On February 23, the NASDAQ Stock Market LLC (Nasdaq or Exchange) filed with the Securities and Exchange Commission a proposed amendment to Nasdaq Rule 4611 aimed to update and codify the requirements applicable to the Exchange members that provide sponsored access to other firms and customers to the Nasdaq execution system. Because the Exchange filed the proposal as a “non-controversial” rule change, the rule is effective upon filing with the SEC.
As amended, the sponsored access rule would be identical to the corresponding rule of NYSE Arca, Inc., which the SEC has approved and determined to be consistent with the Securities Exchange Act of 1934. The Exchange maintains that proper usage of Nasdaq’s systems and the protection of investors will be achieved by virtue of sponsored participants having to enter into and maintain customer agreements with one or more sponsoring members of the Exchange which contain “Sponsorship Provisions.” Such provisions:
- obligate the sponsoring member and sponsored participant to enter into a contractual relationship with the Exchange;
- ensure that orders and trades are honored;
- hold the sponsoring member responsible for the conduct of sponsored participants;
- obligate sponsored participants to comply with all applicable Nasdaq rules;
- restrict access to Nasdaq systems to a limited group of known and educated users;
- require sponsoring members to have procedures to monitor its employees, agents and customers in their access to and use of the Nasdaq systems; and
- ensure full payment of all applicable Nasdaq fees.
Similarly, the International Securities Exchange, LLC (ISE) has proposed an amendment to ISE Rule 706 to permit sponsored customers of a member to access ISE. A sponsored customer’s access to ISE is conditioned on such customer entering into a sponsorship arrangement with a sponsoring member. Each sponsorship arrangement includes the following components: maintenance of a customer agreement with a sponsoring member, which would incorporate the “Sponsoring Provisions;” and an express acknowledgement of the sponsoring member’s responsibility for the orders, executions and actions of its sponsored customer.