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Extension of Time Periodfor Commission Action

SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

Form 19b-4

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Fax (301) 978-8472

Jeffrey Last Name

2

Proposed Rule Change by

Pilot

NASDAQ Stock Market

104-2008

Amendment No.

File No. SR -

Davis

[email protected]

(301) 978-8484Telephone

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Pursuant to the requirements of the Securities Exchange Act of 1934,

Section 19(b)(3)(A) Section 19(b)(3)(B)Initial Amendment

Pursuant to Rule 19b-4 under the Securities Exchange Act of 1934

Description

Edward S Knight,

Edward S. KnightBy

Section 19(b)(2)

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The self-regulatory organization may choose to attach as Exhibit 5 proposedchanges to rule text in place of providing it in Item I and which may otherwise bemore easily readable if provided separately from Form 19b-4. Exhibit 5 shall beconsidered part of the proposed rule change.

Exhibit 5 - Proposed Rule Text

SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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The self-regulatory organization must provide all required information, presented in a clear and comprehensible manner, to enable the public to provide meaningfulcomment on the proposal and for the Commission to determine whether theproposal is consistent with the Act and applicable rules and regulations under the Act.

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The Notice section of this Form 19b-4 must comply with the guidelines forpublication in the Federal Register as well as any requirements for electronic filingas published by the Commission (if applicable). The Office of the Federal Register(OFR) offers guidance on Federal Register publication requirements in the Federal Register Document Drafting Handbook, October 1998 Revision. For example, allreferences to the federal securities laws must include the corresponding cite to the United States Code in a footnote. All references to SEC rules must include thecorresponding cite to the Code of Federal Regulations in a footnote. All referencesto Securities Exchange Act Releases must include the release number, releasedate, Federal Register cite, Federal Register date, and corresponding file number(e.g., SR-[SRO]-xx-xx). A material failure to comply with these guidelines will result in the proposed rule change being deemed not properly filed. See also Rule 0-3 underthe Act (17 CFR 240.0-3)

Copies of notices, written comments, transcripts, other communications. If suchdocuments cannot be filed electronically in accordance with Instruction F, they shallbe filed in accordance with Instruction G.

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SR-NASDAQ-2008-104 Amendment 2 of 54 1. Text of Proposed Rule Change

(a) Pursuant to the provisions of Section 19(b)(1) under the Securities Exchange

Act of 1934 (“Act”),1 and Rule 19b-4 thereunder,2 The Nasdaq Stock Market LLC

(“Nasdaq”), is filing with the Securities and Exchange Commission (“Commission”) a

Response to Comments and Proposed Amendment 2 regarding its proposal (“Proposal”)

to modify NASDAQ Rule 4611 which governs electronic access to NASDAQ’s order

execution systems.3

The text of the proposed rule change is below. Proposed new language is

underlined; proposed deletions are in brackets.

The Proposal is designed to clarify and improve the existing

regulatory framework governing the manner in which NASDAQ members provide

Sponsored Access and Direct Market Access to firms and other NASDAQ members.

Nasdaq is proposing to amend Rule 4611(d) to ensure that member firms are assuming

full responsibility for their customers’ trading activity and have effective financial and

regulatory controls in place to protect market participants from systemic risk and preserve

the integrity of the marketplace. The Proposal will also ensure that NASDAQ has access

to all information necessary to provide effective exchange oversight.

4

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b-4. 3 The Proposal was filed on December 30, 2009, amended on January 8, 2009, and published for

notice and comment in the Federal Register on January 29, 2009. See Exchange Act Release No. 59275 (Jan. 22, 2009), 74 FR 5193 (Jan. 29, 2009).

4 Changes are marked to the rule text that appears in the electronic manual of Nasdaq found at http://nasdaq.complinet.com.

http://nasdaq.complinet.com/�

SR-NASDAQ-2008-104 Amendment 2 of 54

* * * * *

4611. Nasdaq Market Center Participant Registration

(a) – (c) No change.

(d) [Members may provide “Sponsored Access” to the Nasdaq Market Center in accordance with the provisions below: Sponsored Participants. A Sponsored Participant may obtain authorized access to the Nasdaq Market Center only if such access is authorized in advance by one or more Nasdaq members as follows:]

[(1) Sponsored Participants must enter into and maintain customer agreements with one or more Sponsoring Members establishing proper relationship(s) and account(s) through which the Sponsored Participant may trade on the Nasdaq Market Center. Such customer agreement(s) must incorporate the Sponsorship Provisions set forth in paragraph (2) below.]

[(2) For a Sponsored Participant to obtain and maintain authorized access to the Nasdaq Market Center, a Sponsored Participant and its Sponsoring Member must agree in writing to the following Sponsorship Provisions:

(A) Sponsored Participant and its Sponsoring Member must have entered into and maintained a User Agreement with The NASDAQ Stock Market LLC. The Sponsoring Member must designate the Sponsored Participant by name in its User Agreement as such.

(B) Sponsoring Member acknowledges and agrees that (i) All orders entered by the Sponsored Participants and any person acting on behalf of or in the name of such Sponsored Participant and any executions occurring as a result of such orders are binding in all respects on the Sponsoring Member and

(ii) Sponsoring Member is responsible for any and all actions taken by such Sponsored Participant and any person acting on behalf of or in the name of such Sponsored Participant.

(C) Sponsoring Member shall comply with the Nasdaq Certificate of Incorporation, Bylaws, Rules and procedures with regard to the Nasdaq Market Center and Sponsored Participant shall comply with Nasdaq Certificate of Incorporation, Bylaws, Rules and procedures with regard to the Nasdaq Market Center, as if Sponsored Participant were a Nasdaq Member.


(D) Sponsored Participant shall maintain, keep current and provide to the Sponsoring Member a list of individuals authorized to obtain access to the Nasdaq Market Center on behalf of the Sponsored Participant. (E) Sponsored Participant shall familiarize its authorized individuals with all of the Sponsored Participant's obligations under this Rule and will assure that they receive appropriate training prior to any use or access to the Nasdaq Market Center. (F) Sponsored Participant may not permit anyone other than authorized individuals to use or obtain access to the Nasdaq Market Center. (G) Sponsored Participant shall take reasonable security precautions to prevent unauthorized use or access to the Nasdaq Market Center, including unauthorized entry of information into the Nasdaq Market Center, or the information and data made available therein. Sponsored Participant understands and agrees that Sponsored Participant is responsible for any and all orders, trades and other messages and instructions entered, transmitted or received under identifiers, passwords and security codes of authorized individuals, and for the trading and other consequences thereof. (H) Sponsored Participant acknowledges its responsibility to establish adequate procedures and controls that permit it to effectively monitor its employees’, agents’ and customers' use and access to the Nasdaq Market Center for compliance with the terms of this agreement. (I) Sponsored Participant shall pay when due all amounts, if any, payable to Sponsoring Member, Nasdaq, or any other third parties that arise from the Sponsored Participant’s access to and use of the Nasdaq Market Center. Such amounts include, but are not limited to applicable exchange and regulatory fees.]

[(3) The Sponsoring Member must provide Nasdaq with a Notice of Consent acknowledging its responsibility for the orders, executions and actions of its Sponsored Participant at issue.]

Access to a Trading Center. If a member enters into an arrangement with another person (e.g., a customer, another member, or a non-member broker-dealer) to provide that person with access to Nasdaq or otherwise allow such person to route its orders to Nasdaq using the member’s market participant identifier (“MPID”), the member is responsible for all trading conducted pursuant to that arrangement to the same extent as trading directly conducted by the member for customers. Consequently, the member is responsible for implementing policies and

SR-NASDAQ-2008-104 Amendment 2 of 54 procedures for supervising and monitoring the trading effected pursuant to the arrangement to ensure that it is in compliance with all applicable federal securities laws and rules and Exchange rules. This obligation applies irrespective of the manner in which orders pursuant to such arrangements reach Nasdaq.

(1) Definition.

(A) Sponsored Access is the practice by a member (“Sponsoring Member”) of providing access to Nasdaq to another person, firm or customer (“Sponsored Participant”) whereby the Sponsored Participant enters orders into Nasdaq using a Sponsored Access System but the orders do not pass through a Member System prior to reaching Nasdaq.

(B). Direct Market Access (“DMA”) is the practice by a member (“Sponsoring Member”) of providing access to Nasdaq to another person, firm or customer (“Sponsored Participant”) whereby the Sponsored Participant makes decisions regarding order routing and order entry but the orders pass through a Member System prior to reaching Nasdaq.

(C). A Member System is 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 sections (4) and (5) below.

(D) A Sponsored Access System is any system that applies pre- and post-trade financial and regulatory controls set forth in sections (4) and (5) below and that is not administered and controlled solely by the Sponsoring Member.

(2) Compliance. To ensure that Sponsored Access is consistent with high market quality and the protection of investors, Sponsoring Members providing Sponsored Access shall at a minimum comply with the Contractual Provisions, Financial Controls, and Regulatory Controls set forth in sections (3), (4), and (5) below. Sponsoring Members providing Direct Market Access shall at a minimum comply with the Financial Controls and Regulatory Controls set forth in sections (4) and (5) below.

(3) Contractual Provisions.


(A) A Sponsoring Member that provides Sponsored Access shall execute and maintain agreements with each Sponsored Participant containing the commitments below.

(i ) All trading activity by the Sponsored Participant shall comply with all applicable federal securities laws and rules and Exchange rules, including but not limited to the Nasdaq Certificate of Incorporation, Bylaws, Rules and procedures with regard to the Nasdaq Market Center (“Regulatory Requirements”).

(ii) Sponsored Participant shall promptly upon request provide Sponsoring Member with access to such books and records and financial information that is necessary to allow the Sponsoring Member to comply with its regulatory obligations with respect to activity of the Sponsored Participant within the Sponsored Access arrangement, and otherwise cooperate with the Sponsoring Member in furtherance of Sponsoring Member’s compliance with applicable Regulatory Requirements. Information provided by Sponsored Participants to Sponsoring Members pursuant to such requests shall be maintained as confidential by the Sponsoring Member, provided that such information shall be available to Nasdaq upon request for regulatory purposes.

(iii) Sponsored Participant shall maintain its trading activity within the credit, product or other financial limits specified by the Sponsoring Member.

(iv) Sponsored Participant shall maintain all technology permitting sponsored access to Nasdaq in a physically secure manner and may not permit unauthorized individuals to use or obtain access to Nasdaq. Sponsored Participant shall familiarize its authorized individuals with the Regulatory Requirements and will provide appropriate training prior to use or access to Nasdaq.

(v) Sponsored Participant shall agree that the Sponsoring Member or Nasdaq may immediately terminate the Sponsored Access if the Sponsoring Member or Nasdaq determines that continuing such access poses serious risk to the Sponsoring Member or to the integrity of the market.

(B) A Sponsoring Member that provides Sponsored Access shall execute and maintain agreements with each third party (“Third Party Provider”) that provides a Sponsored Access System to Sponsored Participants for accessing Nasdaq, specifying which of the financial and regulatory controls stated in subsections (4) and (5) below are


satisfied by the technology provided, and containing the commitments below.

(i) Third Party Providers shall promptly upon request provide Sponsoring Member with access to such books and records and financial information that is necessary to allow the Sponsoring Member to comply with its regulatory obligations with respect to activity of the Sponsored Participant within the Sponsored Access arrangement, and otherwise cooperate with the Sponsoring Member in furtherance of Sponsoring Member’s compliance with applicable Regulatory Requirements. Information provided by Sponsored Participants to Sponsoring Members pursuant to such requests shall be maintained as confidential by the Sponsoring Member, provided that such information shall be available to Nasdaq upon request for regulatory purposes.

(ii) Third Party Providers shall maintain all technology permitting Sponsored Access to Nasdaq in a physically secure manner and may not permit unauthorized individuals to use or obtain access to Nasdaq.

(iii) Third Party Providers shall agree that Nasdaq or its agent may audit the Sponsored Access System and that the Sponsoring Member or Nasdaq may immediately terminate the Sponsored Access if the Sponsored Participant or Third Party Provider fails to abide by its commitments.

(4) Financial Controls. Each Sponsoring Member shall establish adequate procedures and controls that permit it to effectively monitor and control the Sponsored Access or Direct Market Access to systemically limit the Sponsoring Member’s financial exposure. At a minimum, the Member System or Sponsored Access System shall be reasonably designed to:

(A) Prevent each Sponsored Participant from entering orders that in aggregate exceed appropriate pre-set credit thresholds. Sponsoring Members may also set finely-tuned credit thresholds by sector, security or otherwise. (B) Prevent Sponsored Participants from trading products that the Sponsoring Member is restricted from trading or that the Sponsored Participant is restricted from trading for reasons specific to the Sponsored Participant. (C) Prevent Sponsored Participants from submitting erroneous orders by providing for the rejection of orders that exceed certain price or size


parameters, on an order-by-order basis or over a short period of time, or that indicate duplicative orders.

(5) Regulatory Controls. Each Sponsoring Member shall establish

adequate procedures and controls reasonably designed to permit it to effectively monitor and control compliance with Regulatory Requirements,

(A) Each Sponsoring Member shall have systemic controls reasonably designed to ensure compliance by the Sponsored Participant with all applicable Regulatory Requirements. (B) Each Sponsoring Member shall ensure that appropriate supervisory personnel receive and review timely reports of all trading activity by its Sponsored Participants sufficient to permit the Sponsoring Member to comply with applicable Regulatory Requirements, and to monitor for illegal activity such as market manipulation or insider trading. At a minimum, appropriate supervisory personnel should receive immediate post-trade execution reports of trading activity of all Sponsored Participants, including their identities; all required audit trail information by no later than the end of the trading day; and all information necessary to create and maintain the trading records required by applicable Regulatory Requirements by no later than the end of the trading day. Appropriate supervisory personnel shall review execution reports immediately and all other reports promptly.

(b) Not applicable.

(c) Not applicable.

2. Procedures of the Self-Regulatory Organization

The Board of Directors of Nasdaq approved the proposed rule change at its

meeting on March 7, 2006, which authorized the filing of the rule change with the

Commission. No other action is necessary under the Exchange’s governing documents

for the filing of the rule change.

Questions regarding this rule filing may be directed to Jeffrey S. Davis, Vice

President and Deputy General Counsel, The Nasdaq Stock Market LLC at (301) 978-

8484.

SR-NASDAQ-2008-104 Amendment 2 of 54 3. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis

for, the Proposed Rule Change

a. Purpose

Currently, Rule 4611(d) is substantially similar to Sponsored Access rules

adopted by other national securities exchanges, including New York Stock Exchange

Rule 123B and NYSE Arca Exchange Rule 7.29(b). NASDAQ is proposing to amend

Rule 4611(d) to ensure that member firms that are assuming responsibility for their

customers’ trading activity have effective financial and regulatory oversight of the

Sponsored Participant, and that NASDAQ has access to all information necessary to

provide effective exchange oversight.

Seven firms and three industry group representatives submitted comment letters

addressing the original proposal, all of which were thoughtful and all of which merit

specific consideration and response.5

5

Set forth below is a recitation of the suggested

modifications to the Proposal, NASDAQ’s response to the suggested modification, and a

Harvey Cloyd, Chief Executive Officer, Electronic Transaction Clearing, Inc., dated February 5, 2009 (“ETC Letter”); John N. Jacobs, Director of Operations, Lime Brokerage LLC, dated February 17, 2009 (“Lime I Letter”); Manisha Kimmel, Executive Director, Financial Information Forum, dated February 19, 2009 (“FIF Letter”); Ted Myerson, President, FTEN, Inc., dated February 19, 2009 (“FTEN I Letter”); Michael A. Barth, Executive Vice President, OES Market Group, dated February 23, 2009 (“OES Letter”); Jeff Bell, Executive Vice President, Clearing and Technology Group, Wedbush Morgan Securities, dated February 23, 2009 (“Wedbush Letter”); Stuart J. Kaswell, Executive Vice President & General Counsel, Managed Funds Association, dated February 24, 2009 (“MFA Letter”); Ann Vlcek, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association, dated February 26, 2009 (“SIFMA Letter”), Nicole Harner Williams, Vice President, Associate General Counsel, Penson Financial Services, Inc., dated February 27, 2009 (“Penson Letter”); Gary LaFever, Chief Corporate Development Officer, FTEN, Inc., dated April 29, 2009 (“FTEN II Letter”); Samuel F. Lek, Chief Executive Officer, Lek Securities Corporation, dated June 15, 2009 (“Lek Letter”); John N. Jacobs, Chief Operations Officer, Lime Brokerage LLC, dated June 30, 2009 (“Lime II Letter”).

http://sec.gov/comments/sr-nasdaq-2008-104/nasdaq2008104-1.pdf�

















SR-NASDAQ-2008-104 Amendment 2 of 54 description of precise changes to the rule language contained in proposed Amendment 1

to the Proposal.

Uniform Rule, Implementation, and Application

Two commenters stressed that industry regulators should develop a uniform rule

and then apply it consistently across all markets and all market participants.6

NASDAQ agrees with each of these recommendations. The regulation of

electronic access should be uniformly regulated and not create the opportunity for

arbitrage between the rules of competing exchanges. To that end, NASDAQ has been

cooperating with the Commission and the Intermarket Surveillance Group (“ISG”),

which includes all self-regulatory organizations (“SROs”) registered under the auspices

of the Commission, towards the development of a uniform rule governing electronic

access to markets. NASDAQ expects that all SROs will adopt the uniform rule and that

the SROs will coordinate with the industry representatives such as SIFMA to develop a

uniform implementation plan that includes adequate opportunity for programming and

Specifically, SIFMA recommended that all exchanges, the Financial Industry Regulatory

Authority (“FINRA”), and the Commission should cooperate to develop a uniform,

workable rule. SIFMA and Wedbush also suggested that, once developed, the uniform

rule should be consistently interpreted and enforced to ensure a level playing field.

Finally, commenters suggested that all exchanges implement the uniform rule on a

common effective date that allows market participants reasonable notice and preparation

time.

6 See SIFMA Letter, Wedbush Letter.

SR-NASDAQ-2008-104 Amendment 2 of 54 testing. NASDAQ expects that consistency in the future application of the uniform rule

will be an on-going topic of discussion at ISG and at the Commission.

Definition of Sponsored Access and Scope of Proposed Rule

Four commenters questioned whether the Proposal properly defines Sponsored

Access.7

Specifically SIFMA and FIF suggest that the proposed definition of Sponsored

Access is overly broad and that the Proposal’s provisions should be limited exclusively to

Sponsored Access arrangements in which Sponsored Participant orders do not flow

through a Sponsoring Member’s trading technology infrastructure prior to reaching

NASDAQ. This would mean that DSA and TPSA would be subject to the proposed

Sponsored Access but that DMA would not and nor would any other electronic order

routing or execution arrangement that involves orders passing through a broker-dealer’s

infrastructure prior to reaching a destination market. The ETC and Penson Letters

recommend that the rule be more narrowly limited to DSA.

The original proposed definition of Sponsored Access included three categories

of access: (1) direct market access, where the Sponsored Participant’s orders pass through

the Sponsoring Member’s systems prior to reaching NASDAQ (“Direct Market Access”

or “DMA”), (b) sponsored access, where the Sponsored Participant enters orders directly

into NASDAQ via a dedicated port provided by the Sponsoring Member (“Direct

Sponsored Access” or “DSA”), and (c) direct access where a service bureau or other third

party provides Sponsored Participants with technology to access NASDAQ under the

auspices of and via an arrangement with the Sponsoring Member (“Third Party

Sponsored Access” or “TPSA”).

7 See ETC Letter, FIF Letter, SIFMA Letter, Penson Letter.


NASDAQ agrees in part with SIFMA and FIF that the proposed rule should focus

on whether or not orders flow through a Sponsoring Member’s trading technology

infrastructure prior to reaching NASDAQ. Using that rubric, genuine Sponsored Access

would be limited to instances where the Sponsored Participant enters orders directly into

NASDAQ using the Sponsoring Member’s MPID and the orders do not pass through a

Member System before reaching NASDAQ. Sponsored Access is distinguished from

Direct Market Access (“DMA”) whereby a member provides 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.

The key to proper regulation of both Sponsored Access and DMA are the

regulatory and financial controls set forth in proposed Rule 4611(d)(4) and (5). In DMA

arrangements, those controls are provided by a “Member System” which is any system

administered and controlled solely by a member that applies the pre- and post-trade

financial and regulatory controls set forth in sections (4) and (5) below. In a Sponsored

Access arrangement, the controls are imposed through contractual provisions set forth in

Rule 4611(d)(3) in combination with the provisions of subsections (d)(4) and (d)(5).

NASDAQ agrees with commenters that DMA arrangements are already

effectively regulated under existing laws and regulations because in such cases, the

broker-dealer that takes responsibility for orders is a member of the exchange with all

attendant compliance obligations and incentives. Orders and executions that flow

through a broker-dealer’s infrastructure are subject to all member compliance obligations

as though generated by the member itself, including capturing details for books and

SR-NASDAQ-2008-104 Amendment 2 of 54 record rules and implementing appropriate pre- and post-trade controls.8

The same cannot be uniformly stated with respect to Sponsored Access. It is true

that all orders entering NASDAQ systems must bear a member MPID and all Sponsoring

Members currently assume full responsibility for all orders that enter NASDAQ systems

under their specific MPIDs. It is also true that NASDAQ members are already closely

regulated, and that NASDAQ systems are closely surveilled both in real-time and post

trade. Nonetheless, members may hold different views of what that responsibility

requires. Members may also assess in different ways the risks to the market posed by

Sponsored Access and the likelihood of errors and harm caused by Sponsored

Participants. Therefore, NASDAQ believes it is critical to establish a clear understanding

of the minimum regulatory and financial controls required in Sponsored Access

arrangements where orders pass directly into NASDAQ systems without first passing

through a Member System as defined herein.

In essence,

NASDAQ believes that NASDAQ members already operate Member Systems that

provide the regulatory and financial controls set forth in proposed subsections (d)(4) and

(d)(5). As such, NASDAQ can enhance the clarity of the obligations of members in

DMA arrangements – and bolster market confidence in the integrity and security of the

market -- without imposing additional obligations.

Accordingly, NASDAQ is proposing to amend the Proposal in several ways.

First, NASDAQ is proposing to add prefatory language to Rule 4611(d) that clearly

8 NASDAQ does not believe the same can be said of TPSA arrangements. Although some TPSA

providers may have substantially identical regulatory policies and procedures, this is not necessarily the case and, in any event, it is not mandated by current rules. Therefore, NASDAQ is not proposing to exclude TPSA from coverage under the Sponsored Access rule.

SR-NASDAQ-2008-104 Amendment 2 of 54 articulates the responsibility of all members to have policies and procedures reasonably

designed to regulate all orders that it enters into NASDAQ systems under its own

MPID(s) regardless of the order entry and access arrangement. NASDAQ believes that

this new language is superior to similar language, which had been included in Rule

4611(d)(2) that is being deleted. Second, NASDAQ is proposing to amend Rule

4611(d)(1) to distinguish between Sponsored Access and DMA as described above, and

to eliminate the distinction set forth in the original proposal between Direct Sponsored

Access and Third Party Sponsored Access. Third, NASDAQ is proposing to define

Member System and Sponsored Access System to ensure that all DMA and Sponsored

Access arrangements are effectively regulated by a system that provides adequate

regulatory and financial controls.

Contractual Provisions

NASDAQ is not proposing to modify the contractual obligations imposed on

DMA arrangements. Under traditional DMA, where orders pass through the member

firm’s infrastructure, the member firm already maintains adequate regulatory and

financial control and NASDAQ already has adequate access to information necessary to

properly surveil and regulate orders entered into NASDAQ through DMA arrangements.

Again, the same cannot be said with confidence about Sponsored Access relationships

and orders that enter NASDAQ without first passing through a Member System.

Accordingly, NASDAQ is maintaining the requirement, set forth in the original proposal,

that Sponsored Access relationships be memorialized and governed by specific

contractual provisions, while leaving DMA free of that requirement.


Several commenters object to the contractual provisions that NASDAQ proposed

to apply to Sponsored Access arrangements.9

NASDAQ agrees that the Proposal is needlessly burdensome in requiring Third

Party providers to execute with each Sponsored Participant a contract containing the

detailed provisions proposed in Rule 4611(d)(3). NASDAQ strongly believes, however,

that Sponsoring Members must have individual contractual relationships with all

Sponsored Participants. Such arrangements are particularly important with respect to

non-member Sponsored Participants that are outside NASDAQ’s regulatory jurisdiction

and continuing oversight. NASDAQ also believes that Sponsoring Members must enter

into a contract with any Third Party Providers that operates technology that the member

utilizes to enable, monitor, or control Sponsored Access or to satisfy the financial and

regulatory controls specified in subsections (4) and (5) (a “Sponsored Access System”).

The contract with Third Party Providers must provide that NASDAQ or its agent must be

allowed to audit the Sponsored Access System. Such contractual arrangements are

FIF and ETC object to the requirement that

Sponsoring Members execute contracts with Third Party providers that require Third

Party providers to sign detailed agreements with each Sponsored Participant. FIF argues

that, in the case of TPSA, the burden of compliance and related contractual obligations

should remain with the Sponsoring Member, rather than with the third-party service

bureau as the Proposal suggests. ETC contends that requiring third-party service

providers to execute with Sponsored Participants contracts containing the specified

provisions is overly burdensome, not justified by the benefits, and redundant of the

existing obligations of the Sponsoring Member.

9 See SIFMA Letter, FIF Letter, MFA Letter, and ETC Letter.

SR-NASDAQ-2008-104 Amendment 2 of 54 important with respect to NASDAQ members that are Sponsored Participants in that they

require the participants in Sponsored Access relations to assess applicable requirements

and specifically allocate responsibility among the parties.

Accordingly, NASDAQ has proposed to divide proposed Rule 4611(d)(3) into

two subsections: Subsection (A) governing agreements between Sponsoring Members

and Sponsored Participants and Subsection (B) governing agreements between

Sponsoring Members and Third Party Providers. NASDAQ proposes to eliminate the

requirement that Third Party Providers execute agreements with Sponsored Participants

containing detailed contractual provisions identical to those required between Sponsoring

Members and Sponsored Participants. New Subsection (B) requires that the agreement

identify the financial and regulatory controls that are satisfied by the third party

technology, and contain commitments appropriately tailored to the third party

relationship including (1) limited access to books and records, (2) physical security of

technology that accesses NASDAQ, (3) the ability of NASDAQ or its agent to audit the

Sponsored Access System, and (4) the ability for the Sponsoring Member or NASDAQ to

terminate access to NASDAQ.

Additionally, SIFMA objects to aspects of the Proposal that require Sponsored

Participants to make their books and records and corporate and financial information

available to the Sponsoring Member upon request. MFA shares these concerns and notes

that because the proposed contractual provisions implicate sensitive proprietary

information, they must be limited to information relevant to oversight of trading activity

conducted under the particular Sponsored Access arrangement and that information

produced must be maintained as confidential by the Sponsoring Member and regulators.


NASDAQ agrees that it can achieve effective exchange oversight through more

narrowly tailored contractual provisions between Sponsoring Members and Sponsored

Participants. Accordingly, NASDAQ is proposing to eliminate proposed Rule

4611(d)(3)(A)(E) and to amend Rule 4611(d)(3)(A)(ii) to require Sponsored Participants

to provide Sponsoring Member with access to such books and records and financial

information that is “necessary to allow the Sponsoring Member to comply with its

regulatory obligations with respect to activity of the Sponsored Participant within the

Sponsored Access arrangement.” Additionally, NASDAQ proposes to include

confidentiality provisions to protect sensitive information provided by Sponsored

Participants to Sponsoring Members for regulatory purposes. These provisions, in

combination with the provision requiring full cooperation by Sponsored Participants, will

provide NASDAQ with full access to information needed for proper regulatory oversight.

MFA also objects to proposed Rule 4611(d)(3)(A)(v) which requires sponsorship

agreements to include a provision permitting the Sponsoring Member or NASDAQ

immediately to terminate access in the event that the Sponsored Participant or Third Party

provider fails to abide by its contractual commitments. MFA argues that Sponsoring

Members and Sponsored Participants have established reasonable grace and cure periods

for breaches of sponsorship agreements and that such terms should be left to those

parties.

NASDAQ agrees that the parties should remain free to negotiate commercial

terms. However, those terms are generally designed to protect the parties’ commercial

interests rather than the interests of NASDAQ and other market participants. NASDAQ

has a separate interest in maintaining a fair and orderly market, including the ability to

SR-NASDAQ-2008-104 Amendment 2 of 54 limit access by market participants that disrupt the markets or pose systemic risks.

Accordingly, NASDAQ proposes to limit Rule 4611(d)(3)(v) to protecting NASDAQ’s

interest in maintaining a fair and orderly market rather than governing commercial terms

between the parties.

Financial Controls

SIFMA comments extensively on the Financial Controls provisions of proposed

Rule 4611(d)(4), including: (1) the provisions should allow for procedures and controls

“reasonably designed” to prevent certain conduct, rather than impose a strict liability

standard; (2) it is not possible for Sponsoring Members to prevent the entry of orders in a

Direct Sponsored Access arrangement; and (3) by imposing a general obligation on

Sponsoring Members to make a determination of creditworthiness and to impose

financial limits, the proposed rule could cause Sponsoring Members to allow excessive

risk-taking; and (4) the product limitation provision should not impose restrictions on

Sponsored Participants that are unique to the Sponsoring Member.

NASDAQ agrees that in a “procedures-based” regime such as NASDAQ is

proposing to govern Sponsored Access arrangements, such procedures cannot ensure

compliance or prevent errors from occurring. Such procedures must, however, be

reasonably designed to ensure compliance or prevent errors. This is consistent with the

approach that the Commission adopted with respect to enforcement of Regulation NMS

and that SROs have adopted with respect to supervisory systems within member firms.

What constitutes “reasonable” cannot be specified in a one-size-fits-all rule but rather

requires an individual assessment of the facts and circumstances of each Sponsoring

SR-NASDAQ-2008-104 Amendment 2 of 54 Member.10

Essentially, NASDAQ’s proposed Financial Controls provisions would require

Sponsoring Members to undertake a creditworthiness determination and to develop

monitoring and controls incorporating that determination.

Accordingly, NASDAQ proposes to modify Rule 4611(d)(4) to require

“reasonably designed” procedures and controls.

11 NASDAQ is not dictating

how that determination is undertaken or implemented but the provision does require at a

minimum that Sponsoring Members have real-time or nearly real-time ability to monitor

and control the conduct of Sponsored Participants.12 The importance of such controls in

limiting systemic risk justifies the burden imposed by the narrowly tailored proposed

provisions.13

The product limitation provision of the contractual requirements set forth in

subsection (d)(4)(B) has two primary goals. First, it requires that Sponsoring Members

be qualified to sponsor market participants to trade specific products. If a Sponsoring

member does not have proper expertise and experience trading a product, it cannot be

expected to effectively monitor the trading of such products. Second, it is another

Indeed, NASDAQ believes that Sponsoring Members should embrace this

requirement as a means of limiting the risk they assume by accepting responsibility for

the trading activity of Sponsored Participants.

10 See Wedbush Letter. 11 It is difficult to see that requiring firms to undertake a creditworthiness determination and to

impose controls would result in more risk-taking behavior than currently exists, as SIFMA appears to claim.

12 NASDAQ is not requiring that Sponsoring Members utilize pre-trade risk management offered by the exchange, or that pre-trade checks occur at the exchange level, as some commenters suggest. See Wedbush Letter. NASDAQ does, recognize that offering additional pre-trade risk management functionality would benefit the marketplace.

13 NASDAQ is skeptical of SIFMA’s claims that such controls cannot be implemented and that requiring such controls would effectively prohibit Direct Sponsored Access. In fact, SIFMA’s claims are directly contradicted by statements contained in the FTEN Letter and the Lime I Letter.

SR-NASDAQ-2008-104 Amendment 2 of 54 “know-your-customer” provision that requires Sponsoring Members to assess the market

participants that they sponsor and to limit trading to products for which the Sponsored

Participant is qualified. It is not, as SIFMA implies, designed to transfer to Sponsored

Participants limitations that are specific to the Sponsoring Members, such as restrictions

imposed by SEC Rule 10b-18.

Regulatory Controls

SIFMA also comments extensively on the Regulatory Controls provisions of

proposed Rule 4611(d)(5), including: (1) the provisions should allow for procedures and

controls “reasonably designed” to prevent certain conduct, rather than impose a strict

liability standard; (2) it is not practical for Sponsoring Members to regulate the conduct

of Sponsored Participants on a real-time basis given that much current surveillance

occurs on a post-trade basis; (3) providing a non-exclusive list of regulatory requirements

will create confusion for market participants; and (4) post-trade reports should be

reviewed by “appropriate supervisory personnel” as defined by the Sponsoring Member..

As stated above with respect to Financial Controls, NASDAQ agrees that in a

“procedures-based” regime such as NASDAQ is proposing to govern Sponsored Access

arrangements, such procedures cannot ensure compliance or prevent errors from

occurring. Such procedures must, however, be reasonably designed to ensure compliance

or prevent errors. This is consistent with the approach that the Commission adopted with

respect to enforcement of Regulation NMS and that SROs have adopted with respect to

supervisory systems within member firms. What constitutes “reasonable” cannot be

specified in a one-size-fits-all rule but rather requires an individual assessment of the

facts and circumstances of each Sponsoring Member. Accordingly, NASDAQ proposes

SR-NASDAQ-2008-104 Amendment 2 of 54 to modify Rule 4611(d)(5)(A) to require “reasonably designed” procedures and controls.

Nonetheless, NASDAQ continues to believe that the regulatory integrity of its market

requires that all orders entered by Sponsored Participants should be subject to real-time

or nearly real-time regulatory controls.

NASDAQ also proposes to amend Rule 4611(d)(5)(A) to eliminate the non-

exclusive list of regulatory requirements and to replace it with a general reference to

Regulatory Requirements, which is already defined within the proposed rule. NASDAQ

agrees that a non-exclusive list could cause confusion regarding both the regulatory

requirements specifically listed as well as those not listed.

NASDAQ proposes to amend Rule 4611(d)(5)(B) to permit trading activity

reports to be reviewed by “appropriate supervisory personnel” and that execution reports

must be reviewed immediately and other reports must be reviewed “promptly.”

NASDAQ agrees with SIFMA’s contention that Firms should be free to determine which

personnel are best suited to review trading activity reports provided that they have the

requisite supervisory training and responsibility.14

Lastly, several commenters have noted the potential systemic risk posed by

Sponsored Access arrangements and the importance to the marketplace of effective

regulation of such arrangements.

Additionally, the rule as currently

proposed creates ambiguity about when trading reports must be reviewed. It is intended

that firms review execution reports immediately and other reports promptly.

15

14 See SIFMA Letter.

NASDQAQ agrees and, in response to those

commenters, NASDAQ is working to develop a proposal that would require Sponsoring

15 See Lime Letter, Lek Letter, FTEN Letter.

SR-NASDAQ-2008-104 Amendment 2 of 54 Members to obtain a unique MPID for each Sponsored Participant. Many but not all

NASDAQ members that sponsor multiple participants already obtain a unique MPID for

each. Separating the trading activity of multiple Sponsored Participants of a single

Sponsoring Member will make automated algorithmic surveillance of the market efficient

and effective without that additional work. Thus, requiring a unique MPID for each

sponsored participant would preserve the ability of Sponsored Participants to maintain

anonymity and achieve the primary goals of sponsorship, while simultaneously ensuring

that NASDAQ has full transparency effectively to regulate conduct on its market.

NASDAQ will work with other markets to develop a uniform rule in the near future.


b. Statutory Basis

Nasdaq believes that the proposed rule change is consistent with the provisions of

Section 6 of the Act,16 in general and with Section 6(b)(5) of the Act,17

4. Self-Regulatory Organization’s Statement on Burden on Competition

in particular, in

that it is designed to promote just and equitable principles of trade and to protect

investors and the public interest. The proposal is consistent with these obligations

because it updates the standards for providing Sponsored Access, and clearly articulates

the obligations in the NASDAQ’s rules.

Nasdaq does not believe that the proposed rule change will result in any burden

on competition that is not necessary or appropriate in furtherance of the purposes of the

Act, as amended.

5. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received from Members, Participants, or Others

Written comments were neither solicited nor received.

6. Extension of Time Period for Commission Action

Nasdaq does not consent to the extension of any time period for Commission

action regarding this proposal.

7. Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)

Not applicable.

8. Proposed Rule Change Based on rules of Another Self-Regulatory Organization of the Commission

None. 16 15 U.S.C. 78(f). 17 15 U.S.C. 78f-3(6).

SR-NASDAQ-2008-104 Amendment 2 of 54 9. Exhibits

1. Completed notice of proposed rule change for publication in the Federal

Register.

4. Comparison of Rule Language proposed in Amendment 2 with that

proposed in Amendment 1.


EXHIBIT 1 SECURITIES AND EXCHANGE COMMISSION (Release No. 34- ; File No. SR-NASDAQ-2008-104) October __, 2009 Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Approval of Proposal to Modify NASDAQ Rule 4611 Governing Sponsored Access 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 October 19, 2009, The NASDAQ

Stock Market LLC (“NASDAQ”) filed with the Securities and Exchange Commission

(“Commission”) the proposed rule change as described in Items I, II, and III below,

which Items have been substantially prepared by Nasdaq. The original proposal was filed

on December 30, 2009, and amended on January 8, 2009.3

I. Self-Regulatory Organization’s Statement of the Terms of the Substance of the

Proposed Rule Change

The Commission is

publishing this notice to solicit comments on the proposed rule change from interested

persons.

NASDAQ hereby submit a Response to Comments and Proposed Amendment 2

regarding its proposal (“Proposal”) to modify NASDAQ Rule 4611 which governs

electronic access to NASDAQ’s order execution systems. The text of the proposed rule

change is available at http://nasdaqomx.cchwallstreet.com/, at NASDAQ’s principal

office, and at the Commission’s Public Reference Room. 1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b-4.

3 See Exchange Act Release No. 59275 (Jan. 22, 2009), 74 FR 5193 (Jan. 29, 2009).

http://nasdaqomx.cchwallstreet.com/�


* * * * *



[(d) Members may provide “Sponsored Access” to the Nasdaq Market Center in accordance with the provisions below: Sponsored Participants. A Sponsored Participant may obtain authorized access to the Nasdaq Market Center only if such access is authorized in advance by one or more Nasdaq members as follows:]






(C) Sponsoring Member shall comply with the Nasdaq Certificate of Incorporation, Bylaws, Rules and procedures with regard to the Nasdaq Market Center and Sponsored Participant shall comply with Nasdaq Certificate of Incorporation, Bylaws, Rules and procedures with regard to the Nasdaq Market Center, as if Sponsored Participant were a Nasdaq Member.


(D) Sponsored Participant shall maintain, keep current and provide to the Sponsoring Member a list of individuals authorized to obtain access to the Nasdaq Market Center on behalf of the Sponsored Participant. (E) Sponsored Participant shall familiarize its authorized individuals with all of the Sponsored Participant's obligations under this Rule and will assure that they receive appropriate training prior to any use or access to the Nasdaq Market Center. (F) Sponsored Participant may not permit anyone other than authorized individuals to use or obtain access to the Nasdaq Market Center. (G) Sponsored Participant shall take reasonable security precautions to prevent unauthorized use or access to the Nasdaq Market Center, including unauthorized entry of information into the Nasdaq Market Center, or the information and data made available therein. Sponsored Participant understands and agrees that Sponsored Participant is responsible for any and all orders, trades and other messages and instructions entered, transmitted or received under identifiers, passwords and security codes of authorized individuals, and for the trading and other consequences thereof. (H) Sponsored Participant acknowledges its responsibility to establish adequate procedures and controls that permit it to effectively monitor its employees’, agents’ and customers' use and access to the Nasdaq Market Center for compliance with the terms of this agreement. (I) Sponsored Participant shall pay when due all amounts, if any, payable to Sponsoring Member, Nasdaq, or any other third parties that arise from the Sponsored Participant’s access to and use of the Nasdaq Market Center. Such amounts include, but are not limited to applicable exchange and regulatory fees.]


(d) Access to a Trading Center. If a member enters into an arrangement with another person (e.g., a customer, another member, or a non-member broker-dealer) to provide that person with access to Nasdaq or otherwise allow such person to route its orders to Nasdaq using the member’s market participant identifier (“MPID”), the member is responsible for all trading conducted pursuant to that arrangement to the same extent as trading directly conducted by the member for customers. Consequently, the member is responsible for implementing policies and procedures for supervising and monitoring the


trading effected pursuant to the arrangement to ensure that it is in compliance with all applicable federal securities laws and rules and Exchange rules. This obligation applies irrespective of the manner in which orders pursuant to such arrangements reach Nasdaq.

(1) Definition.





(2) Compliance. To ensure that Sponsored Access is consistent with high market quality and the protection of investors, Sponsoring Members providing Sponsored Access shall at a minimum comply with the Contractual Provisions, Financial Controls, and Regulatory Controls set forth in sections (3), (4), and (5) below. Sponsoring Members providing Direct Market Access shall at a minimum comply with the Financial Controls and Regulatory Controls set forth in sections (4) and (5) below.


(A) A Sponsoring Member that provides Sponsored Access shall execute and maintain agreements with each Sponsored Participant containing the commitments below.

(i ) All trading activity by the Sponsored Participant shall comply with all applicable federal securities laws and rules and Exchange rules, including but not limited to the Nasdaq Certificate of Incorporation, Bylaws, Rules and procedures with regard to the Nasdaq Market Center (“Regulatory Requirements”).


(ii) Sponsored Participant shall promptly upon request provide Sponsoring Member with access to such books and records and financial information that is necessary to allow the Sponsoring Member to comply with its regulatory obligations with respect to activity of the Sponsored Participant within the Sponsored Access arrangement, and otherwise cooperate with the Sponsoring Member in furtherance of Sponsoring Member’s compliance with applicable Regulatory Requirements. Information provided by Sponsored Participants to Sponsoring Members pursuant to such requests shall be maintained as confidential by the Sponsoring Member, provided that such information shall be available to Nasdaq upon request for regulatory purposes.

(iii) Sponsored Participant shall maintain its trading activity within the credit, product or other financial limits specified by the Sponsoring Member.

(iv) Sponsored Participant shall maintain all technology permitting sponsored access to Nasdaq in a physically secure manner and may not permit unauthorized individuals to use or obtain access to Nasdaq. Sponsored Participant shall familiarize its authorized individuals with the Regulatory Requirements and will provide appropriate training prior to use or access to Nasdaq.

(v) Sponsored Participant shall agree that the Sponsoring Member or Nasdaq may immediately terminate the Sponsored Access if the Sponsoring Member or Nasdaq determines that continuing such access poses serious risk to the Sponsoring Member or to the integrity of the market.

(B) A Sponsoring Member that provides Sponsored Access shall execute and maintain agreements with each third party (“Third Party Provider”) that provides a Sponsored Access System to Sponsored Participants for accessing Nasdaq, specifying which of the financial and regulatory controls stated in subsections (4) and (5) below are satisfied by the technology provided, and containing the commitments below.

(i) Third Party Providers shall promptly upon request provide Sponsoring Member with access to such books and records and financial information that is necessary to allow the Sponsoring Member to comply with its regulatory obligations with respect to activity of the Sponsored Participant within the Sponsored Access arrangement, and otherwise cooperate with the Sponsoring Member in furtherance of Sponsoring Member’s compliance with


applicable Regulatory Requirements. Information provided by Sponsored Participants to Sponsoring Members pursuant to such requests shall be maintained as confidential by the Sponsoring Member, provided that such information shall be available to Nasdaq upon request for regulatory purposes.




(A) Prevent each Sponsored Participant from entering orders that in aggregate exceed appropriate pre-set credit thresholds. Sponsoring Members may also set finely-tuned credit thresholds by sector, security or otherwise. (B) Prevent Sponsored Participants from trading products that the Sponsoring Member is restricted from trading or that the Sponsored Participant is restricted from trading for reasons specific to the Sponsored Participant. (C) Prevent Sponsored Participants from submitting erroneous orders by providing for the rejection of orders that exceed certain price or size parameters, on an order-by-order basis or over a short period of time, or that indicate duplicative orders.

(5) Regulatory Controls. Each Sponsoring Member shall establish adequate

procedures and controls reasonably designed to permit it to effectively monitor and control compliance with Regulatory Requirements,

(A) Each Sponsoring Member shall have systemic controls reasonably designed to ensure compliance by the Sponsored Participant with all applicable Regulatory Requirements.


(B) Each Sponsoring Member shall ensure that appropriate supervisory personnel receive and review timely reports of all trading activity by its Sponsored Participants sufficient to permit the Sponsoring Member to comply with applicable Regulatory Requirements, and to monitor for illegal activity such as market manipulation or insider trading. At a minimum, appropriate supervisory personnel should receive immediate post-trade execution reports of trading activity of all Sponsored Participants, including their identities; all required audit trail information by no later than the end of the trading day; and all information necessary to create and maintain the trading records required by applicable Regulatory Requirements by no later than the end of the trading day. Appropriate supervisory personnel shall review execution reports immediately and all other reports promptly.

* * * * *

II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis

for, the Proposed Rule Change

In its filing with the Commission, NASDAQ 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. NASDAQ 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

Currently, Rule 4611(d) is substantially similar to Sponsored Access rules

adopted by other national securities exchanges, including New York Stock Exchange

Rule 123B and NYSE Arca Exchange Rule 7.29(b). NASDAQ is proposing to amend

Rule 4611(d) to ensure that member firms that are assuming responsibility for their

customers’ trading activity have effective financial and regulatory oversight of the


Sponsored Participant, and that NASDAQ has access to all information necessary to

provide effective exchange oversight.

Seven firms and three industry group representatives submitted comment letters

addressing the original proposal, all of which were thoughtful and all of which merit

specific consideration and response.4

Uniform Rule, Implementation, and Application

Set forth below is a recitation of the suggested

modifications to the Proposal, NASDAQ’s response to the suggested modification, and a

description of precise changes to the rule language contained in proposed Amendment 1

to the Proposal.

Two commenters stressed that industry regulators should develop a uniform rule

and then apply it consistently across all markets and all market participants.5

4

Specifically, SIFMA recommended that all exchanges, the Financial Industry Regulatory

Authority (“FINRA”), and the Commission should cooperate to develop a uniform,

workable rule. SIFMA and Wedbush also suggested that, once developed, the uniform

Harvey Cloyd, Chief Executive Officer, Electronic Transaction Clearing, Inc., dated February 5, 2009 (“ETC Letter”); John N. Jacobs, Director of Operations, Lime Brokerage LLC, dated February 17, 2009 (“Lime I Letter”); Manisha Kimmel, Executive Director, Financial Information Forum, dated February 19, 2009 (“FIF Letter”); Ted Myerson, President, FTEN, Inc., dated February 19, 2009 (“FTEN I Letter”); Michael A. Barth, Executive Vice President, OES Market Group, dated February 23, 2009 (“OES Letter”); Jeff Bell, Executive Vice President, Clearing and Technology Group, Wedbush Morgan Securities, dated February 23, 2009 (“Wedbush Letter”); Stuart J. Kaswell, Executive Vice President & General Counsel, Managed Funds Association, dated February 24, 2009 (“MFA Letter”); Ann Vlcek, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association, dated February 26, 2009 (“SIFMA Letter”), Nicole Harner Williams, Vice President, Associate General Counsel, Penson Financial Services, Inc., dated February 27, 2009 (“Penson Letter”); Gary LaFever, Chief Corporate Development Officer, FTEN, Inc., dated April 29, 2009 (“FTEN II Letter”); Samuel F. Lek, Chief Executive Officer, Lek Securities Corporation, dated June 15, 2009 (“Lek Letter”); John N. Jacobs, Chief Operations Officer, Lime Brokerage LLC, dated June 30, 2009 (“Lime II Letter”).

5 See SIFMA Letter, Wedbush Letter.



















rule should be consistently interpreted and enforced to ensure a level playing field.

Finally, commenters suggested that all exchanges implement the uniform rule on a

common effective date that allows market participants reasonable notice and preparation

time.

NASDAQ agrees with each of these recommendations. The regulation of

electronic access should be uniformly regulated and not create the opportunity for

arbitrage between the rules of competing exchanges. To that end, NASDAQ has been

cooperating with the Commission and the Intermarket Surveillance Group (“ISG”),

which includes all self-regulatory organizations (“SROs”) registered under the auspices

of the Commission, towards the development of a uniform rule governing electronic

access to markets. NASDAQ expects that all SROs will adopt the uniform rule and that

the SROs will coordinate with the industry representatives such as SIFMA to develop a

uniform implementation plan that includes adequate opportunity for programming and

testing. NASDAQ expects that consistency in the future application of the uniform rule

will be an on-going topic of discussion at ISG and at the Commission.

Definition of Sponsored Access and Scope of Proposed Rule

Four commenters questioned whether the Proposal properly defines Sponsored

Access.6

6 See ETC Letter, FIF Letter, SIFMA Letter, Penson Letter.

The original proposed definition of Sponsored Access included three categories

of access: (1) direct market access, where the Sponsored Participant’s orders pass through

the Sponsoring Member’s systems prior to reaching NASDAQ (“Direct Market Access”

or “DMA”), (b) sponsored access, where the Sponsored Participant enters orders directly

into NASDAQ via a dedicated port provided by the Sponsoring Member (“Direct


Sponsored Access” or “DSA”), and (c) direct access where a service bureau or other third

party provides Sponsored Participants with technology to access NASDAQ under the

auspices of and via an arrangement with the Sponsoring Member (“Third Party

Sponsored Access” or “TPSA”).

Specifically SIFMA and FIF suggest that the proposed definition of Sponsored

Access is overly broad and that the Proposal’s provisions should be limited exclusively to

Sponsored Access arrangements in which Sponsored Participant orders do not flow

through a Sponsoring Member’s trading technology infrastructure prior to reaching

NASDAQ. This would mean that DSA and TPSA would be subject to the proposed

Sponsored Access but that DMA would not and nor would any other electronic order

routing or execution arrangement that involves orders passing through a broker-dealer’s

infrastructure prior to reaching a destination market. The ETC and Penson Letters

recommend that the rule be more narrowly limited to DSA.

NASDAQ agrees in part with SIFMA and FIF that the proposed rule should focus

on whether or not orders flow through a Sponsoring Member’s trading technology

infrastructure prior to reaching NASDAQ. Using that rubric, genuine Sponsored Access

would be limited to instances where the Sponsored Participant enters orders directly into

NASDAQ using the Sponsoring Member’s MPID and the orders do not pass through a

Member System before reaching NASDAQ. Sponsored Access is distinguished from

Direct Market Access (“DMA”) whereby a member provides 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.


The key to proper regulation of both Sponsored Access and DMA are the

regulatory and financial controls set forth in proposed Rule 4611(d)(4) and (5). In DMA

arrangements, those controls are provided by a “Member System” which is any system

administered and controlled solely by a member that applies the pre- and post-trade

financial and regulatory controls set forth in sections (4) and (5) below. In a Sponsored

Access arrangement, the controls are imposed through contractual provisions set forth in

Rule 4611(d)(3) in combination with the provisions of subsections (d)(4) and (d)(5).

NASDAQ agrees with commenters that DMA arrangements are already

effectively regulated under existing laws and regulations because in such cases, the

broker-dealer that takes responsibility for orders is a member of the exchange with all

attendant compliance obligations and incentives. Orders and executions that flow

through a broker-dealer’s infrastructure are subject to all member compliance obligations

as though generated by the member itself, including capturing details for books and

record rules and implementing appropriate pre- and post-trade controls.7

7 NASDAQ does not believe the same can be said of TPSA arrangements.

Although some TPSA providers may have substantially identical regulatory policies and procedures, this is not necessarily the case and, in any event, it is not mandated by current rules. Therefore, NASDAQ is not proposing to exclude TPSA from coverage under the Sponsored Access rule.

In essence,

NASDAQ believes that NASDAQ members already operate Member Systems that

provide the regulatory and financial controls set forth in proposed subsections (d)(4) and

(d)(5). As such, NASDAQ can enhance the clarity of the obligations of members in

DMA arrangements – and bolster market confidence in the integrity and security of the

market -- without imposing additional obligations.


The same cannot be uniformly stated with respect to Sponsored Access. It is true

that all orders entering NASDAQ systems must bear a member MPID and all Sponsoring

Members currently assume full responsibility for all orders that enter NASDAQ systems

under their specific MPIDs. It is also true that NASDAQ members are already closely

regulated, and that NASDAQ systems are closely surveilled both in real-time and post

trade. Nonetheless, members may hold different views of what that responsibility

requires. Members may also assess in different ways the risks to the market posed by

Sponsored Access and the likelihood of errors and harm caused by Sponsored

Participants. Therefore, NASDAQ believes it is critical to establish a clear understanding

of the minimum regulatory and financial controls required in Sponsored Access

arrangements where orders pass directly into NASDAQ systems without first passing

through a Member System as defined herein.

Accordingly, NASDAQ is proposing to amend the Proposal in several ways.

First, NASDAQ is proposing to add prefatory language to Rule 4611(d) that clearly

articulates the responsibility of all members to have policies and procedures reasonably

designed to regulate all orders that it enters into NASDAQ systems under its own

MPID(s) regardless of the order entry and access arrangement. NASDAQ believes that

this new language is superior to similar language, which had been included in Rule

4611(d)(2) that is being deleted. Second, NASDAQ is proposing to amend Rule

4611(d)(1) to distinguish between Sponsored Access and DMA as described above, and

to eliminate the distinction set forth in the original proposal between Direct Sponsored

Access and Third Party Sponsored Access. Third, NASDAQ is proposing to define

Member System and Sponsored Access System to ensure that all DMA and Sponsored


Access arrangements are effectively regulated by a system that provides adequate

regulatory and financial controls.

Contractual Provisions

NASDAQ is not proposing to modify the contractual obligations imposed on

DMA arrangements. Under traditional DMA, where orders pass through the member

firm’s infrastructure, the member firm already maintains adequate regulatory and

financial control and NASDAQ already has adequate access to information necessary to

properly surveil and regulate orders entered into NASDAQ through DMA arrangements.

Again, the same cannot be said with confidence about Sponsored Access relationships

and orders that enter NASDAQ without first passing through a Member System.

Accordingly, NASDAQ is maintaining the requirement, set forth in the original proposal,

that Sponsored Access relationships be memorialized and governed by specific

contractual provisions, while leaving DMA free of that requirement.

Several commenters object to the contractual provisions that NASDAQ proposed

to apply to Sponsored Access arrangements.8

8 See SIFMA Letter, FIF Letter, MFA Letter, and ETC Letter.

FIF and ETC object to the requirement that

Sponsoring Members execute contracts with Third Party providers that require Third

Party providers to sign detailed agreements with each Sponsored Participant. FIF argues

that, in the case of TPSA, the burden of compliance and related contractual obligations

should remain with the Sponsoring Member, rather than with the third-party service

bureau as the Proposal suggests. ETC contends that requiring third-party service

providers to execute with Sponsored Participants contracts containing the specified


provisions is overly burdensome, not justified by the benefits, and redundant of the

existing obligations of the Sponsoring Member.

NASDAQ agrees that the Proposal is needlessly burdensome in requiring Third

Party providers to execute with each Sponsored Participant a contract containing the

detailed provisions proposed in Rule 4611(d)(3). NASDAQ strongly believes, however,

that Sponsoring Members must have individual contractual relationships with all

Sponsored Participants. Such arrangements are particularly important with respect to

non-member Sponsored Participants that are outside NASDAQ’s regulatory jurisdiction

and continuing oversight. NASDAQ also believes that Sponsoring Members must enter

into a contract with any Third Party Providers that operates technology that the member

utilizes to enable, monitor, or control Sponsored Access or to satisfy the financial and

regulatory controls specified in subsections (4) and (5) (a “Sponsored Access System”).

The contract with Third Party Providers must provide that NASDAQ or its agent must be

allowed to audit the Sponsored Access System. Such contractual arrangements are

important with respect to NASDAQ members that are Sponsored Participants in that they

require the participants in Sponsored Access relations to assess applicable requirements

and specifically allocate responsibility among the parties.

Accordingly, NASDAQ has proposed to divide proposed Rule 4611(d)(3) into

two subsections: Subsection (A) governing agreements between Sponsoring Members

and Sponsored Participants and Subsection (B) governing agreements between

Sponsoring Members and Third Party Providers. NASDAQ proposes to eliminate the

requirement that Third Party Providers execute agreements with Sponsored Participants

containing detailed contractual provisions identical to those required between Sponsoring


Members and Sponsored Participants. New Subsection (B) requires that the agreement

identify the financial and regulatory controls that are satisfied by the third party

technology, and contain commitments appropriately tailored to the third party

relationship including (1) limited access to books and records, (2) physical security of

technology that accesses NASDAQ, (3) the ability of NASDAQ or its agent to audit the

Sponsored Access System, and (4) the ability for the Sponsoring Member or NASDAQ to

terminate access to NASDAQ.

Additionally, SIFMA objects to aspects of the Proposal that require Sponsored

Participants to make their books and records and corporate and financial information

available to the Sponsoring Member upon request. MFA shares these concerns and notes

that because the proposed contractual provisions implicate sensitive proprietary

information, they must be limited to information relevant to oversight of trading activity

conducted under the particular Sponsored Access arrangement and that information

produced must be maintained as confidential by the Sponsoring Member and regulators.

NASDAQ agrees that it can achieve effective exchange oversight through more

narrowly tailored contractual provisions between Sponsoring Members and Sponsored

Participants. Accordingly, NASDAQ is proposing to eliminate proposed Rule

4611(d)(3)(A)(E) and to amend Rule 4611(d)(3)(A)(ii) to require Sponsored Participants

to provide Sponsoring Member with access to such books and records and financial

information that is “necessary to allow the Sponsoring Member to comply with its

regulatory obligations with respect to activity of the Sponsored Participant within the

Sponsored Access arrangement.” Additionally, NASDAQ proposes to include

confidentiality provisions to protect sensitive information provided by Sponsored


Participants to Sponsoring Members for regulatory purposes. These provisions, in

combination with the provision requiring full cooperation by Sponsored Participants, will

provide NASDAQ with full access to information needed for proper regulatory oversight.

MFA also objects to proposed Rule 4611(d)(3)(A)(v) which requires sponsorship

agreements to include a provision permitting the Sponsoring Member or NASDAQ

immediately to terminate access in the event that the Sponsored Participant or Third Party

provider fails to abide by its contractual commitments. MFA argues that Sponsoring

Members and Sponsored Participants have established reasonable grace and cure periods

for breaches of sponsorship agreements and that such terms should be left to those

parties.

NASDAQ agrees that the parties should remain free to negotiate commercial

terms. However, those terms are generally designed to protect the parties’ commercial

interests rather than the interests of NASDAQ and other market participants. NASDAQ

has a separate interest in maintaining a fair and orderly market, including the ability to

limit access by market participants that disrupt the markets or pose systemic risks.

Accordingly, NASDAQ proposes to limit Rule 4611(d)(3)(v) to protecting NASDAQ’s

interest in maintaining a fair and orderly market rather than governing commercial terms

between the parties.

Financial Controls

SIFMA comments extensively on the Financial Controls provisions of proposed

Rule 4611(d)(4), including: (1) the provisions should allow for procedures and controls

“reasonably designed” to prevent certain conduct, rather than impose a strict liability

standard; (2) it is not possible for Sponsoring Members to prevent the entry of orders in a


Direct Sponsored Access arrangement; and (3) by imposing a general obligation on

Sponsoring Members to make a determination of creditworthiness and to impose

financial limits, the proposed rule could cause Sponsoring Members to allow excessive

risk-taking; and (4) the product limitation provision should not impose restrictions on

Sponsored Participants that are unique to the Sponsoring Member.

NASDAQ agrees that in a “procedures-based” regime such as NASDAQ is

proposing to govern Sponsored Access arrangements, such procedures cannot ensure

compliance or prevent errors from occurring. Such procedures must, however, be

reasonably designed to ensure compliance or prevent errors. This is consistent with the

approach that the Commission adopted with respect to enforcement of Regulation NMS

and that SROs have adopted with respect to supervisory systems within member firms.

What constitutes “reasonable” cannot be specified in a one-size-fits-all rule but rather

requires an individual assessment of the facts and circumstances of each Sponsoring

Member.9

Essentially, NASDAQ’s proposed Financial Controls provisions would require

Sponsoring Members to undertake a creditworthiness determination and to develop

monitoring and controls incorporating that determination.

Accordingly, NASDAQ proposes to modify Rule 4611(d)(4) to require

“reasonably designed” procedures and controls.

10

9 See Wedbush Letter.

NASDAQ is not dictating

how that determination is undertaken or implemented but the provision does require at a

minimum that Sponsoring Members have real-time or nearly real-time ability to monitor

10 It is difficult to see that requiring firms to undertake a creditworthiness determination and to impose controls would result in more risk-taking behavior than currently exists, as SIFMA appears to claim.


and control the conduct of Sponsored Participants.11 The importance of such controls in

limiting systemic risk justifies the burden imposed by the narrowly tailored proposed

provisions.12

The product limitation provision of the contractual requirements set forth in

subsection (d)(4)(B) has two primary goals. First, it requires that Sponsoring Members

be qualified to sponsor market participants to trade specific products. If a Sponsoring

member does not have proper expertise and experience trading a product, it cannot be

expected to effectively monitor the trading of such products. Second, it is another

“know-your-customer” provision that requires Sponsoring Members to assess the market

participants that they sponsor and to limit trading to products for which the Sponsored

Participant is qualified. It is not, as SIFMA implies, designed to transfer to Sponsored

Participants limitations that are specific to the Sponsoring Members, such as restrictions

imposed by SEC Rule 10b-18.

Indeed, NASDAQ believes that Sponsoring Members should embrace this

requirement as a means of limiting the risk they assume by accepting responsibility for

the trading activity of Sponsored Participants.

11 NASDAQ is not requiring that Sponsoring Members utilize pre-trade risk

management offered by the exchange, or that pre-trade checks occur at the exchange level, as some commenters suggest. See Wedbush Letter. NASDAQ does, recognize that offering additional pre-trade risk management functionality would benefit the marketplace.

12 NASDAQ is skeptical of SIFMA’s claims that such controls cannot be implemented and that requiring such controls would effectively prohibit Direct Sponsored Access. In fact, SIFMA’s claims are directly contradicted by statements contained in the FTEN Letter and the Lime I Letter.


Regulatory Controls

SIFMA also comments extensively on the Regulatory Controls provisions of

proposed Rule 4611(d)(5), including: (1) the provisions should allow for procedures and

controls “reasonably designed” to prevent certain conduct, rather than impose a strict

liability standard; (2) it is not practical for Sponsoring Members to regulate the conduct

of Sponsored Participants on a real-time basis given that much current surveillance

occurs on a post-trade basis; (3) providing a non-exclusive list of regulatory requirements

will create confusion for market participants; and (4) post-trade reports should be

reviewed by “appropriate supervisory personnel” as defined by the Sponsoring Member..

As stated above with respect to Financial Controls, NASDAQ agrees that in a

“procedures-based” regime such as NASDAQ is proposing to govern Sponsored Access

arrangements, such procedures cannot ensure compliance or prevent errors from

occurring. Such procedures must, however, be reasonably designed to ensure compliance

or prevent errors. This is consistent with the approach that the Commission adopted with

respect to enforcement of Regulation NMS and that SROs have adopted with respect to

supervisory systems within member firms. What constitutes “reasonable” cannot be

specified in a one-size-fits-all rule but rather requires an individual assessment of the

facts and circumstances of each Sponsoring Member. Accordingly, NASDAQ proposes

to modify Rule 4611(d)(5)(A) to require “reasonably designed” procedures and controls.

Nonetheless, NASDAQ continues to believe that the regulatory integrity of its market

requires that all orders entered by Sponsored Participants should be subject to real-time

or nearly real-time regulatory controls.


NASDAQ also proposes to amend Rule 4611(d)(5)(A) to eliminate the non-

exclusive list of regulatory requirements and to replace it with a general reference to

Regulatory Requirements, which is already defined within the proposed rule. NASDAQ

agrees that a non-exclusive list could cause confusion regarding both the regulatory

requirements specifically listed as well as those not listed.

NASDAQ proposes to amend Rule 4611(d)(5)(B) to permit trading activity

reports to be reviewed by “appropriate supervisory personnel” and that execution reports

must be reviewed immediately and other reports must be reviewed “promptly.”

NASDAQ agrees with SIFMA’s contention that Firms should be free to determine which

personnel are best suited to review trading activity reports provided that they have the

requisite supervisory training and responsibility.13

Lastly, several commenters have noted the potential systemic risk posed by

sponsored access arrangements and the importance to the marketplace of effective

regulation of such arrangements.

Additionally, the rule as currently

proposed creates ambiguity about when trading reports must be reviewed. It is intended

that firms review execution reports immediately and other reports promptly.

14

13 See SIFMA Letter.

NASDQAQ agrees and, in response to those

commenters, NASDAQ is working to develop a proposal that would require Sponsoring

Members to obtain a unique MPID for each Sponsored Participant. Many but not all

NASDAQ members that sponsor multiple participants already obtain a unique MPID for

each. Separating the trading activity of multiple Sponsored Participants of a single

Sponsoring Member will make automated algorithmic surveillance of the market efficient

14 See Lime Letter, Lek Letter, FTEN Letter.


and effective without that additional work. Thus, requiring a unique MPID for each

Sponsored Participant would preserve the ability of Sponsored Participants to maintain

anonymity and achieve the primary goals of sponsorship, while simultaneously ensuring

that NASDAQ has full transparency effectively to regulate conduct on its market.

NASDAQ will work with other markets to develop a uniform rule in the near future.

2. Statutory Basis

Nasdaq believes that the proposed rule change is consistent with the provisions of

Section 6 of the Act,15 in general and with Section 6(b)(5) of the Act,16

B. Self-Regulatory Organization’s Statement on Burden on Competition

in particular, in

that it is designed to promote just and equitable principles of trade and to protect

investors and the public interest. The proposal is consistent with these obligations

because it updates the standards for providing Sponsored Access, and clearly articulates

the obligations in the NASDAQ’s rules.

NASDAQ does not believe that the proposed rule change will result in any burden

on competition that is not necessary or appropriate in furtherance of the purposes of the

Act, as amended.

C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received from Members, Participants, or Others

Written comments were neither solicited nor received.

15 15 U.S.C. 78(f).

16 15 U.S.C. 78f-3(6).


III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

Within 35 days of the date of publication of this notice in the Federal 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 self-regulatory organization consents, the Commission will:

A. by order approve 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, as amended, is

consistent with the Act. Comments may be submitted by any of the following methods:

Electronic comments:

• Use the Commission's Internet comment form

(http://www.sec.gov/rules/sro.shtml); or

• Send an e-mail to [email protected]. Please include File Number

SR-NASDAQ-2008-104 on the subject line.

Paper comments:

• 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-NASDAQ-2008-104. This file number

should be included on the subject line if e-mail is used.

http://www.sec.gov/rules/sro.shtml�

mailto:[email protected]�


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 inspection and copying in the Commission’s Public Reference

Room on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of

such filing also will be available for inspection and copying at the principal offices 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-NASDAQ-2008-104, and should

be submitted on or before [insert date 21 days from publication in the Federal Register].

For the Commission, by the Division of Trading and Markets, pursuant to

delegated authority.17

Florence E. Harmon Deputy Secretary

17 17 CFR 200.30-3(a)(12).


EXHIBIT 4

This document compares the rule language proposed in Amendment 1 with that proposed in Amendment 2. Deletions from Amendment 1 are in strikethrough; additions are in double underline.



(d) Members may provide “Sponsored Access” to the Nasdaq Market Center in accordance with the provisions below: Sponsored Participants. [A Sponsored Participant may obtain authorized access to the Nasdaq Market Center only if such access is authorized in advance by one or more Nasdaq members as follows:]






(C) Sponsoring Member shall comply with the Nasdaq Certificate of Incorporation, Bylaws, Rules and procedures with regard to the Nasdaq Market Center and Sponsored Participant shall comply with Nasdaq Certificate of


Incorporation, Bylaws, Rules and procedures with regard to the Nasdaq Market Center, as if Sponsored Participant were a Nasdaq Member. (D) Sponsored Participant shall maintain, keep current and provide to the Sponsoring Member a list of individuals authorized to obtain access to the Nasdaq Market Center on behalf of the Sponsored Participant. (E) Sponsored Participant shall familiarize its authorized individuals with all of the Sponsored Participant's obligations under this Rule and will assure that they receive appropriate training prior to any use or access to the Nasdaq Market Center. (F) Sponsored Participant may not permit anyone other than authorized individuals to use or obtain access to the Nasdaq Market Center. (G) Sponsored Participant shall take reasonable security precautions to prevent unauthorized use or access to the Nasdaq Market Center, including unauthorized entry of information into the Nasdaq Market Center, or the information and data made available therein. Sponsored Participant understands and agrees that Sponsored Participant is responsible for any and all orders, trades and other messages and instructions entered, transmitted or received under identifiers, passwords and security codes of authorized individuals, and for the trading and other consequences thereof. (H) Sponsored Participant acknowledges its responsibility to establish adequate procedures and controls that permit it to effectively monitor its employees’, agents’ and customers' use and access to the Nasdaq Market Center for compliance with the terms of this agreement. (I) Sponsored Participant shall pay when due all amounts, if any, payable to Sponsoring Member, Nasdaq, or any other third parties that arise from the Sponsored Participant’s access to and use of the Nasdaq Market Center. Such amounts include, but are not limited to applicable exchange and regulatory fees.]


Access to a Trading Center. If a member enters into an arrangement with another person (e.g., a customer, another member, or a non-member broker-dealer) to provide that person with access to Nasdaq or otherwise allow such person to route its orders to Nasdaq using the member’s market participant identifier (“MPID”), the member is responsible for all trading conducted pursuant to that arrangement to the same extent as trading directly conducted by the member for customers. Consequently, the member is responsible for implementing policies and procedures for supervising and monitoring the trading effected pursuant to the arrangement to ensure that it is in compliance with all applicable federal

SR-NASDAQ-2008-104 Amendment 2 of 54 securities laws and rules and Exchange rules. This obligation applies irrespective of the manner in which orders pursuant to such arrangements reach Nasdaq.

(1) Definition. Sponsored Access is the practice by a member firm (“Sponsoring Member”) of providing access to Nasdaq to another firm or customer (“Sponsored Participant”). Sponsored Access takes multiple forms, including but not limited to: (a) direct market access, where the Sponsored Participant’s orders pass through the Sponsoring Member’s systems prior to reaching Nasdaq (“Direct Market Access”), (b) sponsored access, where the Sponsored Participant enters orders directly into Nasdaq via a dedicated port provided by the Sponsoring Member (“Direct Sponsored Access”), and (c) direct access where a service bureau or other third party provides Sponsored Participants with technology to access Nasdaq under the auspices of and via an arrangement with the Sponsoring Member (“Third Party Sponsored Access”).





(2) Compliance. Irrespective of the form of Sponsored Access provided, Sponsoring Members are responsible for the conduct of their Sponsored Participants as if the conduct were their own. To ensure that Sponsored Access is consistent with high market quality and the protection of investors, Sponsoring Members providing Sponsored Access shall at a minimum comply with the Contractual Provisions, Financial Controls, and Regulatory Controls set forth in sections (3), (4), and (5) below. Sponsoring Members providing Direct Market


Access shall at a minimum comply with the Financial Controls and Regulatory Controls set forth in sections (4) and (5) below.


(A) A Sponsoring Member that provides Direct Sponsored Access or Third Party Sponsored Access shall execute and maintain agreements with each Sponsored Participant containing the commitments below. A Sponsoring Member that provides Third Party Sponsored Access must execute and maintain agreements with each service bureau or other entity that facilitates such Third Party Sponsored Access providing that such entity will execute and maintain agreements with each Sponsored Participant containing the commitments below for the benefit of the Sponsoring Member.

(Ai) All trading activity by the Sponsored Participant shall comply with all applicable federal securities laws and rules and Exchange rules, including but not limited to the Nasdaq Certificate of Incorporation, Bylaws, Rules and procedures with regard to the Nasdaq Market Center (“Regulatory Requirements”).

(Bii) Sponsored Participant shall promptly upon request provide Sponsoring Member with access to such books and records promptly upon request and financial information that is necessary to allow the Sponsoring Member to comply with its regulatory obligations with respect to activity of the Sponsored Participant within the Sponsored Access arrangement, and otherwise cooperate with the Sponsoring Member in furtherance of Sponsoring Member’s compliance with applicable Regulatory Requirements. Information provided by Sponsored Participants to Sponsoring Members pursuant to such requests shall be maintained as confidential by the Sponsoring Member, provided that such information shall be available to Nasdaq upon request for regulatory purposes.

(Ciii) Sponsored Participant shall maintain its trading activity within the credit, product or other financial limits specified by the Sponsoring Member.

(Div) Sponsored Participant shall maintain all technology permitting sponsored access to Nasdaq in a physically secure manner and may not permit unauthorized individuals to use or obtain access to Nasdaq. Sponsored Participant shall familiarize its authorized individuals with the Regulatory Requirements and will provide appropriate training prior to use or access to Nasdaq.


(E) Sponsored Participant shall provide the Sponsoring Member complete and current corporate and financial information about the Sponsored Participant.

(Fv) Sponsored Participant shall agree that the Sponsoring Member or Nasdaq may immediately terminate the Sponsored Access if the Sponsored Participant or third party access provider fails to abide by its commitments Sponsoring Member or Nasdaq determines that continuing such access poses serious risk to the Sponsoring Member or to the integrity of the market.

(B) A Sponsoring Member that provides Sponsored Access shall execute and maintain agreements with each third party (“Third Party Provider”) that provides a Sponsored Access System to Sponsored Participants for accessing Nasdaq, specifying which of the financial and regulatory controls stated in subsections (4) and (5) below are satisfied by the technology provided, and containing the commitments below.

(i) Third Party Providers shall promptly upon request provide Sponsoring Member with access to such books and records and financial information that is necessary to allow the Sponsoring Member to comply with its regulatory obligations with respect to activity of the Sponsored Participant within the Sponsored Access arrangement, and otherwise cooperate with the Sponsoring Member in furtherance of Sponsoring Member’s compliance with applicable Regulatory Requirements. Information provided by Sponsored Participants to Sponsoring Members pursuant to such requests shall be maintained as confidential by the Sponsoring Member, provided that such information shall be available to Nasdaq upon request for regulatory purposes.





(A) Prevent each Sponsored Participant from entering orders that in aggregate exceed appropriate pre-set credit thresholds. Sponsoring Members may also set finely-tuned credit thresholds by sector, security or otherwise. (B) Prevent Sponsored Participants from trading products that the Sponsored Participant or Sponsoring Member is restricted from trading or that the Sponsored Participant is restricted from trading for reasons specific to the Sponsored Participant. (C) Prevent Sponsored Participants from submitting erroneous orders by providing for the rejection of orders that exceed certain price or size parameters, on an order-by-order basis or over a short period of time, or that indicate duplicative orders.

(5) Regulatory Controls. Each Sponsoring Member shall establish adequate

procedures and controls reasonably designed to permit it to effectively monitor and control compliance with Regulatory Requirements,

(A) Each Sponsoring Member shall have systemic controls reasonably designed to ensure compliance by the Sponsored Participant with all applicable Regulatory Requirements, including but not limited to compliance with rules relating to short selling; trading halts; proper uses of order types; proper use of Intermarket Sweep Orders; trading ahead of customer limit orders; prohibitions against manipulative trading practices, including wash sales and marking the close; restricted lists of securities for purposes of SEC Rule 10b-18; and applicable margin rules.

(B) Each Sponsoring Member shall ensure that compliance personnel appropriate supervisory personnel receive and review timely reports of all trading activity by its Sponsored Participants sufficient to permit the Sponsoring Member to comply with applicable Regulatory Requirements, and to monitor for illegal activity such as market manipulation or insider trading. At minimum, the member firm’s compliance unit appropriate supervisory personnel should receive immediate post-trade execution reports of trading activity of its all Sponsored Participants, including their identities; all required audit trail information by no later than the end of the trading day; and all information necessary to create and maintain the trading records required by applicable Regulatory Requirements by no later than the end of the trading day. Appropriate supervisory personnel shall review execution reports immediately and other reports promptly.

omb approval omb number: 3235-0045 expires:...

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