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Friday, October 30, 2009

Equity Regulatory Alert #2009 - 21
NASDAQ Files Amendments to Sponsored Access Proposal

Markets Impacted:

  • The NASDAQ Stock Market
  • NASDAQ OMX BX

Contact Information:

What you need to know:

  • As announced in Equity Regulatory Alert #2009-3, the SEC issued a Notice asking for comment on NASDAQ’s proposal to modify the requirements for members that provide Sponsored Access into NASDAQ and The NASDAQ Options Market.
  • After reviewing comments on the original proposal, NASDAQ has filed Amendment 2 and Amendment 3 to its Sponsored Access proposal.
  • Refer to Amendment 2 for the full text of the proposed rule.

What has been filed?

The NASDAQ Stock Market, LLC® (NASDAQ)® has filed with the Securities and Exchange Commission (SEC) two new amendments (Amendment 2 and Amendment 3) to its proposal to update NASDAQ Rule 4611(d), which governs Sponsored Access. Amendment 2 is designed to ensure that Sponsoring Members are assuming responsibility for their Sponsored Participants’ trading activity and have effective financial and regulatory oversight over the Sponsored Participant, and NASDAQ has access to all information necessary to provide effective exchange oversight. Amendment 3 clarifies that when a member provides another person or entity with access to NASDAQ systems, it must do so either through a Sponsored Access System or a Member System.

The proposed amendment takes into account the issues addressed via comment letters received during the comment period for NASDAQ’s original proposed rule change.

How does the proposal address implementation and application?

NASDAQ expects that all self-regulatory organizations (SROs) will adopt a uniform Sponsored Access rule. NASDAQ will work with the SEC and other SROs to develop a uniform implementation plan that includes adequate opportunity for programming and testing.

How does the proposal define Sponsored Access and what is the scope of the proposed rule?

NASDAQ defines Sponsored Access as the practice by a Member of providing access to a Sponsored Participant who enters orders directly into the NASDAQ system using the Sponsoring Member’s MPID. The orders do not pass through a Member System prior to reaching NASDAQ.

Sponsored Access is distinguished from Direct Market Access (DMA), which is defined as the practice by a member of providing access to NASDAQ to a person or firm that makes decisions regarding order routing and order entry but the orders pass through a Member System prior to reaching NASDAQ.

What requirements will apply to Sponsored Access and DMA?

Similar to the original proposal, Amendment 2 recommends contractual provisions, financial controls and regulatory controls.

What contractual requirements will apply?

As in the original proposal, NASDAQ will not require contracts for DMA arrangements as these orders pass through the member firm’s infrastructure and the member firm already maintains adequate regulatory and financial control.

NASDAQ will retain the requirement set forth in the original proposal that Sponsored Access relationships be memorialized and governed by specific contractual provisions, but has eliminated the requirement that Third Party providers enter into contracts with Sponsored Participants.

How will financial controls be addressed?

NASDAQ has proposed a financial controls provision applicable to both Sponsored Access and DMA that would require Sponsoring Members to undertake a creditworthiness determination, and to develop monitoring and controls incorporating that determination. At a minimum, Sponsoring Members must have real-time or nearly real-time ability to monitor and control the conduct of Sponsored Participants.

Will regulatory controls be modified?

NASDAQ has proposed to require procedures and controls “reasonably designed” to ensure compliance with Regulatory Requirements, which are defined in the rule. The procedures and controls, which are applicable to both Sponsored Access and DMA, will include a requirement for appropriate supervisory personnel to review trade reports to permit the Sponsoring Member to comply with Regulatory Requirements and to monitor for illegal activity.

What sponsored access agreements are currently required by NASDAQ?

NASDAQ Rule 4611(d) governs sponsored access to NASDAQ and requires both a User Agreement for Sponsored Access and a Notice of Consent. However, as announced in Equity Regulatory Alert #2008-43, Members are not required to submit the User Agreement or Notice of Consent at this time since a new rule is being developed.

Where can I get additional information?


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