets will
redeem the shares in excess of the applicable ownership limit for their
fair market value.\22\ In addition, no person, alone or together with
its related persons, may vote or cause the voting of more than twenty
percent of the voting power of the then issued and outstanding capital
stock of BATS Global Markets.\23\ If any stockholder purports to vote,
or cause the voting of, shares that would violate this voting limit,
BATS Global Markets will not honor such vote in excess of the voting
limit.\24\
---------------------------------------------------------------------------
\19\ See BATS Global Markets proposed Amended and Restated
Certificate of Incorporation FIFTH (a)(ii).
\20\ See BATS Global Markets proposed Amended and Restated
Certificate of Incorporation FIFTH (b)(i)(A).
\21\ See BATS Global Markets proposed Amended and Restated
Certificate of Incorporation FIFTH (b)(i)(B).
\22\ See BATS Global Markets proposed Amended and Restated
Certificate of Incorporation FIFTH (e).
\23\ See BATS Global Markets proposed Amended and Restated
Certificate of Incorporation FIFTH (b)(i)(C).
\24\ See BATS Global Markets proposed Amended and Restated
Certificate of Incorporation FIFTH (d).
---------------------------------------------------------------------------
The BATS Global Markets Board may waive the forty percent ownership
limitation applicable to non-BATS Y Exchange member stockholders and
the twenty percent voting limitation, pursuant to a resolution duly
adopted by the Board of Directors, if it makes certain findings. Any
such waiver would not be effective until approved by the Commission
pursuant to Section 19 of the Act.\25\ However, as long as BATS Global
Markets directly or indirectly controls BATS Y Exchange, the BATS
Global Markets Board cannot waive the voting and ownership limits above
twenty percent for BATS Y Exchange members and their related
persons.\26\
---------------------------------------------------------------------------
\25\ See BATS Global Markets proposed Amended and Restated
Certificate of Incorporation FIFTH (b)(ii)(B).
\26\ These provisions are generally consistent with waiver of
ownership and voting limits approved by the Commission for other
SROs. See e.g., EDGX and EDGA Exchange Order, supra note 18; BATS
Exchange Order, supra note 18; NSX Demutualization Order, supra note
18; CHX Demutualization Order, supra note 18; and Securities
Exchange Act Release No. 49718 (May 17, 2004), 69 FR 29611 (May 24,
2004) (SR-PCX-2004-08).
---------------------------------------------------------------------------
Members that trade on an exchange traditionally have ownership
interests in such exchange. As the Commission has noted in the past,
however, a member's interest in an exchange could become so large as to
cast doubt on whether the exchange can fairly and objectively exercise
its self-regulatory responsibilities with respect to that member.\27\ A
member that is a controlling shareholder of an exchange might be
tempted to exercise that controlling influence by directing the
exchange to refrain from, or the exchange may hesitate to, diligently
monitor and surveil the member's conduct or diligently enforce its
rules and the federal securities laws with respect to conduct by the
member that violates such provisions.
---------------------------------------------------------------------------
\27\ See, e.g., Securities Exchange Act Release Nos. 53128
(January 13, 2006), 71 FR 3550 (January 23, 2006) (File No. 10-131)
(``Nasdaq Exchange Registration Order'') and 53382 (February 27,
2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) (``NYSE/
Archipelago Merger Approval Order'').
---------------------------------------------------------------------------
In addition, as proposed, BATS Y Exchange will be a wholly-owned
subsidiary of BATS Global Markets. The BATS Y Exchange proposed Amended
and Restated By-Laws identifies this ownership structure.\28\ Any
changes to
[[Page 51297]]
the BATS Y Exchange Amended and Restated By-Laws, including any change
in the provision that identifies BATS Global Markets as the sole owner,
must be filed with and approved by the Commission pursuant to Section
19 of the Act.\29\ Further, pursuant to the BATS Y Exchange proposed
Amended and Restated By-Laws, BATS Global Markets may not transfer or
assign, in whole or in part, its ownership interest in BATS Y
Exchange.\30\
---------------------------------------------------------------------------
\28\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article I(cc).
\29\ See 15 U.S.C. 78s.
\30\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article IV, Section 7.
---------------------------------------------------------------------------
The Commission believes that these provisions are consistent with
the Act. These requirements should minimize the potential that a person
could improperly interfere with or restrict the ability of the
Commission or the Exchange to effectively carry out their regulatory
oversight responsibilities under the Act.
3. BATS Y Exchange
BATS Y Exchange has applied to the Commission to register as a
national securities exchange. As part of its exchange application, the
Exchange has filed the BATS Y Exchange Certificate of Incorporation and
the proposed Amended and Restated By-Laws of BATS Y Exchange. In these
documents, among other things, BATS Y Exchange establishes the
composition of the Exchange Board and the BATS Y Exchange committees.
a. The BATS Y Exchange Board of Directors
The Exchange Board will be the governing body of BATS Y Exchange
and possess all of the powers necessary for the management of the
business and affairs of the Exchange and the execution of its
responsibilities as an SRO. Under the BATS Y Exchange proposed Amended
and Restated By-Laws:
The Exchange Board will be composed of ten directors; \31\
---------------------------------------------------------------------------
\31\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article III, Section 2(a).
---------------------------------------------------------------------------
One director will be the Chief Executive Officer of BATS Y
Exchange; \32\
---------------------------------------------------------------------------
\32\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article III, Section 2(b).
---------------------------------------------------------------------------
The number of Non-Industry Directors,\33\ including at
least one Independent Director,\34\ will equal or exceed the sum of the
number of Industry Directors \35\ and Member Representative Directors;
\36\ and
---------------------------------------------------------------------------
\33\ ``Non-Industry Director'' means a Director who is an
Independent Director or any other individual who would not be an
Industry Director. See BATS Y Exchange proposed Amended and Restated
By-Laws Article I(v).
\34\ ``Independent Director'' means a ``Director who has no
material relationship with the [Exchange], or any Exchange Member or
any affiliate of any such Exchange Member; provided, however, that
an individual who otherwise qualifies as an Independent Director
shall not be disqualified from serving in such capacity solely
because such Director is a Director of the [Exchange] or its
stockholder.'' See BATS Y Exchange proposed Amended and Restated By-
Laws Article I(m).
\35\ Generally, an ``Industry Director'' is, among other things,
a Director that is or has been within the past three years an
officer, director, employee, or owner of a broker-dealer. In
addition, persons who have a consulting or employment relationship
with the Exchange and its affiliates, are considered ``Industry.''
See BATS Y Exchange proposed Amended and Restated By-Laws Article
I(o).
\36\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article III, Section 2(b)(i).
---------------------------------------------------------------------------
At least twenty percent of the directors on the Exchange
Board will be Member Representative Directors.\37\
---------------------------------------------------------------------------
\37\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article III, Section 2(b)(ii). ``Member Representative Director''
means a ``Director who has been appointed as such to the initial
Board of Directors pursuant to Article III, Section 4(g) of these
By-Laws, or elected by stockholders after having been nominated by
the Member Nominating Committee or by an Exchange Member pursuant to
these By-Laws and confirmed as the nominee of Exchange Members after
majority vote of Exchange Members, if applicable. A Member
Representative Director must be an officer, director, employee, or
agent of an Exchange Member that is not a Stockholder Exchange
Member.'' See BATS Y Exchange proposed Amended and Restated By-Laws
Article I(s). See also BATS Y Exchange proposed Amended and Restated
By-Laws Article III, Section 4(b).
---------------------------------------------------------------------------
BATS Global Markets will appoint the initial Exchange Board,
including the Member Representative Directors, which shall serve until
the first annual meeting of stockholders.\38\ The first annual meeting
of the stockholders will be held prior to BATS Y Exchange commencing
operations as a national securities exchange.\39\ At the first annual
meeting of stockholders, a new Exchange Board will be elected pursuant
to the BATS Y Exchange proposed Amended and Restated By-Laws.
Therefore, prior to commencing operations as a national securities
exchange, BATS Y Exchange Members will have the opportunity to
participate in the selection of Member Representative Directors, and
the Exchange Board will be in compliance with the compositional
requirements contained in the BATS Y Exchange proposed Amended and
Restated By-Laws.\40\
---------------------------------------------------------------------------
\38\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article I(s) and Article III, Section 4(g).
\39\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article IV, Section 1(b).
\40\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article III, Section 2.
---------------------------------------------------------------------------
BATS Global Markets will appoint the initial Nominating Committee
\41\ and Member Nominating Committee,\42\ consistent with each
committee's compositional requirements,\43\ to nominate candidates for
election to the Exchange Board. Each of the Nominating Committee and
Member Nominating Committee, after completion of its respective duties
for nominating directors for election to the Board for that year, shall
nominate candidates to serve on the succeeding year's Nominating
Committee or Member Nominating Committee, as applicable. Additional
candidates for the Member Nominating Committee may be nominated and
elected by BATS Y Exchange Members pursuant to a petition process.\44\
---------------------------------------------------------------------------
\41\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article VI, Section 2. The Nominating Committee will be comprised of
at least three directors, and the number of Non-Industry members on
the Nominating Committee must equal or exceed the number of Industry
members.
\42\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article VI, Section 3. The Member Nominating Committee will be
comprised of at least three directors, and each member of the Member
Nominating Committee shall be a Member Representative member.
\43\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article VI, Section 1.
\44\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article VI, Section 1.
---------------------------------------------------------------------------
The Nominating Committee will nominate candidates for each director
position other than the Member Representative Directors, and BATS
Global Markets, as the sole shareholder, will elect those directors.
The Member Nominating Committee will nominate candidates for each
Member Representative Director position on the Exchange Board.\45\
Additional candidates may be nominated for the Member Representative
Director positions by BATS Y Exchange Members pursuant to a petition
process.\46\ If no candidates are nominated pursuant to a petition
process, then the initial nominees of the Member Nominating Committee
will be nominated as Member Representative Directors by the Nominating
Committee. If a petition process produces additional candidates, then
the candidates nominated pursuant to a petition process, together with
those nominated by the Member Nominating Committee, will be presented
to BATS Y Exchange
[[Page 51298]]
Members for election to determine the final nomination of Member
Representative Directors.\47\ The candidates who receive the most votes
will be nominated as Member Representative Directors by the Nominating
Committee.\48\ BATS Global Markets, as the sole shareholder, will elect
those candidates nominated by the Nominating Committee as Member
Representative Directors.\49\
---------------------------------------------------------------------------
\45\ The Member Nominating Committee will solicit comments from
BATS Y Exchange Members for the purpose of approving and submitting
names of candidates for election to the position of Member
Representative Director. See BATS Y Exchange proposed Amended and
Restated By-Laws Article III, Section 4(b).
\46\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article III, Section 4(c). The petition must be signed by executive
representatives of ten percent or more of the Exchange members. No
Exchange member, together with its affiliates, may account for more
than fifty percent of the signatures endorsing a particular
candidate. Id.
\47\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article III, Section 4(e) and (f). Each BATS Y Exchange Member shall
have the right to cast one vote for each available Member
Representative Director nomination, provided that any such vote must
be cast for a person on the List of Candidates and that no BATS Y
Exchange Member, together with its affiliates, may account for more
than twenty percent of the votes cast for a candidate. Id.
\48\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article III, Section 4(f).
\49\ Id.
---------------------------------------------------------------------------
The Commission believes that the requirement in the BATS Y Exchange
proposed Amended and Restated By-Laws that twenty percent of the
directors be Member Representative Directors and the means by which
they are chosen by members provides for the fair representation of
members in the selection of directors and the administration of BATS Y
Exchange consistent with the requirement in Section 6(b)(3) of the
Act.\50\ As the Commission has previously noted, this requirement helps
to ensure that members have a voice in the use of self-regulatory
authority, and that an exchange is administered in a way that is
equitable to all those who trade on its market or through its
facilities.\51\
---------------------------------------------------------------------------
\50\ 15 U.S.C. 78f(b)(3).
\51\ See Nasdaq Exchange Registration Order and NYSE/Archipelago
Merger Approval Order, supra note 27; BATS Exchange Order, supra
note 18; and EDGX and EDGA Exchange Order, supra note 18.
---------------------------------------------------------------------------
The Commission has previously stated its belief that the inclusion
of public, non-industry representatives on exchange oversight bodies is
critical to an exchange's ability to protect the public interest.\52\
Further, public, non-industry representatives help to ensure that no
single group of market participants has the ability to systematically
disadvantage other market participants through the exchange governance
process. The Commission believes that public directors can provide
unique, unbiased perspectives, which should enhance the ability of the
Exchange Board to address issues in a non-discriminatory fashion and
foster the integrity of BATS Y Exchange.\53\ The Commission believes
that the proposed composition of the Exchange Board satisfies the
requirements in Section 6(b)(3) of the Act,\54\ which requires that one
or more directors be representative of issuers and investors and not be
associated with a member of the exchange, or with a broker or
dealer.\55\
---------------------------------------------------------------------------
\52\ See, e.g., Regulation of Exchanges and Alternative Trading
Systems, Securities Exchange Act Release No. 40760 (December 8,
1998), 63 FR 70844 (December 22, 1998) (``Regulation ATS Release'').
\53\ See Nasdaq Exchange Registration Order and NYSE/Archipelago
Merger Approval Order, supra note 27; BATS Exchange Order, supra
note 18; and EDGX and EDGA Exchange Order, supra note 18.
\54\ 15 U.S.C. 78f(b)(3).
\55\ The number of Non-Industry Directors on the Exchange Board
must equal or exceed the sum of the Industry and Member
Representative Directors, and the Exchange Board must include at
least one Independent Director. See BATS Y Exchange proposed Amended
and Restated By-Laws Article III, Section 2(b)(i).
---------------------------------------------------------------------------
b. BATS Y Exchange Committees
In the BATS Y Exchange proposed Amended and Restated By-Laws, BATS
Y Exchange has proposed to establish several committees. Specifically,
BATS Y Exchange has proposed to establish the following committees that
would be appointed by the Chairman of the Exchange Board, with the
approval of the Exchange Board: A Compensation Committee; \56\ Audit
Committee; \57\ Regulatory Oversight Committee; \58\ Appeals Committee;
\59\ Executive Committee; \60\ and Finance Committee.\61\ In addition,
BATS Y Exchange has proposed to establish a Nominating Committee \62\
and a Member Nominating Committee, which would be elected on an annual
basis by vote of stockholders.\63\ The Commission believes that BATS Y
Exchange's proposed committees should enable BATS Y Exchange to carry
out its responsibilities under the Act and are consistent with the Act.
---------------------------------------------------------------------------
\56\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article V, Section 6(a). The Compensation Committee will be
comprised of at least three people, and each voting member of the
Compensation Committee shall be a Non-Industry Director. Id.
\57\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article V, Section 6(b). The Audit Committee will be comprised of at
least three people, and a majority of the Audit Committee members
shall be Non-Industry Directors and a Non-Industry Director shall
serve as Chairman of the Audit Committee. Id.
\58\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article V, Section 6(c). The Regulatory Oversight Committee will be
comprised of at least three people, and each member of the
Regulatory Oversight Committee shall be a Non-Industry Director. Id.
\59\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article V, Section 6(d). The Appeals Committee shall consist of one
Independent Director, one Industry Director, and one Member
Representative Director. Id.
\60\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article V, Section 6(e). The number of Non-Industry Directors on the
Executive Committee shall equal or exceed the number of Industry
Directors. The percentage of Independent Directors on the Executive
Committee shall be at least as great as the percentage of
Independent Directors on the whole Exchange Board, and the
percentage of Member Representative Directors on the Executive
Committee shall be at least as great as the percentage of Member
Representative Directors on the whole Exchange Board. Id.
\61\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article V, Section 6(f).
\62\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article VI, Section 2, and supra note 41.
\63\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article VI, Section 1, and supra note 42. Additional candidates for
the Member Nominating Committee may be nominated and elected by BATS
Exchange members pursuant to a petition process. See supra note 46
and accompanying text.
---------------------------------------------------------------------------
B. Regulation of BATS Y Exchange
As a prerequisite for the Commission's approval of an exchange's
application for registration, an exchange must be organized and have
the capacity to carry out the purposes of the Act.\64\ Specifically, an
exchange must be able to enforce compliance by its members, and persons
associated with its members, with the federal securities laws and the
rules of the exchange.\65\
---------------------------------------------------------------------------
\64\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
\65\ Id. See also Section 19(g) of the Act, 15 U.S.C. 78s(g).
---------------------------------------------------------------------------
1. Membership
Membership on BATS Y Exchange will be open to any registered broker
or dealer that is a member of another registered national securities
exchange or association (other than or in addition to BATS Exchange),
or any natural person associated with such a registered broker or
dealer.\66\ To remain eligible for membership in BATS Y Exchange, a
BATS Y Exchange member must be a member of another SRO at all
times.\67\
---------------------------------------------------------------------------
\66\ See BATS Y Exchange Rules 2.3 and 2.5(a)(4). BATS Y
Exchange will only have one class of membership, with all members
enjoying the same rights and privileges on the Exchange. Although
BATS Y Exchange will permit members to register as Exchange Market
Makers, such Market Makers will not receive special privileges or
rights vis-[agrave]-vis other members.
\67\ Id.
---------------------------------------------------------------------------
For a temporary 90-day period after approval of BATS Y Exchange's
application, an applicant that is a current member of BATS Exchange and
an active member of another SRO will be able to apply through an
expedited process to become a BATS Y Exchange member by submitting a
waive-in application form, including membership agreements.\68\ BATS Y
Exchange may request additional documentation in addition to the waive-
in application form in order to determine that a waive-
[[Page 51299]]
in applicant meets BATS Y Exchange's qualification standards.\69\
---------------------------------------------------------------------------
\68\ See BATS Y Exchange Rule 2.4.
\69\ Id.
---------------------------------------------------------------------------
All other applicants (and after the 90-day period has ended, those
that could have waived in through the expedited process) may apply for
membership in BATS Y Exchange by submitting a full membership
application to BATS Y Exchange.\70\ Applications for association with
an Exchange Member shall be submitted to the Exchange on Form U-4 and
such other forms as BATS Y Exchange may prescribe.
---------------------------------------------------------------------------
\70\ See BATS Y Exchange Rule 2.6.
---------------------------------------------------------------------------
BATS Y Exchange will receive and review all applications for
membership in the Exchange. If the Exchange is satisfied that the
applicant is qualified for membership, the Exchange will promptly
notify the applicant, in writing, of such determination, and the
applicant shall be a member of the Exchange.\71\ If the Exchange is not
satisfied that the applicant is qualified for membership, the Exchange
shall promptly notify the applicant of the grounds for denial.\72\ Once
an applicant is a member of the Exchange, it must continue to possess
all the qualifications set forth in the BATS Y Exchange rules. When the
Exchange has reason to believe that an Exchange member or associated
person of a member fails to meet such qualifications, the Exchange may
suspend or revoke such person's membership or association.\73\
---------------------------------------------------------------------------
\71\ See BATS Y Exchange Rule 2.6(c).
\72\ See BATS Y Exchange Rule 2.6(d).
\73\ See BATS Y Exchange Rule 2.7; see also BATS Y Exchange
Rules Chapters VII and VIII.
---------------------------------------------------------------------------
Appeal of a staff denial, suspension, or revocation of membership
will be heard by the Appeals Committee.\74\ Decisions of the Appeals
Committee will be made in writing and will be sent to the parties to
the proceeding. The decisions of the Appeals Committee will be subject
to review by the Exchange Board, on its own motion, or upon written
request by the aggrieved party or by the Chief Regulatory Officer
(``CRO''). The Exchange Board will have sole discretion to grant or
deny the request. The Exchange Board will conduct the review of the
Appeals Committee's decision. The Exchange Board may affirm, reverse,
or modify the Appeals Committee's decision. The Exchange Board's
decision is final.\75\
---------------------------------------------------------------------------
\74\ See BATS Y Exchange Rule 10.3; see also BATS Y Exchange
proposed Amended and Restated By-Laws Article V, Section 6(d).
\75\ See BATS Y Exchange Rule 10.5(b). Membership decisions are
subject to review by the Commission. See BATS Y Exchange Rule 10.7.
---------------------------------------------------------------------------
The Commission finds that the BATS Y Exchange's membership rules
are consistent with Section 6 of the Act,\76\ specifically Section
6(b)(2) of the Act,\77\ which requires that a national securities
exchange have rules that provide that any registered broker or dealer
or natural person associated with such broker or dealer may become a
member and any person may become associated with an exchange member.
The Commission notes that pursuant to Section 6(c) of the Act, an
exchange must deny membership to any person, other than a natural
person, that is not a registered broker or dealer, any natural person
that is not, or is not associated with, a registered broker or dealer,
and registered broker-dealers that do not satisfy certain standards,
such as financial responsibility or operational capacity. As a
registered exchange, BATS Y Exchange must independently determine if an
applicant satisfies the standards set forth in the Act, regardless of
whether an applicant is a member of another SRO.\78\
---------------------------------------------------------------------------
\76\ 15 U.S.C. 78f.
\77\ 15 U.S.C. 78f(b)(2).
\78\ See Nasdaq Exchange Registration Order, supra note 27.
---------------------------------------------------------------------------
2. Regulatory Independence
BATS Y Exchange has proposed several measures to help ensure the
independence of its regulatory function from its market operations and
other commercial interests. The regulatory operations of BATS Y
Exchange will be supervised by the CRO and monitored by the Regulatory
Oversight Committee. The Regulatory Oversight Committee will consist of
three members, each of whom must be a Non-Industry Director.\79\ The
Regulatory Oversight Committee will be responsible for monitoring the
adequacy and effectiveness of the Exchange's regulatory program,
assessing the Exchange's regulatory performance, and assisting the
Exchange Board in reviewing the Exchange's regulatory plan and the
overall effectiveness of the Exchange's regulatory functions.\80\ The
Regulatory Oversight Committee also will meet with the CRO in executive
session at regularly scheduled meetings and at any time upon request of
the CRO or any member of the Regulatory Oversight Committee.\81\
---------------------------------------------------------------------------
\79\ See BATS Y Exchange proposed Amended and Restated By-Laws
Articles I(v) and V, Section 6(c).
\80\ See BATS Exchange Amended and Restated By-Laws Article V,
Section 6(c).
\81\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article VII, Section 9.
---------------------------------------------------------------------------
BATS Y Exchange proposes that its CRO have general supervision of
the regulatory operations of the Exchange, including overseeing
surveillance, examination, and enforcement functions.\82\ The CRO also
will administer any regulatory services agreement with another SRO to
which BATS Y Exchange is a party.\83\ The CRO will be an Executive Vice
President or Senior Vice President that reports directly to the Chief
Executive Officer.\84\ The CRO also may serve as BATS Y Exchange's
General Counsel.\85\
---------------------------------------------------------------------------
\82\ Id.
\83\ Id.
\84\ Id.
\85\ Id. See also Nasdaq Exchange Registration Order, supra note
27.
---------------------------------------------------------------------------
In addition, BATS Y Exchange has taken steps designed to provide
sufficient funding for the Exchange to carry out its responsibilities
under the Act. Specifically, BATS Y Exchange has represented that: (1)
BATS Global Markets will allocate sufficient operational assets and
make a capital contribution to the Exchange's capital account prior to
the launch of the Exchange; (2) such an allocation and contribution
will be adequate to operate the Exchange, including the regulation of
the Exchange; and (3) there will be an explicit agreement between the
Exchange and BATS Global Markets that requires BATS Global Markets to
provide adequate funding for BATS Y Exchange's operations, including
the regulation of the Exchange.\86\ In addition, any revenues received
by BATS Y Exchange from fees derived from its regulatory function or
regulatory penalties will not be used for non-regulatory purposes.\87\
---------------------------------------------------------------------------
\86\ See Amendment No. 1.
\87\ See BATS Y Exchange proposed Amended and Restated By-Laws
Article X, Section 4.
---------------------------------------------------------------------------
3. Regulatory Contract
Although BATS Y Exchange will be an SRO with all of the attendant
regulatory obligations under the Act, it has entered into a regulatory
services agreement with FINRA (``Regulatory Contract''), under which
FINRA will perform certain regulatory functions on BATS Y Exchange's
behalf.\88\ Specifically, BATS Y Exchange represents that FINRA will
assist Exchange staff on registration issues on an as-needed basis,
investigate potential violations of BATS Y Exchange's rules or federal
securities laws related to activity on the Exchange, conduct
examinations related to market conduct on the Exchange by Members,
assist the Exchange with disciplinary proceedings pursuant to BATS Y
Exchange's Rules, including issuing charges and conducting hearings,
and provide
[[Page 51300]]
dispute resolution services to BATS Y Exchange Members on behalf of the
Exchange, including operation of the Exchange's arbitration program.
BATS Y Exchange represents that FINRA also will provide the Exchange
with access to FINRA's WebCRD system, and will assist with programming
BATS Y-specific functionality relating to such system.\89\
Notwithstanding the Regulatory Contract, BATS Y Exchange will retain
ultimate legal responsibility for the regulation of its members and its
market.
---------------------------------------------------------------------------
\88\ See BATS Y Exchange Rule 13.7; see also Amendment No. 1.
Pursuant to the applicable provisions of the Freedom of Information
Act, 5 U.S.C. 552, and Commission regulations thereunder, 17 CFR
200.83, BATS Y Exchange has requested confidential treatment for the
Regulatory Contract.
\89\ See Amendment No. 1.
---------------------------------------------------------------------------
The Commission believes that it is consistent with the Act to allow
BATS Y Exchange to contract with FINRA to perform examination,
enforcement, and disciplinary functions.\90\ These functions are
fundamental elements to a regulatory program, and constitute core self-
regulatory functions. The Commission believes that FINRA has the
expertise and experience to perform these functions on behalf of BATS Y
Exchange.\91\
---------------------------------------------------------------------------
\90\ See, e.g., Regulation ATS Release, supra note 52. See also
Securities Exchange Act Release Nos. 50122 (July 29, 2004), 69 FR
47962 (August 6, 2004) (SR-Amex-2004-32) (order approving rule that
allowed Amex to contract with another SRO for regulatory services)
(``Amex Regulatory Services Approval Order''); 57478 (March 12,
2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004) (``NOM
Approval Order''); Nasdaq Exchange Registration Order, supra note
27; BATS Exchange Order, supra note 18; and EDGX and EDGA Exchange
Order, supra note 18.
\91\ See, e.g., Amex Regulatory Services Approval Order, supra
note 90; NOM Approval Order, supra note 90; and Nasdaq Exchange
Registration Order, supra note 27. The Commission notes that the
Regulatory Contract is not before the Commission and, therefore, the
Commission is not acting on it.
---------------------------------------------------------------------------
At the same time, BATS Y Exchange, unless relieved by the
Commission of its responsibility,\92\ bears the responsibility for
self-regulatory conduct and primary liability for self-regulatory
failures, not the SRO retained to perform regulatory functions on the
Exchange's behalf. In performing these regulatory functions, however,
FINRA may nonetheless bear liability for causing or aiding and abetting
the failure of BATS Y Exchange to perform its regulatory functions.\93\
Accordingly, although FINRA will not act on its own behalf under its
SRO responsibilities in carrying out these regulatory services for BATS
Y Exchange, FINRA may have secondary liability if, for example, the
Commission finds that the contracted functions are being performed so
inadequately as to cause a violation of the federal securities laws by
BATS Y Exchange.\94\
---------------------------------------------------------------------------
\92\ See Section 17(d)(1) of the Act and Rule 17d-2 thereunder,
15 U.S.C. 78q(d)(1) and 17 CFR 240.17d-2. See also infra notes 95-
103 and accompanying text.
\93\ For example, if failings by FINRA have the effect of
leaving BATS Y Exchange in violation of any aspect of BATS Y
Exchange's self-regulatory obligations, BATS Y Exchange would bear
direct liability for the violation, while FINRA may bear liability
for causing or aiding and abetting the violation. See, e.g., Nasdaq
Exchange Registration Order, supra note 27; BATS Exchange Order,
supra note 18; EDGX and EDGA Exchange Order, supra note 18; and
Securities Exchange Act Release No. 42455 (February 24, 2000), 65 FR
11388 (March 2, 2000) (File No. 10-127) (order approving the
International Securities Exchange LLC's application for registration
as a national securities exchange).
\94\ Id.
---------------------------------------------------------------------------
4. 17d-2 Agreement
Section 19(g)(1) of the Act \95\ requires every SRO to examine its
members and persons associated with its members and to enforce
compliance with the federal securities laws and the SRO's own rules,
unless the SRO is relieved of this responsibility pursuant to Section
17(d) of the Act.\96\ Section 17(d) was intended, in part, to eliminate
unnecessary multiple examinations and regulatory duplication with
respect to members of more than one SRO (``common members'').\97\ Rule
17d-2 of the Act permits SROs to propose joint plans allocating
regulatory responsibilities concerning common members.\98\ These
agreements, which must be filed with and approved by the Commission,
generally cover such regulatory functions as personnel registration,
branch office examinations, and sales practices. Commission approval of
a 17d-2 plan relieves the specified SRO of those regulatory
responsibilities allocated by the plan to another SRO.\99\ Many
existing SROs have entered in to such agreements.\100\
---------------------------------------------------------------------------
\95\ 15 U.S.C. 78s(g)(1).
\96\ 15 U.S.C. 78q(d).
\97\ See Securities Exchange Act Release No. 12935 (October 28,
1976), 41 FR 49091 (November 8, 1976) (``Rule 17d-2 Adopting
Release'').
\98\ 17 CFR 240.17d-2.
\99\ See Rule 17d-2 Adopting Release, supra note 97.
\100\ See, e.g., Securities Exchange Act Release Nos. 13326
(March 3, 1977), 42 FR 13878 (March 14, 1977) (NYSE/Amex); 13536
(May 12, 1977), 42 FR 26264 (May 23, 1977) (NYSE/BSE); 14152
(November 9, 1977), 42 FR 59339 (November 16, 1977) (NYSE/CSE);
13535 (May 12, 1977), 42 FR 26269 (May 23, 1977) (NYSE/CHX); 13531
(May 12, 1977), 42 FR 26273 (May 23, 1977) (NYSE/PSE); 14093
(October 25, 1977), 42 FR 57199 (November 1, 1977) (NYSE/Phlx);
15191 (September 26, 1978), 43 FR 46093 (October 5, 1978) (NASD/BSE,
CSE, CHX and PSE); 16858 (May 30, 1980), 45 FR 37927 (June 5, 1980)
(NASD/BSE, CSE, CHX and PSE); 42815 (May 23, 2000), 65 FR 34762 (May
31, 2000) (NASD/ISE); and 54136 (July 12, 2006), 71 FR 40759 (July
18, 2006) (NASD/Nasdaq).
---------------------------------------------------------------------------
BATS Y Exchange has represented to the Commission that BATS Y
Exchange and FINRA intend to file a 17d-2 agreement with the Commission
covering common members of BATS Y Exchange and FINRA. This agreement
would allocate to FINRA regulatory responsibility, with respect to
common members, for the following: \101\
---------------------------------------------------------------------------
\101\ See Amendment No 1.
---------------------------------------------------------------------------
FINRA will examine common members of BATS Y Exchange and
FINRA for compliance with federal securities laws, rules and
regulations, and rules of BATS Exchange that have been certified by
BATS Y Exchange as identical or substantially similar to FINRA rules.
FINRA will investigate common members of BATS Y Exchange
and FINRA for violations of federal securities laws, rules or
regulations, or BATS Y Exchange rules that has been certified by BATS Y
Exchange as identical or substantially identical to a FINRA rule.
FINRA will enforce compliance by common members with
federal securities laws, rules and regulations, and rules of BATS Y
Exchange that have been certified by BATS Y Exchange as identical or
substantially similar to FINRA rules.
Because BATS Y Exchange anticipates entering into this 17d-2
agreement, it has not made provision to fulfill the regulatory
obligations that would be undertaken by FINRA under this agreement with
respect to common members of BATS Y Exchange and FINRA.\102\
Accordingly, the Commission is conditioning the operation of BATS Y
Exchange on approval by the Commission of a 17d-2 agreement between
BATS Y Exchange and FINRA that allocates the above specified matters to
FINRA.\103\
---------------------------------------------------------------------------
\102\ The Commission notes that regulation that is to be covered
by the 17d-2 agreement for common members will be carried out by
FINRA under the Regulatory Contract for BATS Y Exchange members that
are not also members of FINRA.
\103\ Alternatively, BATS Y Exchange could demonstrate that it
has the ability to fulfill its regulatory obligations.
---------------------------------------------------------------------------
5. Discipline and Oversight of Members
As noted above, a prerequisite for the Commission approval of an
exchange's application for registration, an exchange must be organized
and have the capacity to carry out the purposes of the Act.
Specifically, an exchange must be able to enforce compliance by its
members and persons associated with its members with federal securities
laws and the rules of the exchange.\104\ As noted above, pursuant to
the Regulatory Contract, FINRA will perform many of the initial
disciplinary processes on behalf of BATS Y Exchange.\105\ For example,
FINRA will investigate potential securities laws violations, issue
complaints, and conduct hearings
[[Page 51301]]
pursuant to BATS Y Exchange rules. Appeals from disciplinary decisions
will be heard by the Appeals Committee \106\ and the Appeals
Committee's decision shall be final. In addition, the Exchange Board
may on its own initiative order review of a disciplinary decision.\107\
---------------------------------------------------------------------------
\104\ See 15 U.S.C. 78f(b)(1).
\105\ See supra note 90 and accompanying text.
\106\ See BATS Y Exchange Rule 8.10(b).
\107\ See BATS Y Exchange Rule 8.10(c).
---------------------------------------------------------------------------
The BATS Y Exchange proposed Amended and Restated By-Laws and BATS
Y Exchange rules provide that the Exchange has disciplinary
jurisdiction over its members so that it can enforce its members'
compliance with its rules and the federal securities laws.\108\ The
Exchange's rules also permit it to sanction members for violations of
its rules and violations of the federal securities laws by, among other
things, expelling or suspending members, limiting members' activities,
functions, or operations, fining or censuring members, or suspending or
barring a person from being associated with a member, or any other
fitting sanction.\109\ BATS Y Exchange's rules also provide for the
imposition of fines for certain minor rule violations in lieu of
commencing disciplinary proceedings.\110\ Accordingly, as a condition
to the operation of BATS Y Exchange, a Minor Rule Violation Plan
(``MRVP'') filed by BATS Y Exchange under Act Rule 19d-1(c)(2) must be
declared effective by the Commission.\111\
---------------------------------------------------------------------------
\108\ See generally BATS Y Exchange proposed Amended and
Restated By-Laws Article X and BATS Y Exchange Rules Chapters II and
VIII.
\109\ See BATS Y Exchange Rules 2.2 and 8.1(a).
\110\ See BATS Y Exchange Rule 8.15.
\111\ 17 CFR 240.19d-1(c)(2).
---------------------------------------------------------------------------
The Commission finds that the BATS Y Exchange's proposed Amended
and Restated By-Laws and rules concerning its disciplinary and
oversight programs are consistent with the requirements of Sections
6(b)(6) and 6(b)(7) \112\ of the Act in that they provide fair
procedures for the disciplining of members and persons associated with
members. The Commission further finds that the rules of BATS Y Exchange
provide it with the ability to comply, and with the authority to
enforce compliance by its members and persons associated with its
members, with the provisions of the Act, the rules and regulations
thereunder, and the rules of BATS Y Exchange.\113\
---------------------------------------------------------------------------
\112\ 15 U.S.C. 78f(b)(6) and (b)(7).
\113\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------
C. BATS Y Exchange Trading System
1. Trading Rules
BATS Y Exchange will operate a fully automated electronic order
book. Exchange members and entities that enter into sponsorship
arrangements with Exchange members will have access to the BATS Y
Exchange system (collectively, ``Users'').\114\ Users will be able to
electronically submit market and various types of limit orders to the
Exchange from remote locations. BATS Y Exchange will not have a trading
floor, but will allow firms to register as market makers with
affirmative and negative market making obligations.\115\ All orders
submitted to BATS Y Exchange will be displayed unless designated
otherwise by the BATS Y Exchange member submitting the order. Displayed
orders will be displayed on an anonymous basis at a specified price.
Non-displayed orders will not be displayed but will be ranked in the
BATS Y Exchange system at a specified price. The BATS Y Exchange system
will continuously and automatically match orders pursuant to price/time
priority, except that displayed orders will have priority over non-
displayed orders at the same price.\116\
---------------------------------------------------------------------------
\114\ To obtain authorized access to the BATS Y Exchange System,
each User must enter in to a User Agreement with the Exchange. See
BATS Y Exchange Rule 11.3(a).
\115\ See BATS Y Exchange Rules 11.5 through 11.8. BATS Y
Exchange's rules relating to maker makers are consistent with the
rules of other national securities exchanges. See, e.g., BATS
Exchange Rules 11.5 through 11.8; and National Stock Exchange, Inc.
Rules 11.5 through 11.8.
\116\ See BATS Y Exchange Rule 11.12.
---------------------------------------------------------------------------
The BATS Y Exchange system is designed to comply with Rule 611 of
Regulation NMS \117\ by requiring that, for any execution to occur on
the Exchange during regular trading hours, the price must be equal to,
or better than, any ``protected quotation'' within the meaning of
Regulation NMS (``Protected Quotation''), unless an exception to Rule
611 of Regulation NMS applies.\118\ BATS Y Exchange will direct any
orders or portion of orders that cannot be executed in their entirety
to away markets for execution through BATS Trading, unless the terms of
the orders direct the Exchange not to route such orders away.\119\
---------------------------------------------------------------------------
\117\ 17 CFR 242.611.
\118\ See BATS Y Exchange Rule 11.13.
\119\ See BATS Y Exchange Rule 11.13(a)(2).
---------------------------------------------------------------------------
BATS Y Exchange intends to operate as an automated trading center
in compliance with Rule 600(b)(4) of Regulation NMS.\120\ BATS Y
Exchange will display automated quotations at all times except in the
event that a systems malfunction renders the system incapable of
displaying automated quotations.\121\ The Exchange has designed its
rules relating to orders, modifiers, and order execution to comply with
the requirements of Regulation NMS, including an immediate-or-cancel
functionality.\122\ These proposed rules include accepting orders
marked as intermarket sweep orders, which will allow orders so
designated to be automatically matched and executed without reference
to Protected Quotations at other trading centers,\123\ and routing
orders marked as intermarket sweep orders by a User to a specific
trading center for execution.\124\ In addition, BATS Y Exchange rules
address locked and crossed markets,\125\ as required by Rule 610(d) of
Regulation NMS.\126\ The Commission believes that BATS Y Exchange's
rules are consistent with the Act, in particular with the requirements
of Rule 610(d) and Rule 611 of Regulation NMS.
---------------------------------------------------------------------------
\120\ 17 CFR 242.600(b)(4).
\121\ See BATS Y Exchange Rule 11.13(c); see also 17 CFR
242.600(b)(3).
\122\ See BATS Y Exchange Rules 11.9 and 11.13; see also 17 CFR
242.600(b)(3).
\123\ See BATS Y Exchange Rule 11.9(d)(1).
\124\ See BATS Y Exchange Rule 11.9(d)(2).
\125\ See BATS Y Exchange Rule 11.20.
\126\ 17 CFR 242.610(d).
---------------------------------------------------------------------------
As stated above, BATS Y Exchange intends to operate as an automated
trading center and have its best bid and best offer be a Protected
Quotation.\127\ To meet their regulatory responsibilities under Rule
611(a) of Regulation NMS, market participants must have sufficient
notice of new Protected Quotations, as well as all necessary
information (such as final technical specifications).\128\ Therefore,
the Commission believes that it would be a reasonable policy and
procedure under Rule 611(a) for industry participants to begin treating
BATS Y Exchange's best bid and best offer as a Protected Quotation
within 90 days after the date of this order, or such later date as BATS
Y Exchange begins operation as a national securities exchange.
---------------------------------------------------------------------------
\127\ 17 CFR 242.600(b)(58).
\128\ See Securities Exchange Act Release No. 53829 (May 18,
2006), 71 FR 30038, 30041 (May 24, 2006) (File No. S7-10-04)
(extending the compliance dates for Rule 610 and Rule 611 of
Regulation NMS under the Act).
---------------------------------------------------------------------------
2. Section 11 of the Act
Section 11(a)(1) of the Act \129\ prohibits a member of a national
securities exchange from effecting transactions on that exchange for
its own account, the account of an associated person, or an account
over which it or its associated person
[[Page 51302]]
exercises discretion (collectively, ``covered accounts'') unless an
exception applies. Rule 11a2-2(T) under the Act,\130\ known as the
``effect versus execute'' rule, provides exchange members with an
exemption from the Section 11(a)(1) prohibition. Rule 11a2-2(T) permits
an exchange member, subject to certain conditions, to effect
transactions for covered accounts by arranging for an unaffiliated
member to execute the transactions on the exchange. To comply with Rule
11a2-2(T)'s conditions, a member: (i) Must transmit the order from off
the exchange floor; (ii) may not participate in the execution of the
transaction once it has been transmitted to the member performing the
execution; \131\ (iii) may not be affiliated with the executing member;
and (iv) with respect to an account over which the member has
investment discretion, neither the member nor its associated person may
retain any compensation in connection with effecting the transaction
except as provided in the Rule.
---------------------------------------------------------------------------
\129\ 15 U.S.C. 78k(a)(1).
\130\ 17 CFR 240.11a2-2(T).
\131\ The member may, however, participate in clearing and
settling the transaction.
---------------------------------------------------------------------------
In a letter to the Commission, BATS Y Exchange requested that the
Commission concur with BATS Y Exchange's conclusion that BATS Y
Exchange members that enter orders into the BATS Y Exchange system
satisfy the requirements of Rule 11a2-2(T).\132\ For reasons set forth
below, the Commission believes that BATS Y Exchange members entering
orders into the BATS Y Exchange system would satisfy the conditions of
the Rule.
---------------------------------------------------------------------------
\132\ See to Elizabeth M. Murphy, Secretary, Commission, from
Anders Franzon, Vice President and Associate General Counsel, BATS
Exchange, Inc., dated June 30, 2010 (``BATS Y Exchange 11(a)
Letter'').
---------------------------------------------------------------------------
The Rule's first condition is that orders for covered accounts be
transmitted from off the exchange floor. The BATS Y Exchange system
receives orders electronically through remote terminals or computer-to-
computer interfaces. In the context of other automated trading systems,
the Commission has found that the off-floor transmission requirement is
met if a covered account order is transmitted from a remote location
directly to an exchange's floor by electronic means.\133\ Since the
BATS Y Exchange system receives orders electronically through remote
terminals or computer-to-computer interfaces, the Commission believes
that the BATS Y Exchange system satisfies the off-floor transmission
requirement.
---------------------------------------------------------------------------
\133\ See, e.g., Securities Exchange Act Release Nos. 59154
(December 23, 2008) 73 FR 80468 (December 31, 2008) (SR-BSE-2008-48)
(order approving proposed rules of NASDAQ OMX BX); 49068 (January
13, 2004), 69 FR 2775 (January 20, 2004) (order approving the Boston
Options Exchange as an options trading facility of the Boston Stock
Exchange); 44983 (October 25, 2001), 66 FR 55225 (November 1, 2001)
(order approving Archipelago Exchange as electronic trading facility
of the Pacific Exchange (``PCX'')(``ArcaEx Order'')); 29237 (May 24,
1991), 56 FR 24853 (May 31, 1991) (regarding NYSE's Off-Hours
Trading Facility); 15533 (January 29, 1979), 44 FR 6084 (January 31,
1979) (regarding the American Stock Exchange (``Amex'') Post
Execution Reporting System, the Amex Switching System, the
Intermarket Trading System, the Multiple Dealer Trading Facility of
the Cincinnati Stock Exchange, the PCX Communications and Execution
System, and the Philadelphia Stock Exchange's (``Phlx'') Automated
Communications and Execution System (``1979 Release'')); and 14563
(March 14, 1978), 43 FR 11542 (March 17, 1978) (regarding the NYSE's
Designated Order Turnaround System (``1978 Release'')).
---------------------------------------------------------------------------
Second, the rule requires that the member not participate in the
execution of its order. BATS Y Exchange represented that at no time
following the submission of an order is a member able to acquire
control or influence over the result or timing of an order's
execution.\134\ According to BATS Y Exchange, the execution of a
member's order is determined solely by what orders, bids, or offers are
present in the system at the time the member submits the order.
Accordingly, the Commission believes that a BATS Y Exchange member
would not participate in the execution of an order submitted into the
BATS Y Exchange system.
---------------------------------------------------------------------------
\134\ See BATS Y Exchange 11(a) Letter, supra note 132. The
member may cancel or modify the order, or modify the instructions
for executing the order, but only from off the Exchange floor. Id.
The Commission has stated that the non-participation requirement is
satisfied under such circumstances so long as such modifications or
cancellations are also transmitted from off the floor. See
Securities Exchange Act Release No. 14563 (March 14, 1978), 43 FR
11542 (March 17, 1978) (stating that the ``non-participation
requirement does not prevent initiating members from canceling or
modifying orders (or the instructions pursuant to which the
initiating member wishes orders to be executed) after the orders
have been transmitted to the executing member, provided that any
such instructions are also transmitted from off the floor'').
---------------------------------------------------------------------------
Third, Rule 11a2-2(T) requires that the order be executed by an
exchange member who is unaffiliated with the member initiating the
order. The Commission has stated that this requirement is satisfied
when automated exchange facilities, such as the BATS Y Exchange system,
are used, as long as the design of these systems ensures that members
do not possess any special or unique trading advantages in handling
their orders after transmitting them to the exchange.\135\ BATS Y
Exchange has represented that the design of the BATS Y Exchange system
ensures that no member has any special or unique trading advantage in
the handling of its orders after transmitting its orders to BATS Y
Exchange.\136\ Based on BATS Y Exchange's representation, the
Commission believes that the BATS Y Exchange system satisfies this
requirement.
---------------------------------------------------------------------------
\135\ In considering the operation of automated execution
systems operated by an exchange, the Commission noted that while
there is no independent executing exchange member, the execution of
an order is automatic once it has been transmitted into the systems.
Because the design of these systems ensures that members do not
possess any special or unique trading advantages in handling their
orders after transmitting them to the exchange, the Commission has
stated that executions obtained through these systems satisfy the
independent execution requirement of Rule 11a2-2(T). See 1979
Release, supra note 133.
\136\ See BATS Y Exchange 11(a) Letter, supra note 132.
---------------------------------------------------------------------------
Fourth, in the case of a transaction effected for an account with
respect to which the initiating member or an associated person thereof
exercises investment discretion, neither the initiating member nor any
associated person thereof may retain any compensation in connection
with effecting the transaction, unless the person authorized to
transact business for the account has expressly provided otherwise by
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T).\137\ BATS Y Exchange represented that BATS Y Exchange members
trading for covered accounts over which they exercise investment
discretion must comply with this condition in order to rely on the
rule's exemption.\138\
---------------------------------------------------------------------------
\137\ 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written
contract to retain compensation, in connection with effecting
transactions for covered accounts over which such member or
associated person thereof exercises investment discretion, to
furnish at least annually to the person authorized to transact
business for the account a statement setting forth the total amount
of compensation retained by the member in connection with effecting
transactions for the account during the period covered by the
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, supra
note 133 (stating ``[t]he contractual and disclosure requirements
are designed to assure that accounts electing to permit transaction-
related compensation do so only after deciding that such
arrangements are suitable to their interests'').
\138\ See BATS Y Exchange 11(a) Letter, supra note 132.
---------------------------------------------------------------------------
D. Section 11A of the Act
Section 11A of the Act and the rules thereunder form the basis of
our national market system and impose requirements on exchanges to
implement its objectives. Specifically, national securities exchanges
are required, under Rule 601 of Regulation NMS,\139\ to file
transaction reporting plans regarding transactions in listed equity and
Nasdaq securities that are
[[Page 51303]]
executed on their facilities. Currently registered exchanges satisfy
this requirement by participating in the Consolidated Transaction
Association Plan (``CTA Plan'') for listed equities and the Joint Self-
Regulatory Organization Plan Governing the Collection, Consolidation
and Dissemination of Quotation and Transaction Information for Nasdaq-
Listed Securities Traded on Exchanges on an Unlisted Trading Privileges
Basis (``Nasdaq UTP Plan'') for Nasdaq securities.\140\ Before BATS Y
Exchange can begin operating as an exchange, it must join these plans
as a participant.
---------------------------------------------------------------------------
\139\ 17 CFR 242.601.
\140\ These plans also satisfy the requirement in Rule 603 that
national securities exchanges and national securities associations
act jointly pursuant to an effective national market system plan to
disseminate consolidated information, including a national best bid
and offer, and quotations for and transactions in NMS stocks. See 17
CFR 242.603. See also Nasdaq Exchange Registration Order, supra note
27.
---------------------------------------------------------------------------
National securities exchanges are required, under Rule 602 of
Regulation NMS,\141\ to collect bids, offers, quotation sizes and
aggregate quotation sizes from those members who are responsible broker
or dealers. National securities exchanges must then make this
information available to vendors at all times when the exchange is open
for trading. The current exchanges satisfy this requirement by
participating in the Consolidated Quotation System Plan (``CQ Plan'')
for listed equity securities and the Nasdaq UTP Plan for Nasdaq
securities. Before BATS Y Exchange can begin operating as an exchange
it also must join the CQ Plan as a participant, in addition to the CTA
Plan and the Nasdaq UTP Plan.
---------------------------------------------------------------------------
\141\ 17 CFR 242.602.
---------------------------------------------------------------------------
Finally, national securities exchanges must make available certain
order execution information pursuant to Rule 605 of Regulation
NMS.\142\ Current exchanges have standardized the required disclosure
mechanisms by participating in the Order Execution Quality Disclosure
Plan.\143\ BATS Y Exchange must join this plan before it begins
operations as an exchange.
---------------------------------------------------------------------------
\142\ 17 CFR 242.605.
\143\ See Securities Exchange Act Release No. 44177 (April 12,
2001), 66 FR 19814 (April 17, 2001).
---------------------------------------------------------------------------
E. Order Routing
As discussed above, BATS Global Markets wholly owns BATS Y
Exchange, BATS Exchange, and BATS Trading.\144\ As such, BATS Y
Exchange and BATS Exchange are affiliated with BATS Trading, which is a
registered broker-dealer and member of FINRA. BATS Trading is a member
of BATS Exchange and will become a member of BATS Y Exchange.
---------------------------------------------------------------------------
\144\ See supra Section III.A.
---------------------------------------------------------------------------
BATS Y Exchange's proposed Rule 2.10 provides generally that,
without prior Commission approval, the Exchange may not, directly or
indirectly, acquire or maintain an ownership interest in a member
organization of such Exchange. In addition, BATS Y Exchange's Rule 2.10
provides that, without prior Commission approval, none of the
Exchange's members may be or become an affiliate of the Exchange or an
affiliate of an affiliate of the Exchange. However, BATS Y Exchange
proposes that its affiliate, BATS Trading, become a member of the
Exchange to provide certain routing services on behalf of the Exchange.
Specifically, BATS Y Exchange proposes to (1) operate BATS Trading as a
facility of the Exchange to provide outbound routing services to other
securities exchanges,\145\ automated trading systems, electronic
communications networks, or other broker-dealers (collectively,
``Trading Centers''), and (2) receive through BATS Trading orders
routed inbound to the Exchange from its affiliated exchange (i.e., BATS
Exchange). Accordingly, BATS Y Exchange seeks Commission approval of an
exception in the Exchange's Rule 2.10 that will permit the affiliation
between the Exchange and its member, BATS Trading.
---------------------------------------------------------------------------
\145\ Securities exchanges to which BATS Y Exchange proposes to
route orders include its affiliated exchange (i.e., BATS Exchange).
---------------------------------------------------------------------------
Recognizing that the Commission has previously expressed concern
regarding the potential for conflicts of interest in instances where a
member firm is affiliated with an exchange, particularly where a member
is routing orders to such affiliated exchange,\146\ BATS Y Exchange has
proposed limitations and conditions on BATS Trading's affiliation with
the Exchange. Specifically, BATS Y Exchange proposes that BATS Trading
operate as an affiliated outbound router on behalf of the Exchange,
subject to certain conditions set forth in the Exchange's Rule 2.11;
and that BATS Trading operate as an affiliated inbound router on behalf
of the Exchange subject to certain conditions set forth in the
Exchange's Rule 2.12.\147\
---------------------------------------------------------------------------
\146\ See e.g., Securities Exchange Act Release No. 53382
(February 27, 2006), 71 FR 11251 FR (March 6, 2006).
\147\ See BATS Y Exchange Rules 2.11 and 2.12.
---------------------------------------------------------------------------
1. BATS Trading as Outbound Router
BATS Y Exchange proposes that BATS would operate as a facility (as
defined in Section 3(a)(2) of the Act) of the Exchange providing
outbound routing services from the Exchange to other Trading
Centers.\148\ BATS Trading's operation as a facility providing outbound
routing services for BATS Y Exchange is subject to the conditions that:
---------------------------------------------------------------------------
\148\ See BATS Y Exchange Rule 2.11.
---------------------------------------------------------------------------
BATS Y Exchange regulates BATS Trading as a facility of
the Exchange;
FINRA, a self-regulatory organization unaffiliated with
the Exchange or any of its affiliates, is BATS Trading's designated
examining authority;
BATS Trading will not engage in any business other than
(a) its outbound router function, (b) its inbound router function as
described in Exchange Rule 2.12, and (c) any other activities it may
engage in as approved by the Commission;
The use of BATS Trading for outbound routing by Exchange
members is optional;
The Exchange will establish and maintain procedures and
internal controls reasonably designed to adequately restrict the flow
of confidential and proprietary information between the Exchange and
its facilities (including BATS Trading) and any other entity; \149\ and
---------------------------------------------------------------------------
\149\ Id.
---------------------------------------------------------------------------
The books, records, premises, officers, agents, directors
and employees of BATS Trading as a facility of the Exchange shall be
deemed to be the books, records, premises, officers, agents, directors
and employees of the Exchange for purposes of, and subject to oversight
pursuant to, the Act.
As a facility of BATS Y Exchange, BATS Trading will be subject to
the Exchange's and the Commission's regulatory oversight, and BATS Y
Exchange will be responsible for ensuring that BATS Trading's outbound
routing function is operated consistent with Section 6 of the Act and
the Exchange's rules. In addition, BATS Y Exchange will be required to
file with the Commission proposed rule changes and fees relating to
BATS Trading's outbound routing function. Any such rules and fees
relating to BATS Trading's outbound router function will be subject to
exchange non-discrimination requirements. The Commission notes that the
proposed conditions for the operation of BATS Trading as affiliated
outbound router on behalf of the Exchange are consistent with
conditions the Commission has approved for other exchanges.\150\ The
[[Page 51304]]
Commission therefore finds the proposed operation of BATS Trading as an
affiliated outbound router of BATS Y Exchange to be consistent with the
Act.
---------------------------------------------------------------------------
\150\ See, e.g., Securities Exchange Act Release No. 59153
(December 23, 2008), 73 FR 80485 (December 31, 2008) (order
approving outbound routing by broker-dealer affiliate of Nasdaq
Stock Exchange); BATS Exchange Order, supra note 18; and EDGX and
EDGA Exchange Order, supra note 18.
---------------------------------------------------------------------------
2. BATS Trading as Inbound Router
BATS Y Exchange also proposes that BATS Trading, operating as a
facility of the BATS Exchange, provide routing services from BATS
Exchange to BATS Y Exchange (i.e., ``inbound'' routing), subject to the
following conditions and limitations:
The Exchange enter into (1) a 17d-2 agreement with FINRA,
a non-affiliated SRO,\151\ to relieve the Exchange of regulatory
responsibilities for BATS Trading with respect to rules that are common
rules between the Exchange and the non-affiliated SRO, and (2) the
Regulatory Contract with FINRA,\152\ a non-affiliated SRO, to perform
regulatory responsibilities for BATS Trading for unique Exchange rules.
---------------------------------------------------------------------------
\151\ See supra Section III.B.4 for a discussion of the Rule
17d-2 agreement.
\152\ See supra Section III.B.3 for a discussion of the
Regulatory Contract.
---------------------------------------------------------------------------
The Regulatory Contract requires the Exchange to provide
the non-affiliated SRO with information, in an easily accessible
manner, regarding all exception reports, alerts, complaints, trading
errors, cancellations, investigations, and enforcement matters
(collectively ``Exceptions'') in which BATS Trading is identified as a
participant that has potentially violated Exchange or Commission Rules,
and requires that FINRA provide a report, at least quarterly, to the
Exchange quantifying all Exceptions in which BATS Trading is identified
as a participant that has potentially violated Exchange or Commission
rules.
BATS Y Exchange has in place a rule that requires BATS
Global Market to establish and maintain procedures and internal
controls reasonably designed to ensure that BATS Trading does not
develop or implement changes to its system based on non-public
information obtained as a result of its affiliation with the Exchange,
until such information is available generally to similarly situated
members of the Exchange.
Routing of orders from BATS Trading to the Exchange, in
BATS Trading's capacity as a facility of BATS Exchange, be authorized
for a pilot period of 12 months.\153\
---------------------------------------------------------------------------
\153\ See BATS Y Exchange Rule 2.12.
---------------------------------------------------------------------------
Although the Commission continues to be concerned about potential
unfair competition and conflicts of interest between an exchange's
self-regulatory obligations and its commercial interest when the
exchange is affiliated with one of its members, for the reasons
discussed below, the Commission believes that it is consistent with the
Act to permit BATS Trading to be affiliated with BATS Y Exchange and to
provide inbound routing to BATS Y Exchange on a pilot basis, subject to
the conditions described above.
BATS Y Exchange has proposed five conditions applicable to BATS
Trading's inbound routing activities, which are enumerated above. The
Commission believes that these conditions mitigate its concerns about
potential conflicts of interest and unfair competitive advantage. In
particular, the Commission believes that FINRA's oversight of BATS
Trading,\154\ combined with FINRA's monitoring of BATS Trading's
compliance with the equity trading rules and quarterly reporting to the
Exchange, will help to protect the independence of the Exchange's
regulatory responsibilities with respect to BATS Trading. The
Commission also believes that the requirement that BATS Y Exchange
establish and maintain procedures and internal controls reasonably
designed to ensure that BATS Trading does not develop or implement
changes to its system based on non-public information obtained as a
result of its affiliation with the Exchange, until such information is
available generally to similarly situated members of the Exchange, is
reasonably designed to ensure that BATS Trading cannot misuse any
information advantage it may have because of its affiliation with the
Exchange. Furthermore, the Commission believes that BATS Y Exchange's
proposal to allow BATS Trading to route orders inbound to the Exchange
from its affiliated exchange (i.e., BATS Exchange), on a pilot basis,
will provide BATS Y Exchange and the Commission an opportunity to
assess the impact of any conflicts of interest of allowing an
affiliated member of an Exchange to route orders inbound to the
Exchange and whether such affiliation provides an unfair competitive
advantage.
---------------------------------------------------------------------------
\154\ This oversight will be accomplished through the Rule 17d-2
agreement and the Regulatory Contract.
---------------------------------------------------------------------------
Further, the Commission notes that the proposed conditions for the
operation of BATS Trading as affiliated inbound router on behalf of
BATS Y Exchange are consistent with conditions the Commission has
approved for other exchanges.\155\ The Commission therefore finds the
proposed operation of BATS Trading as an affiliated inbound router of
BATS Y Exchange is consistent with the Act.
---------------------------------------------------------------------------
\155\ See e.g., Securities Exchange Release Nos. 60598
(September 1, 2009), 74 FR 46280 (September 8, 2009) (SR-ISE-2009-
45); 59154 (December 23, 2008) 73 FR 80468 (December 31, 2008) (SR-
BSE-2008-48) (order approving proposed rulebook of NASDAQ OMX BX);
59009 (November 24, 2008), 73 FR 73363 (December 2, 2008) (order
granting accelerated approval to File No. SR-NYSEALTR-2008-07); and
EDGX and EDGA Exchange Order, supra note 18.
---------------------------------------------------------------------------
F. Listing Requirements/Unlisted Trading Privileges
BATS Y Exchange initially does not intend to list any securities.
Accordingly, BATS Y Exchange has not proposed rules that would allow it
to list any securities at this time.\156\ Instead, BATS Y Exchange has
proposed to trade securities pursuant to unlisted trading privileges,
consistent with Section 12(f) of the Act and Rule 12f-5 thereunder.
Rule 12f-5 requires an exchange that extends unlisted trading
privileges to securities to have in effect a rule or rules providing
for transactions in the class or type of security to which the exchange
extends unlisted trading privileges.\157\ BATS Y Exchange's rules allow
it to extend unlisted trading privileges to any security listed on
another national securities exchange or with respect to which unlisted
trading privileges may otherwise be extended in accordance with Section
12(f) of the Act.\158\ BATS Y Exchange's proposed rules provide for
transactions in the class or type of security to which the exchange
intends to extend unlisted trading privileges.\159\ In addition,
pursuant to its rules, BATS Y Exchange will cease trading any equity
security admitted to unlisted trading privileges that is no longer
listed on another national securities exchange or to which unlisted
trading privileges may no longer be extended, consistent with Section
12(f). The Commission finds that these rules are consistent with the
Act.
---------------------------------------------------------------------------
\156\ BATS Y Exchange has incorporated listing standards for
certain derivative securities products in its rules. However, BATS Y
Exchange's rules will prohibit BATS Y Exchange from listing any
derivative security product pursuant to these listing standards
until BATS Y Exchange submits a proposed rule change to the
Commission to amend its listing standards to comply with Rule 10A-3
under the Act and incorporate qualitative listing criteria. See BATS
Y Exchange Rule 14.1(a).
\157\ 17 CFR 240.12f-5. See also Securities Exchange Act Release
No. 35737 (April 21, 1995), 60 FR 20891 (April 28, 1995) (adopting
Rule 12f-5).
\158\ See BATS Y Exchange Rule 14.1(a).
\159\ Id. BATS Y Exchange's rules currently do not provide for
the trading of options, security futures, or other similar
instruments.
---------------------------------------------------------------------------
[[Page 51305]]
IV. Exemption From Section 19(b) of the Act With Regard to FINRA Rules
Incorporated by Reference
BATS Y Exchange proposes to incorporate by reference certain FINRA
rules as Exchange rules. Thus, for certain Exchange rules, Exchange
members will comply with an Exchange rule by complying with the FINRA
rule referenced.\160\ In connection with its proposal to incorporate
FINRA rules by reference, BATS Y Exchange requested, pursuant to Rule
240.0-12,\161\ an exemption under Section 36 of the Act from the rule
filing requirements of Section 19(b) of the Act for changes to those
BATS Y Exchange rules that are effected solely by virtue of a change to
a cross-referenced FINRA rule.\162\ BATS Y Exchange proposes to
incorporate by reference categories of rules (rather than individual
rules within a category) that are not trading rules. BATS Y Exchange
agrees to provide written notice to its members whenever a proposed
rule change to a FINRA rule that is incorporated by reference is
proposed.\163\
---------------------------------------------------------------------------
\160\ BATS Y Exchange proposes to incorporate by reference the
12000 and 13000 Series of FINRA's NASD Manual, the NASD Code of
Arbitration Procedure for Customer and Industry Disputes. See BATS Y
Exchange Rule 9.1.
\161\ See 17 CFR 240.0-12.
\162\ See to Elizabeth M. Murphy, Secretary, Commission, from
Anders Franzon, Vice President and Associate General Counsel, BATS
Exchange, Inc., dated June 30, 2010.
\163\ BATS Exchange will provide such notice via a posting on
the same Web site location where BATS Exchange will post its own
rule filings pursuant to Commission Rule 19b-4(l). The posting will
include a link to the location on the FINRA Web site where the
proposed rule change is posted. See id.
---------------------------------------------------------------------------
Using its authority under Section 36 of the Act,\164\ the
Commission previously exempted certain SROs from the requirement to
file proposed rule changes under Section 19(b) of the Act.\165\ Each
such exempt SRO agreed to be governed by the incorporated rules, as
amended from time to time, but is not required to file a separate
proposed rule change with the Commission each time the SRO whose rules
are incorporated by reference seeks to modify its rules.
---------------------------------------------------------------------------
\164\ 15 U.S.C. 78mm.
\165\ See, e.g., NOM Approval Order, supra note 90; Nasdaq
Exchange Registration Order, supra note 27; BATS Exchange Order,
supra note 18; and EDGX and EDGA Exchange Order, supra note 18.
---------------------------------------------------------------------------
In addition, each such exempt SRO incorporated by reference only
regulatory rules (i.e., margin, suitability, arbitration), not trading
rules, and incorporated by reference whole categories of rules (i.e.,
did not ``cherry-pick'' certain individual rules within a category).
Each such exempt SRO had reasonable procedures in place to provide
written notice to its members each time a change is proposed to the
incorporated rules of another SRO in order to provide its members with
notice of a proposed rule change that affects their interests, so that
they would have an opportunity to comment on it.
The Commission is granting BATS Y Exchange's request for exemption,
pursuant to Section 36 of the Act, from the rule filing requirements of
Section 19(b) of the Act with respect to the rules that BATS Y Exchange
proposes to incorporate by reference. This exemption is conditioned
upon BATS Y Exchange providing written notice to its members whenever
FINRA proposes to change a rule that BATS Y Exchange has incorporated
by reference. The Commission believes that this exemption is
appropriate in the public interest and consistent with the protection
of investors because it will promote more efficient use of Commission
and SRO resources by avoiding duplicative rule filings based on
simultaneous changes to identical rules sought by more than one SRO.
Consequently, the Commission grants BATS Y Exchange's exemption
request.
V. Conclusion
It is ordered that the application of BATS Y Exchange for
registration as a national securities exchange be, and hereby is,
granted.
It is further ordered that operation of BATS Y Exchange is
conditioned on the satisfaction of the requirements below:
A. Participation in National Market System Plans. BATS Y Exchange
must join the CTA Plan, the CQ Plan, the Nasdaq UTP Plan, and the Order
Execution Quality Disclosure Plan.
B. Intermarket Surveillance Group. BATS Y Exchange must join the
Intermarket Surveillance Group.
C. Minor Rule Violation Plan. A MRVP filed by BATS Y Exchange under
Rule 19d-1(c)(2) must be declared effective by the Commission.\166\
---------------------------------------------------------------------------
\166\ 17 CFR 240.19d-1(c)(2).
---------------------------------------------------------------------------
D. 17d-2 Agreement. An agreement pursuant to Rule 17d-2 \167\
between FINRA and BATS Y Exchange that allocates to FINRA regulatory
responsibility for those matters specified above \168\ must be approved
by the Commission, or BATS Y Exchange must demonstrate that it
independently has the ability to fulfill all of its regulatory
obligations.
---------------------------------------------------------------------------
\167\ 17 CFR 240.17d-2.
\168\ See supra notes 95 to 103 and accompanying text.
---------------------------------------------------------------------------
E. Examination by the Commission. BATS Y Exchange must have, and
represent in a letter to the staff in the Commission's Office of
Compliance Inspections and Examinations that it has, adequate
procedures and programs in place to effectively regulate BATS Y
Exchange.
F. Trade Processing and Exchange Systems. BATS Y Exchange must
have, and represent in a letter to the staff in the Commission's
Division of Trading and Markets that it has, adequate procedures and
programs in place, as noted in Commission Automation Policy Review
guidelines,\169\ to effectively process trades and maintain the
confidentiality, integrity, and availability of the Exchange's systems.
---------------------------------------------------------------------------
\169\ On November 16, 1989, the Commission published its first
Automation Review Policy (``ARP I''), in which it created a
voluntary framework for self-regulatory organizations to establish
comprehensive planning and assessment programs to determine systems
capacity and vulnerability. On May 9, 1991, the Commission published
its second Automation Review Policy (``ARP II'') to clarify the
types of review and reports that were expected from self-regulatory
organizations. See Securities Exchange Act Release Nos. 27445
(November 16, 1989), 54 FR 48703 (November 24, 1989); and 29185 (May
9, 1991), 56 FR 22490 (May 15, 1991).
---------------------------------------------------------------------------
G. BATS Exchange Inbound Routing. BATS Exchange must have in place
rules approved by the Commission relating to an inbound routing
structure that is consistent with what the Commission has approved for
other national securities exchanges that receive orders from affiliated
routers.\170\
---------------------------------------------------------------------------
\170\ See supra note 155.
---------------------------------------------------------------------------
It is further ordered, pursuant to Section 36 of the Act,\171\ that
BATS Y Exchange shall be exempt from the rule filing requirements of
Section 19(b) of the Act \172\ with respect to the FINRA rules BATS Y
Exchange proposes to incorporate by reference into BATS Y Exchange's
rules, subject to the conditions specified in this Order.
---------------------------------------------------------------------------
\171\ 15 U.S.C. 78mm.
\172\ 15 U.S.C. 78s(b).
By the Commission.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-20536 Filed 8-18-10; 8:45 am]
BILLING CODE 8010-01-P