Federal Register Volume 76, Number 90 (Tuesday, May 10, 2011)
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
FR Doc No: 2011-11337
SECURITIES AND EXCHANGE COMMISSION
Release No. 34-64400; File No. SR-NYSEAmex-2011-27
Self-Regulatory Organizations; NYSE Amex LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending its Fee
Schedule To Eliminate Registered Representative Fees for Amex Trading
Permit (``ATP'') Holders and To Institute a New Transaction-Based
``Options Regulatory Fee''
May 4, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that, on April 28, 2011, NYSE Amex LLC (``NYSE Amex'' or the
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange proposes to amend its Fee Schedule to eliminate registered representative fees for Amex Trading Permit (``ATP'')
Holders and institute a new transaction-based ``Options Regulatory
Fee.'' The text of the proposed rule change is available at the
Exchange, at the Commission's Public Reference Room, on the
Commission's Web site at http://www.sec.gov, and http://www.nyse.com.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received
on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change 1. Purpose
This proposed rule change is based on a rule change previously submitted by NASDAQ OMX BX, Inc. on behalf of the Boston Options
Exchange Group, LLC (``BOX'') that was effective upon filing.\3\ The
Exchange proposes to amend the NYSE Amex Fee Schedule to institute a new transaction-based ``Options Regulatory Fee'' and eliminate registered representative fees. Each ATP Holder that registers an options principal and/or representative who is conducting business on
NYSE Amex currently is assessed a registered representative fee (``RR
Fee'') based on the action(s) associated with the registration. There are annual fees as well as initial, transfer and termination fees.\4\
RR Fees and other regulatory fees collected by the Exchange were intended to cover only a portion of the cost of the Exchange's regulatory programs. Prior to rule changes by other options exchanges, such as the Chicago Board Options Exchange (``CBOE''), BOX, NASDAQ OMX
PHLX (``PHLX'') and the International Securities Exchange (``ISE''), all options exchanges, regardless of size, charged registered representative fees.
\3\ See Securities Exchange Act Release No. 61388 (January 20, 2010), 75 FR 4431 (January 27, 2010) (SR-BX-2010-001) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change Relating to the Registered Representative Fee and Options Regulatory Fee).
\4\ In this regard, the Exchange proposes to eliminate from its options fee schedule any reference to fees the Exchange no longer asks FINRA to collect on its behalf relating to the processing of registered representatives. In particular, the following
``Registration Fees'' will be eliminated from the options fee schedule: The Initial Processing Fee, the Annual Renewal Processing
Fee, the Transfer Processing Fee, the Web CRD System Transition Fee, and the Terminations Fee. Fees relating to the processing of registered representatives that FINRA collects and retains will remain in the Exchange's options fee schedule. In particular, the following ``Registration Fees'' will remain in the options fee schedule: the Disclosure Processing Fee, the Fingerprint Card
Processing Fee, and the fee for Fingerprint Results Processed thru other SROs.
The Exchange believes that the current RR Fee is no longer equitable. The options industry has evolved to a structure with many more Internet-based and discount brokerage firms. These firms have few registered representatives and thus pay very little in RR Fees compared to full service brokerage firms that have many registered representatives. Further, due to the manner in which RR Fees are charged, it is possible for an NYSE Amex ATP Holder to restructure its business to avoid paying these fees altogether. For example, a firm can avoid RR Fees by terminating its ATP status and sending its business to
NYSE Amex through another separate NYSE Amex ATP Holder, even an affiliated firm that has many fewer registered representatives. If firms terminated their ATP status to avoid RR Fees, the Exchange would suffer the loss of a source of funding for its regulatory programs.
More importantly, the regulatory effort the Exchange expends to review the transactions of each type of firm is not commensurate with the number of registered representatives that each firm employs.
In order to address the inequity of the current regulatory fee structure and to offset more fully the cost of the Exchange's regulatory programs, the Exchange proposes to eliminate the current RR
Fee for NYSE Amex ATP Holders and adopt an Options Regulatory Fee
(``ORF'') of $0.004 per contract.\5\ As described below, this fee would be assessed by the Exchange on each ATP Holder for all options transactions executed or cleared by the ATP Holder that are cleared by
OCC in the customer range, regardless of the marketplace of execution.
In particular, the Exchange would impose the ORF on all options transactions executed in the customer range by an ATP Holder,\6\ even if the transactions do not take place on NYSE Amex. The ORF would also be charged for transactions that are not executed by an ATP Holder but are ultimately cleared by an ATP Holder. In the case where an ATP
Holder executes a transaction and a different ATP Holder clears the transaction, the ORF would be assessed to the ATP Holder who executes the transaction. In the case where a non-ATP Holder executes a transaction and an ATP Holder clears the transaction, the ORF would be assessed to the ATP Holder who clears the transaction.
\5\ Because the annual component of the RR Fee has already been assessed for 2011, the Exchange will make a pro rata refund for the remaining portion of the year following elimination of the RR Fee.
In addition, the Exchange notes that permit holders who conduct only equities business will no longer be subject to the RR Fee as a result of the elimination of this fee. Consequently, the Exchange proposes to eliminate from its NYSE Amex Equities Price List any reference to fees the Exchange no longer asks FINRA to collect on its behalf relating to the processing of registered representatives.
In particular, the following ``Registration Fees'' will be eliminated from the equities fee schedule: the Initial Processing
Fee, the Annual Renewal Processing Fee, the Transfer Processing Fee, the Web CRD System Transition Fee, and the Terminations Fee. Fees relating to the processing of registered representatives that FINRA collects and retains will remain in the Exchange's equities fee schedule. In particular, the following ``Registration Fees'' will remain in the equities fee schedule: the Disclosure Processing Fee, the Fingerprint Card Processing Fee, and the fee for Fingerprint
Results Processed thru other SROs. The Exchange will separately submit a rule filing to address funding for equities regulation.
\6\ Such transactions must be cleared by an ATP Holder in the customer range for the ORF to apply. Subject to the foregoing, the
ORF would apply to all customer orders executed by an ATP Holder on
NYSE Amex. Exchange rules require each ATP Holder to submit trade information in order to allow the Exchange to properly prioritize and match orders and quotations and report resulting transactions to the OCC. See NYSE Amex Rule 956NY. The Exchange represents that it has surveillances in place to verify that ATP Holders comply with the rule.
As noted, the ORF would replace RR Fees, which relate to an ATP
Holder's options customer business. Further, RR Fees constituted the single-largest fee assessed that is related to regulation of customer trading activity, and the Exchange believes it is appropriate to charge the ORF only to transactions that clear as customer at the OCC. The
Exchange believes that its broad regulatory responsibilities with respect to an ATP Holders' activities supports applying the ORF to transactions cleared but not executed by an ATP Holder. The Exchange's regulatory responsibilities are the same regardless of whether an ATP
Holder executes a transaction or clears a transaction executed on its behalf. The Exchange regularly reviews all such activities, including performing surveillance for position limit violations, manipulation, front-running, contrary exercise advice violations and insider trading.\7\ These activities span across multiple exchanges.
\7\ The Exchange also participates in The Options Regulatory
Surveillance Authority (``ORSA'') national market system plan and in doing so shares information and coordinates with other exchanges designed to detect the unlawful use of undisclosed material information in the trading of securities options. ORSA is a national market system comprised of several self-regulatory organizations whose functions and objectives include the joint development, administration, operation and maintenance of systems and facilities utilized in the regulation, surveillance, investigation and detection of the unlawful use of undisclosed material information in the trading of securities options. The Exchange compensates ORSA for the Exchange's portion of the cost to perform insider trading surveillance on behalf of the Exchange. The ORF will cover the costs associated with the Exchange's arrangement with ORSA.
The Exchange believes the initial level of the fee is reasonable because it relates to the recovery of the costs of supervising and regulating an ATP
Holder's customer options business. The Exchange believes the amount of the ORF is fair and reasonably allocated because it is a closer approximation to the Exchange's actual costs in administering its regulatory program with respect to customer options activity.
The ORF would be collected indirectly from ATP Holders through their clearing firms by OCC on behalf of the Exchange. The Exchange expects that ATP Holders will pass-through the ORF to their customers in the same manner that firms pass-through to their customers the fees charged by Self Regulatory Organizations (``SROs'') to help the SROs meet their obligations under Section 31 of the Exchange Act.
The ORF is designed to recover a material portion of the costs to the Exchange of the supervision and regulation of ATP Holders, including performing routine surveillances, investigations, as well as policy, rulemaking, interpretive and enforcement activities.\8\ The
Exchange believes that revenue generated from the ORF will cover the substantial majority of the Exchange's regulatory costs related to the
NYSE Amex options market. At present, RR Fees make up the largest part of the Exchange's total options regulatory fee revenue, however, the total amount of NYSE Amex specific regulatory fees collected by the
Exchange is significantly less than the regulatory costs incurred by
NYSE Amex on an annual basis. The Exchange notes that its regulatory responsibilities with respect to an ATP Holder's compliance with options sales practice rules have been allocated to FINRA under a 17d-2 agreement. The ORF is not designed to cover the cost of options sales practice regulation.
\8\ As stated above, the RR Fees collected by the Exchange were originally intended to cover only a portion of the cost of the
Exchange's regulatory programs.
The Exchange would monitor the amount of revenue collected from the
ORF to ensure that it, in combination with its other NYSE Amex regulatory fees and fines, does not exceed the Exchange's total regulatory costs. The Exchange expects to monitor NYSE Amex regulatory costs and revenues at a minimum on an annual basis. If the Exchange determines NYSE Amex regulatory revenues exceed regulatory costs, the
Exchange would adjust the ORF by submitting a fee change filing to the
Commission. The Exchange would notify ATP Holders of adjustments to the
ORF via a Regulatory Bulletin.
The Exchange believes the proposed ORF is equitably allocated because it would be charged to all ATP Holders on all their customer options business. The Exchange believes the proposed ORF is reasonable because it will raise revenue related to the amount of customer options business conducted by an ATP Holder, and thus the amount of Exchange regulatory services those ATP Holders will require with respect to that activity, instead of how many registered representatives a particular
ATP Holder employs.\9\
\9\ The Exchange expects that implementation of the proposed ORF will result generally in many traditional brokerage firms paying less regulatory fees while Internet and discount brokerage firms will pay more.
With almost all transactions on the Exchange conducted electronically, the amount of resources required by the Exchange to surveil non-customer trading activity is significantly less than the amount of resources the Exchange must dedicate to surveil customer trading activity. This is because surveilling customer trading activity is much more labor-intensive and requires greater expenditure of human and technical resources than surveilling non-customer trading activity, which tends to be more automated and less labor-intensive. As a result, the costs associated with administering the customer component of the
Exchange's overall regulatory program are materially higher than the costs associated with administering the non-customer component (e.g., market maker) of its regulatory program.
The Exchange believes it is reasonable and appropriate for the
Exchange to charge the ORF for options transactions regardless of the exchange on which the transactions occur. The Exchange has a statutory obligation to enforce compliance by ATP Holders and their associated persons under the Exchange Act and the rules of the Exchange and to surveil for other manipulative conduct by market participants
(including non-ATP Holders) trading on the Exchange. The Exchange cannot effectively surveil for such conduct without looking at and evaluating activity across all options markets. Many of the Exchange's market surveillance programs require the Exchange to look at and evaluate activity across all options markets, such as surveillance for position limit violations, manipulation, front-running and contrary exercise advice violations/expiring exercise declarations.\10\ Also, the Exchange and the other options exchanges are required to populate a consolidated options audit trail (``COATS'') system in order to surveil an ATP Holder's activities across markets.\11\
\10\ The Exchange and other options SROs are parties to a 17d-2 agreement allocating among the SROs regulatory responsibilities relating to compliance by the common members with rules for expiring exercise declarations, position limits, OCC trade adjustments, and
Large Option Position Report reviews. See, e.g., Securities Exchange
Act Release No. 61588 (February 25, 2010).
\11\ COATS effectively enhances intermarket options surveillance by enabling the options exchanges to reconstruct the market promptly to effectively surveil certain rules.
In addition to its own surveillance programs, the Exchange works with other SROs and exchanges on intermarket surveillance related issues. Through its participation in the Intermarket Surveillance Group
(``ISG''),\12\ the Exchange shares information and coordinates inquiries and investigations with other exchanges designed to address potential intermarket manipulation and trading abuses. The Exchange's participation in ISG helps it to satisfy the Exchange Act requirement that it have coordinated surveillance with markets on which security futures are traded and markets on which any security underlying security futures are traded to detect manipulation and insider trading.\13\
\12\ ISG is an industry organization formed in 1983 to coordinate intermarket surveillance among the SROs by cooperatively sharing regulatory information pursuant to a written agreement between the parties. The goal of the ISG's information sharing is to coordinate regulatory efforts to address potential intermarket trading abuses and manipulations.
\13\ See Exchange Act Section 6(h)(3)(I).
The Exchange believes that charging the ORF across markets will avoid having ATP Holders direct their trades to other markets in order to avoid the fee and to thereby avoid paying for their fair share of regulation. If the ORF did not apply to activity across markets then an
ATP Holder would send their orders to the least cost, least regulated exchange. Other exchanges do impose a similar fee on their member's activity, including the activity of those members on NYSE Amex.\14\
\14\ The Exchange notes that CBOE currently assesses an options regulatory fee similar to the one proposed herein, which fee is also assessed on the trading activity of a CBOE member on NYSE Amex. See
Securities Exchange Act Release No. 58817 (October 20, 2008), 73 FR 63744 (October 27, 2008). Similar regulatory fees have also been instituted by PHLX (See Securities Exchange Act Release No. 61133
(December 9, 2009), 74 FR 66715 (December 16, 2009) (SR-Phlx-2009- 100)); and ISE (See Securities Exchange Act Release No. 61154
(December 11, 2009), 74 FR 67278 (December 18, 2009) (SR-ISE-2009- 105)).
The Exchange notes that there is established precedent for an SRO charging a fee across markets, namely, FINRA's Trading Activity Fee
\15\ and the CBOE's, PHLX's, ISE's and BOX's ORF.
While the Exchange does not have all the same regulatory responsibilities as FINRA, the Exchange believes that, like other exchanges that have adopted an ORF, its broad regulatory responsibilities with respect to an ATP Holders' activities, irrespective of where their transactions take place, supports a regulatory fee applicable to transactions on other markets. Unlike
FINRA's Trading Activity Fee, the ORF would apply only to a an ATP
Holder's customer options transactions.
\15\ See Securities Exchange Act Release No. 47946 (May 30, 2003), 68 FR 3402 (June 6, 2003).
The Exchange has designated this proposal to be operative on May 1, 2011. 2. Statutory Basis
Exchange believes the proposed rule change is consistent with
Section 6(b) of the Act \16\ in general, and furthers the objectives of
Section6(b)(4) \17\ of the Act in particular, in that it is designed to provide for the equitable allocation of reasonable dues, fees, and other charges among its ATP Holders and other persons using its facilities. The Exchange believes that the ORF is objectively allocated because it would be charged to all ATP Holders for all their transactions that clear as customer at the OCC through an ATP Holder.
Moreover, the Exchange believes the ORF ensures fairness by assessing higher fees to those participants that require more Exchange regulatory services based on the amount of customer options business they conduct.
\16\ 15 U.S.C. 78f (b).
\17\ 15 U.S.C. 78f (b)(4).
The Exchange notes that the Commission has addressed the funding of an SRO's regulatory operations in the Concept Release Concerning Self-
Regulation\18\ and the release on the Fair Administration and
Governance of Self-Regulatory Organizations.\19\ In the Concept
Release, the Commission states that: ``Given the inherent tension between an SRO's role as a business and as a regulator, there undoubtedly is a temptation for an SRO to fund the business side of its operations at the expense of regulation.''\20\ In order to address this potential conflict, the Commission proposed in the Governance Release rules that would require an SRO to direct monies collected from regulatory fees, fines, or penalties exclusively to fund the regulatory operations and other programs of the SRO related to its regulatory responsibilities.\21\ The Exchange has designed the ORF to generate revenues that, when combined with all of the Exchange's other regulatory fees, will be less than or equal to the Exchange's regulatory costs, which is consistent with the Commission's view that regulatory fees be used for regulatory purposes and not to support the
Exchange's business side. In this regard, the Exchange believes that the initial level of the fee is reasonable.
\18\ See Securities Exchange Act Release No. 50700 (November 18, 2004), 69 FR 71256 (December 8, 2004) (``Concept Release'').
\19\ See Securities Exchange Act Release No. 50699 (November 18, 2004), 69 FR 71126 (December 8, 2004) (``Governance Release'').
\20\ Concept Release at 71268.
\21\ Governance Release at 71142.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
The foregoing rule change is effective upon filing pursuant to
Section 19(b)(3)(A) \22\ of the Act and subparagraph (f)(2) of Rule 19b-4 \23\ thereunder, because it establishes a due, fee, or other charge imposed by the NYSE Amex.
\22\ 15 U.S.C. 78s(b)(3)(A).
\23\ 17 CFR 240.19b-4(f)(2).
At any time within 60 days of the filing of such proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to email@example.com. Please include
File Number SR-NYSEAmex-2011-27 on the subject line.
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEAmex-2011-27. This file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F
Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the
Exchange. All comments received will be posted without change; the
Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-
NYSEAmex-2011-27 and should be submitted on or before May 31, 2011.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\24\
\24\ 17 CFR 200.30-3(a)(12).
Elizabeth M. Murphy,
FR Doc. 2011-11337 Filed 5-9-11; 8:45 am
BILLING CODE 8011-01-P