Thursday, January 14, 2010

Equity Regulatory Alert #2010 - 1
NASDAQ OMX Announces SEC Approval of The NASDAQ Stock Market Modified Sponsored Access Rule

What has the SEC approved?

On Wednesday, January 13, 2010, the Securities and Exchange Commission (SEC) approved a modified Sponsored Access rule — NASDAQ SR 2008 - 104 as modified by Amendments 1, 2 and 3.

This approved filing updates NASDAQ Rule 4611 to improve its existing regulatory framework governing the manner in which a NASDAQ^® member provides other entities with access to the NASDAQ Execution System.

What are the general elements of the rule change?

NASDAQ's rule change amends Rule 4611(d) to:

• Define categories of electronic access and explicitly includes Direct Market Access and Sponsored Access
• Require certain specific systemic financial and regulatory control
• Require certain contractual commitments for Sponsored Access
• Require the real-time receipt and timely review of relevant trade activity reports

Does NASDAQ offer any definitions for access?

Yes. Under the rule as approved, a NASDAQ member who enters into an agreement with another person or entity to provide that person with access to NASDAQ using the member's Market Participant Identifier (MPID) does so either through a Sponsored Access System or a Member System as defined by the rule.

Sponsored Access System - Any system that applies pre- and post-trade financial and regulatory controls set forth in proposed sections (d)(4) and (d)(5) of Rule 4611 and that is not administered and controlled solely by the Sponsoring Member.

Member System - Any system administered and controlled solely by the Sponsoring Member and that applies the pre- and post-trade financial and regulatory controls set forth in proposed sections (d)(4) and (d)(5) of Rule 4611.

Does this rule relieve any burden from the Sponsoring Member?

No. This rule is intended to clarify and strengthen a Sponsoring Member's obligations to control risk when it provides non-members access to NASDAQ's execution facilities.

Under the approved rule, as under the existing rule, members that provide such access are responsible for all trading conducted through such arrangements to the same extent as trading directly conducted by the member. The member must ensure that all such activity is in compliance with all applicable federal securities laws and NASDAQ rules.

What other considerations are addressed in the approved rule?

The approved rule includes, but is not limited to, consideration of the following areas:

• Contractual provisions between Sponsoring Members, Sponsored Firms and Third Parties
• Obligations of Sponsored Participants
• Obligations of Third Parties
• Policies of Sponsoring Members
• Systemic pre- and post-trade mechanisms reasonably designed to facilitate financial and regulatory controls
• Timely review of activity by appropriate supervisory personnel of Sponsoring Members

What do firms have to do?

Firms should begin examining their Sponsored Access operations as applicable in anticipation of an effective date.

NASDAQ also recommends firms review the webcast of the SEC Open Meeting held on January 13, 2010, as well as the proposal on advancements to the NASDAQ Sponsored Access rule that the SEC has unanimously elected to publish for comment from the industry and the public.

When does the new rule become effective on The NASDAQ Stock Market?

Although the rule proposal has been approved, the new requirements have not been implemented. NASDAQ is coordinating with the SEC to develop an appropriate implementation schedule. As stated in the proposed rule change, NASDAQ believes that all exchanges will adopt similar rules and that an industry-wide implementation is needed.

Where can I find additional information?

• Contact Transaction Services U.S. Market Sales at +1 800 846 0477.
• Refer to SEC Release No. 34-59275 and Release No. 34-61345.
• Refer to NASDAQ Rule 4611.