Notice2024-31340
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change To Assume Operational Responsibility for Litigating Contested Disciplinary Proceedings Arising Out of Nasdaq-Led Investigations and Enforcement Activities and Amend Rules 9131 and 9810 (of General 5, the Nasdaq Discipline Rules) To Grant Nasdaq Regulation the Same Authority as FINRA In Contested Disciplinary Proceedings To Serve Complaints and Memoranda of Authority
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 30, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 249 (Monday, December 30, 2024)</title>
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[Federal Register Volume 89, Number 249 (Monday, December 30, 2024)]
[Notices]
[Pages 106689-106692]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-31340]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102029; File No. SR-NASDAQ-2024-083]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Proposed Rule Change To Assume Operational
Responsibility for Litigating Contested Disciplinary Proceedings
Arising Out of Nasdaq-Led Investigations and Enforcement Activities and
Amend Rules 9131 and 9810 (of General 5, the Nasdaq Discipline Rules)
To Grant Nasdaq Regulation the Same Authority as FINRA In Contested
Disciplinary Proceedings To Serve Complaints and Memoranda of Authority
December 23, 2024.
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 December 11, 2024, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III, below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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[[Page 106690]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to assume operational responsibility for
certain enforcement functions currently performed by the Financial
Industry Regulatory Authority (``FINRA'') under the Exchange's
authority and supervision. Specifically, the Exchange proposes to (1)
assume operational responsibility for litigating contested disciplinary
proceedings arising out of Nasdaq-led investigations and enforcement
activities, and (2) amend Rules 9131 and 9180[sic] (of General 5, the
Nasdaq Discipline Rules) to grant Nasdaq Regulation the same authority
as FINRA in contested disciplinary proceedings to serve complaints and
memoranda of authority.
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/nasdaq/rules">https://listingcenter.nasdaq.com/rulebook/nasdaq/rules</a>, at
the principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Section 6 of the Act requires that national securities exchanges
enforce their members' compliance with federal securities laws and
rules as well as the exchanges' own rules.\3\ As a self-regulatory
organization (``SRO''), Nasdaq must have a comprehensive regulatory
program that includes the investigation and prosecution of rule
violations. Since it became a national securities exchange, Nasdaq has
contracted with FINRA through various regulatory services agreements
(``RSAs'') to perform certain of these regulatory functions on its
behalf. However, as the Commission has made clear, ``the Nasdaq
Exchange 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.'' \4\
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\3\ 15 U.S.C. 78(f).
\4\ Securities Exchange Act Release No. 53128 (January 13,
2006), 71 FR 3550, 3556 (January 23, 2006).
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a. Background
In April 2019, Nasdaq received Commission approval to reallocate
operational responsibility from FINRA to Nasdaq Regulation Department
\5\ for certain investigation and enforcement activity,\6\ namely:
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\5\ Under Nasdaq Rule 9120(t), Nasdaq Regulation includes the
Nasdaq Enforcement Department.
\6\ Securities Exchange Act Release No. 85505 (April 3, 2019),
84 FR 14170, 14171 (April 9, 2016).
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<bullet> investigation and enforcement responsibilities for conduct
occurring on The Nasdaq Options Market,\7\ and
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\7\ As appropriate, Nasdaq Regulation coordinates with other
SROs to avoid regulatory duplication in cross-market investigations,
primarily through the Cross Market Regulation Working Group.
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<bullet> investigation and enforcement responsibilities for conduct
occurring on Nasdaq's equity market only, i.e., conduct not also on
non-Nasdaq-affiliated equities markets.\8\
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\8\ With respect to the operational responsibilities described,
Nasdaq Regulation already performed these functions for the Nasdaq
PHLX LLC (``Phlx''), Nasdaq ISE, LLC (``ISE''), Nasdaq GEMX, LLC
(``GEMX''), and Nasdaq MRX, LLC (``MRX'') because there is no
comparable rule to Rule General 2, Section 7 on those markets.
Nasdaq BX, Inc. (``BX''), which does have a comparable rule to Rule
General 2, Section 7, received Commission approval to perform these
functions in June 2019. See Securities Exchange Act Release No.
86051 (June 6, 2019), 84 FR 27387 (June 22, 2019).
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In March 2020, Nasdaq received Commission approval to reallocate
operational responsibility from FINRA to Nasdaq Regulation for
additional enforcement activity, namely the handling of certain
contested disciplinary proceedings.\9\ Specifically, Nasdaq requested
and received authority to handle contested disciplinary proceedings
arising out of Nasdaq-led investigation and enforcement activities that
``FINRA is unable or unwilling to handle due to strained resources or
other similar limitations.'' \10\ For those contested disciplinary
proceedings over which Nasdaq did not request approval to assume
operational responsibility, FINRA continues to litigate those matters
under the Exchange's supervision.
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\9\ See Securities Exchange Act Release No. 88209 (February 13,
2020), 85 FR 9870 (February 20, 2020), as modified by Amendment No
1.; Securities Exchange Act Release No. 88516 (March 30, 2020), 85
FR 19042 (April 3, 2020).
\10\ Id.
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b. Proposed Rule Change
Now the Exchange requests approval to (1) assume operational
responsibility for litigating contested disciplinary proceedings
arising out of Nasdaq-led investigations and enforcement activities,
and (2) amend Rules 9131 and 9180[sic] (of General 5, the Nasdaq
Discipline Rules) to grant Nasdaq Regulation the same authority as
FINRA in contested disciplinary proceedings to serve complaints and
memoranda of authority.
Reallocation of Operational Responsibility
The March 2020 Commission approval vested Nasdaq with the authority
to litigate a subset of contested disciplinary proceedings pertinent to
the Exchange (i.e., those contested disciplinary matters arising out of
Nasdaq-led investigations and enforcement activities that ``FINRA is
unable or unwilling to handle due to strained resources or other
similar limitations'').\11\ This proposal expands Nasdaq's enforcement
authority by enabling Nasdaq Regulation to litigate contested
disciplinary proceedings arising out of Nasdaq-led investigations and
enforcement activities in the first instance, regardless of FINRA's
ability or willingness to handle the matter.
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\11\ See supra n. 9.
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Nasdaq's assumption of broader operational responsibility for
litigating contested disciplinary proceedings arising out of Nasdaq-led
investigations and enforcement activities allows for the more immediate
and efficient enforcement of federal securities laws and rules and
Nasdaq's own rules. Nasdaq enjoys deep expertise in its own market
structure and in surveillance on the Exchange. When a Nasdaq
investigation identifies impermissible activity on its Exchange and
Nasdaq cannot settle the matter with the responsible Nasdaq member,
Nasdaq Regulation's assumption of the ability to litigate the contested
disciplinary proceeding avoids the need for FINRA's Enforcement
Department to familiarize itself with the Nasdaq-led investigation and
consequently helps expedites the enforcement of Nasdaq's rules and the
securities laws and rules with which Nasdaq members must comply.
The Exchange notes that this proposal would not change the
disciplinary process or the procedural protections already afforded to
Nasdaq members in contested disciplinary proceedings. For example, the
rules applicable to the disciplinary process remain the same, and
FINRA's Office of Hearing Officers
[[Page 106691]]
will continue to administer the hearing process for all contested
disciplinary proceedings. Therefore, regardless of whether FINRA or the
Exchange is responsible for litigating the matter, FINRA's Office of
Hearing Officers will administer the hearing process.\12\
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\12\ FINRA's Office of Hearing Officers plays no role in
uncontested disciplinary proceedings.
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Nasdaq Rule General 2, Section 7 requires that Nasdaq obtain
Commission approval if regulatory functions subject to RSAs in effect
at the time that Nasdaq began to operate as a national securities
exchange are no longer performed by FINRA or an affiliate thereof, or
by another independent self-regulatory organization. Nasdaq believes
that assuming operational responsibility for contested disciplinary
proceedings arising out of Nasdaq-led investigations will further its
regulatory program and benefit investors and the markets. Commission
approval of the proposal would allow Nasdaq to deliver increased
efficiencies in the regulation of its market and to more effectively
and promptly regulate activity on its market.
Notwithstanding that approval, FINRA will continue to perform
certain functions pursuant to a RSA,\13\ including, among other things,
the handling of certain contested disciplinary proceedings arising out
of FINRA-led investigation and enforcement activities.\14\
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\13\ In addition to work performed pursuant to a RSA, FINRA also
performs work for matters covered by agreements to allocate
regulatory responsibility under Rule 17d-2 of the Act.
\14\ Although Nasdaq anticipates handling contested disciplinary
proceedings arising out of Nasdaq-led investigations and enforcement
activities, Nasdaq retains the right to refer particular matters
arising out of Nasdaq-led investigations or enforcement activities
to FINRA's Department of Enforcement to handle in appropriate
circumstances.
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Technical Amendments Permitting Nasdaq Regulation To Serve Complaints
and Memoranda of Authorities
Nasdaq also proposes two technical updates to its Code of
Procedure. Specifically, the proposed amendments will permit Nasdaq
Regulation Department to serve (1) complaints and; (2) memoranda of
authority in support of temporary cease-and-desist orders in contested
disciplinary proceedings. Under the current rules, which Nasdaq adopted
before the March 2020 rule change permitting Nasdaq Regulation to
litigate certain contested disciplinary matters, only FINRA's
Department of Enforcement may serve a respondent with either a
complaint or a memorandum of authorities supporting a temporary cease-
and-desist order. These technical amendments would avoid the need for
FINRA to serve Nasdaq-authored complaints and memoranda of authority on
respondents, streamlining litigation in contested disciplinary
proceedings handled by Nasdaq Regulation. These technical amendments
also align the two affected rules with the remainder of General 5 (the
Nasdaq Discipline Rules), which rules grant Nasdaq Regulation and
FINRA's Department of Enforcement equivalent powers.
Pursuant to Rule 9131(a) (contained in General 5), ``a complaint
shall be served on each Party by the [FINRA] Department of
Enforcement.'' The proposed amendment would permit Nasdaq Regulation to
also serve a complaint. Similarly, in contested disciplinary
proceedings in which Nasdaq or FINRA seeks a temporary cease-and-desist
order, Rule 9810(b)(2) (contained in General 5) permits only FINRA's
Department of Enforcement to serve a memorandum of authorities in
support of the temporary cease-and-desist request. This proposed
amendment grants Nasdaq Regulation the same authority as FINRA's
Department of Enforcement to serve a memorandum of authorities.
2. Statutory Basis
The Exchange believes that its proposals are consistent with
Section 6(b) of the Act,\15\ in general, and furthers the objectives of
Section 6(b)(5) of the Act,\16\ in particular, in that it is designed
to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general to protect investors and the
public interest.
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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
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In addition, the Exchange believes that the proposals furthers the
objectives of Section 6(b)(7) of the Act,\17\ in particular, in that
these changes will continue to provide for fair procedures for the
disciplining of members and persons associated with members, the denial
of membership to any person seeking membership therein, the barring of
any person from becoming associated with a member thereof, and the
prohibition or limitation by the Exchange of any person with respect to
access to services offered by the Exchange or a member thereof.
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\17\ 15 U.S.C. 78f(b)(7).
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The Exchange believes that its proposal is in keeping with those
principles because it will ensure that contested matters retained by
the Nasdaq Regulation Department are handled effectively, efficiently
and with immediacy. Nasdaq will manage these cases directly in all
instances, with Nasdaq retaining the option to refer cases to FINRA if
Nasdaq's resources are constrained or if another circumstance warrants
FINRA litigating a contested disciplinary proceeding under Nasdaq's
supervision. This approach allows Nasdaq to take timely action when
appropriate, enforce its rules, and uphold investor protection and
market integrity. The proposed amendments, however, would not change or
alter in any way the disciplinary processes around how contested
matters are handled. Rather, they will result in more effective
regulation because it will facilitate timely and more efficient action.
Internalizing the litigation function in Nasdaq-led contested matters
will also facilitate effective regulation because the Exchange will
continue to bring to bear its overall market and surveillance expertise
throughout the disciplinary proceedings. Permitting Nasdaq to serve (1)
complaints and (2) memoranda of authority in support of temporary
cease-and-desist orders are ministerial changes that will enable Nasdaq
to more quickly and efficiently litigate contested disciplinary matters
arising out of Nasdaq-led investigations.
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 not necessary or appropriate in
furtherance of the purposes of the Act. The proposed rule change is
primarily administrative in nature and does not introduce any
competitive concerns. Rather than addressing competitive issues, the
purpose and effect of the proposed rule change is to enable Nasdaq to
litigate contested disciplinary proceedings arising out of Nasdaq-led
investigations and enforcement activities. Permitting Nasdaq to serve
(1) complaints and (2) memoranda of authority in support of temporary
cease-and-desist orders are ministerial changes and do not introduce
any competitive concerns.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal
[[Page 106692]]
Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) by order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#5220273e377f313d3f3f373c2621122137317c353d24"><span class="__cf_email__" data-cfemail="afdddac3ca82ccc0c2c2cac1dbdcefdccacc81c8c0d9">[email protected]</span></a>. Please include
file number SR-NASDAQ-2024-083 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-NASDAQ-2024-083. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). 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 website 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. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-NASDAQ-2024-083 and should
be submitted on or before January 21, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-31340 Filed 12-27-24; 8:45 am]
BILLING CODE 8011-01-P
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