Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt a Best Execution and Interpositioning Rule

<NOTICE> SECURITIES AND EXCHANGE COMMISSION <DEPDOC>[Release No. 34-104494; File No. SR-ISE-2025-43]</DEPDOC> <SUBJECT>Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt a Best Execution and Interpositioning Rule</SUBJECT> <DATE>December 22, 2025.</DATE> Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), <SU>1</SU> <FTREF/> and Rule 19b-4 thereunder, <SU>2</SU> <FTREF/> notice is hereby given that on December 22, 2025, Nasdaq ISE, LLC (“ISE” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the proposed rule change as described in Items I, II, and III, below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. <FTNT> <SU>1</SU>  15 U.S.C. 78s(b)(1). </FTNT> <FTNT> <SU>2</SU>  17 CFR 240.19b-4. </FTNT> <HD SOURCE="HD1">I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change</HD> The Exchange proposes to adopt a Best Execution and Interpositioning rule at proposed Options 9, Section 26. The text of the proposed rule change is available on the Exchange's website at <E T="03">https://listingcenter.nasdaq.com/rulebook/ise/rulefilings,</E> and at the principal office of the Exchange. <HD SOURCE="HD1">II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change</HD> In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. <HD SOURCE="HD2">A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change</HD> <HD SOURCE="HD3">Purpose</HD> The Exchange proposes to adopt a Best Execution and Interpositioning rule at proposed Options 9, Section 26 that is identical to Nasdaq Phlx LLC (“Phlx”) Best Execution and Interpositioning rule at General 9, Section 11. <HD SOURCE="HD3">Background</HD> A broker-dealer has a legal duty to seek best execution of customer orders. The duty of best execution predates the Federal securities laws and is derived from an implied representation that a broker-dealer makes to its customers. The duty is established from “common law agency obligations of undivided loyalty and reasonable care that an agent owes to [its] principal.”  <SU>3</SU> <FTREF/> This obligation requires that a “broker-dealer seek to obtain for its customer orders the most favorable terms reasonably available under the circumstances.”  <SU>4</SU> <FTREF/> The duty of best execution is addressed at FINRA Rule 5310. <FTNT> <SU>3</SU>   <E T="03">See, e.g., Newton</E> v. <E T="03">Merrill, Lynch, Pierce, Fenner & Smith, Inc.,</E> 135 F.3d 266, 270 (3d Cir.), <E T="03">cert. denied,</E> 525 U.S. 811 (1998). </FTNT> <FTNT> <SU>4</SU>   <E T="03">See</E> Securities Exchange Act Release No. 37619A (Sept. 6, 1996), 61 FR 48290 (Sept. 12, 1996) (“Order Execution Obligations Adopting Release”). </FTNT> The Commission has previously stated that the duty of best execution requires a broker-dealer to execute customers' trades at the most favorable terms reasonably available under the circumstances, <E T="03">i.e.,</E> at the best reasonably available price. <SU>5</SU> <FTREF/> The Commission has described a non-exhaustive list of factors that may be relevant to broker-dealers' best execution analysis. These factors include the size of the order, speed of execution, clearing costs, the trading characteristics of the security involved, the availability of accurate information affecting choices as to the most favorable market center for execution and the availability of technological aids to process such information, and the cost and difficulty associated with achieving an execution in a particular market center. <SU>6</SU> <FTREF/> <FTNT> <SU>5</SU>   <E T="03">See</E> Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37538 (June 29, 2005) (“Regulation NMS Adopting Release”). </FTNT> <FTNT> <SU>6</SU>   <E T="03">See</E> Securities Exchange Act Release No. 96496 (December 14, 2022), 88 FR 5440, 5474 [sic] (January 27, 2023) (File No. S7-32-22) (Regulation Best Execution). </FTNT> In addition, the Commission has expressed concerns regarding interpositioning and the duty of best execution. Interpositioning can occur when a broker-dealer places a third party between itself and the best market for executing a customer trade in a manner that results in a customer not receiving the best available market price. <SU>7</SU> <FTREF/> Interpositioning can violate the broker-dealer's duty of best execution when it results in unnecessary transaction costs at the expense of the customer. <SU>8</SU> <FTREF/> <FTNT> <SU>7</SU>   <E T="03">See Edward Sinclair, et al.,</E> Securities Exchange Act Release No. 9115, 1971 WL 120487 (Mar. 24, 1971) (Comm'n op.), aff'd, 444 F2d. 399 (2d Cir. 1971) (order clerk in OTC department of broker-dealer interposed a broker-dealer between his firm and best available market price in return for split of profits with the interposed broker); <E T="03">H.C. Keister & Co., et al.,</E> Securities Exchange Act Release No. 7988, 1966 WL 84120 (Nov. 1, 1966) (Comm'n op.) (in exchange for payments, trader for a large broker-dealer interpositioned a small broker-dealer between its customers' orders and the best available market prices); <E T="03">Synovus Securities, Inc.,</E> Securities Exchange Act Release No. 34313, 1994 WL 323096 (July 5, 1994) (settled order) (broker-dealer and its president placed customer orders with person who was able to promptly sell the bonds to or buy the bonds from other brokers at a profit and customers did not get the best market price). <E T="03">See also</E> <E T="03">SEC</E> v. <E T="03">Ridenour,</E> 913 F.2d 515 (8th Cir. 1990) (a bond salesman violated the antifraud provisions based on his secret interpositioning of his personal trading account between his customers' securities transactions and the fair market price of the trades). </FTNT> <FTNT> <SU>8</SU>    <E T="03">See Thomson & McKinnon,</E> Securities Exchange Act Release No. 8310, 1968 WL 87637 (May 8, 1968) (Comm'n op.) (a National Association of Securities Dealers (“NASD”) member firm interposed broker-dealers between itself and the best available market, and the added transaction cost was borne by its customers; the Commission found that, “[i]n view of the obligation of a broker to obtain the most favorable price for his customer, where he interposes another broker-dealer between himself and a third broker-dealer, he <E T="03">prima facie</E> has not met that obligation and he has the burden of showing that the customer's total cost or proceeds of the transaction is the most favorable obtainable under the circumstances”). </FTNT> <HD SOURCE="HD3">Proposal</HD> At this time, the Exchange proposes to codify the broker dealer's duty of best execution at Options 9, Section 26 and title the new rule, “Best Execution and Interpositioning.” A broker-dealer that engages in a transaction for or with a customer or a customer of another broker-dealer, a Member and persons associated with a Member shall use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions. Utilizing the Commission's non-exhaustive list of factors, FINRA Rule 5310 and identical to Phlx General 9, Section 11, the following are among the factors that will be considered in determining whether a Member has used “reasonable diligence” are: the character of the market for the security, <E T="03">e.g.,</E> price, volatility, relative liquidity, and pressure on available communications; the size and type of transaction; the number of markets checked; accessibility of the quotation; and the terms and conditions of the order which result in the transaction, as communicated to the Member and persons associated with the Member. <SU>9</SU> <FTREF/> <FTNT> <SU>9</SU>   <E T="03">See</E> proposed Options 9, Section 26(a)(1). This rule text is identical to Phlx General 9, Section 11(a)(1). </FTNT> To prevent a broker-dealer from avoiding its best execution obligation via a third-party, the Exchange proposes to state that in any transaction for or with a customer or a customer of another broker-dealer, no Member or person associated with a Member shall interject a third party between the Member and the best market for the subject security in a manner inconsistent with paragraph (a)(1) of this Rule. <SU>10</SU> <FTREF/> <FTNT> <SU>10</SU>   <E T="03">See</E> proposed Options 9, Section 26(a)(2). This rule text is identical to Phlx General 9, Section 11(a)(2). </FTNT> Next, the Exchange notes that it is the Member's obligation to demonstrate best execution. To this end, the Exchange proposes to state that when a Member cannot execute directly with a market maker but must employ a broker's broker or some other means in order to ensure an execution advantageous to the customer, the burden of showing the acceptable circumstances for doing so is on the retail firm. Examples of acceptable circumstances are where a customer's order is “crossed” with another retail firm which has a corresponding order on the other side, or where the identity of the retail firm, ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 22k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━