Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Proposed Rule Change Amending Nasdaq's Membership Application Rules, 62709-62719 [E7-21740]

Download as PDF Federal Register / Vol. 72, No. 214 / Tuesday, November 6, 2007 / Notices connection with the investment by the Investing Fund in the Fund. Any Subadviser will waive fees otherwise payable to the Subadviser, directly or indirectly, by the Investing Company in an amount at least equal to any compensation received from a Fund by the Subadviser, or an affiliated person thereof, other than any advisory fees paid to the Subadviser or its affiliated person by a Fund, in connection with the investment by the Investing Company in the Fund made at the direction of the Subadviser. In the event that the Subadviser waives fees, the benefit of the waiver will be passed through to the Investing Company. 11. With respect to registered separate accounts that invest in any Investing Fund, no sales load will be charged at the Investing Fund level or at the Fund level. Other sales charges and service fees, as defined in Rule 2830, if any, will only be charged at the Investing Fund level or at the Fund level, not both. With respect to other investments in an Investing Fund, any sales charges and/or service fees charged with respect to shares of the Investing Fund will not exceed the limits applicable to a fund of funds as set forth in Rule 2830. 12. No Fund will acquire securities of any investment company or company relying on section 3(c)(1) or 3(c)(7) of the Act in excess of the limits contained in section 12(d)(1)(A) of the Act, except to the extent permitted by section 12(d)(1)(E) of the Act or exemptive relief from the Commission permitting the Fund to purchase shares of an affiliated money market fund for short-term cash management purposes. For the Commission, by the Division of Investment Management, pursuant to delegated authority. Florence E. Harmon, Deputy Secretary. [FR Doc. E7–21694 Filed 11–5–07; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION mstockstill on PROD1PC66 with NOTICES Sunshine Act Meeting Federal Register Citation of Previous Announcement: November 5, 2007 Status: Closed meeting. Place: 100 F Street, NE., Washington, DC. Date and Time of previously Announced meeting: November 8, 2007 at 2 p.m. Change in the Meetings: Date and Time Change. The Closed Meeting scheduled for Thursday, November 8, 2007 at 2 p.m., VerDate Aug<31>2005 16:55 Nov 05, 2007 Jkt 214001 has been changed to Wednesday, November 7, 2007 at 2:30 p.m. At times, changes in Commission priorities require alterations in the scheduling of meeting items. For further information and to ascertain what, if any, matters have been added, deleted or postponed, please contact: The Office of the Secretary at (202) 551–5400. November 1, 2007. Florence E. Harmon, Deputy Secretary. [FR Doc. E7–21772 Filed 11–5–07; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56722; File No. SR– NASDAQ–2007–085] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Proposed Rule Change Amending Nasdaq’s Membership Application Rules October 31, 2007. 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 30, 2007, The NASDAQ Stock Market LLC (‘‘Nasdaq’’) 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 substantially prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The proposed rule change modifies Nasdaq’s membership application procedures. Below is the text of the proposed rule change. Proposed new language is in italics; proposed deletions are in [brackets]. * * * * * 1010. Membership Proceedings 1011. Definitions Unless otherwise provided, terms used in the Rule 1000 Series shall have the meaning as defined in Rule 0120. (a)–(f) No change. (g) ‘‘material change in business operations’’. 1 15 2 17 PO 00000 U.S.C 78s(b)(1). CFR 240.19b–4. Frm 00087 Fmt 4703 Sfmt 4703 62709 The term ‘‘material change in business operations’’ includes, but is not limited to: (1) removing or modifying a membership agreement restriction; (2) market making, underwriting, or acting as a dealer for the first time; [and] (3) adding business activities that require a higher minimum net capital under SEC Rule 15c3–1; and (4) adding business activities that would cause a proprietary trading firm no longer to meet the definition of that term contained in this rule. (h)–(n) No change. (o) ‘‘Proprietary Trading Firm’’ The term ‘‘proprietary trading firm’’ means an Applicant with the following characteristics: (1) the Applicant is not required by Section 15(b)(8) of the Act to become a FINRA member but is a member of another registered securities exchange not registered solely under Section 6(g) of the Act; (2) all funds used or proposed to be used by the Applicant for trading are the Applicant’s own capital, traded through the Applicant’s own accounts; (3) the Applicant does not, and will not have ‘‘customers,’’ as that term is defined in Nasdaq Rule 0120(g); and (4) all Principals and Representatives of the Applicant acting or to be acting in the capacity of a trader must be owners of, employees of, or contractors to the Applicant. 1012. General Provisions (a) No change. (b) Lapse of Application (1) Absent a showing of good cause, an application filed under Rule 1013 or 1017 shall lapse if an Applicant fails to: (A) respond fully within [60] 15 business days after service of an initial written request for information or documents under Rule 1013, [within 30 days after service of] an initial written request for information or documents under Rule 1017, [within 30 days after service of] or a subsequent written request for information or documents under Rule 1013 or 1017, or within such other time period agreed to by the Department and the Applicant; (B) appear at or otherwise participate in a scheduled membership interview pursuant to Rule 1013(b) or 1017(f), if required; or [(C)] file an executed membership agreement under Rule 1014(d) or [Rule] 1017(g)(4) within 25 days after service of the agreement, or within such other period agreed to by the Department and the Applicant. (2) If an Applicant wishes to continue to seek membership or approval of a E:\FR\FM\06NON1.SGM 06NON1 62710 Federal Register / Vol. 72, No. 214 / Tuesday, November 6, 2007 / Notices change in ownership, control, or business operations, then the Applicant shall be required to submit a new application under Rule 1013 or 1017, respectively, and any required fee. Nasdaq shall not refund any fee for a lapsed application. (c)–(d) No change. (e) Computation of Time (1) Calendar Day In the Rule 1010 Series, ‘‘day’’ means calendar day, unless otherwise specified. (2) Formula In computing a period of time under the Rule 1010 Series, the day of the act, event, default, or lapse from which the period of time designated begins to run shall not be included. The last day of the period so computed shall be included unless it is a Saturday, Sunday, or Federal holiday, in which event the period runs until the end of the next day that is not a Saturday, Sunday, or Federal holiday. Intermediate Saturdays, Sundays, and Federal holidays shall be excluded from the computation when the period prescribed is ten days or less or when the term ‘‘business day’’ is used. (f)–(j) No change. 1013. New Member Application [and Interview] (a) Filing of Application (1) Where to File; Contents An Applicant for Nasdaq membership shall file its application with the Department in accordance with this Rule. An Applicant shall submit an application that includes: [(2) Contents] [The application shall include:] (A) a copy of the Applicant’s current Form BD; (B) an original Nasdaq-approved fingerprint card for each Associated Person who will be subject to SEC Rule 17f–2 and for whom a fingerprint card has not been filed with another selfregulatory organization; mstockstill on PROD1PC66 with NOTICES [(C) Reserved] [(D)] (C) a check for such fee as may be required under the Nasdaq Rules; [(E)] (D) a description of the Applicant’s proposed trading activities on Nasdaq, such as the types of securities it will trade, whether it will be a market maker, an order entry firm, and/or engage in block trading activities, and the extent to which the Applicant is conducting such activities as a member of other SRO(s); [business information that describes the VerDate Aug<31>2005 16:55 Nov 05, 2007 Jkt 214001 Applicant’s operations and that includes:] [(i)] (E) [a trial balance and computation of net capital, each of which has been prepared as of a date that is within 30 days before the filing date of the application]a copy of the Applicant’s most recent audited financial statements and a description of any material changes in the Applicant’s financial condition since the date of the financial statements; [(ii) Reserved] [(iii)] (F) an organizational chart; [(iv)] (G) the intended location of the Applicant’s principal place of business and all other offices, if any, whether or not such offices would be required to be registered under the Nasdaq Rules, and the names of the persons who will be in charge of each office; [(v) a list of the types of securities to be offered and sold and the types of retail or institutional customers to be solicited;] [(vi) Reserved] [(vii) Reserved] [(viii) the number of markets to be made, if any, the type and volatility of the products, and the anticipated maximum inventory positions;] [(ix) Reserved] [(x) any plan to distribute or maintain securities products in proprietary positions, and the risks, volatility, degree of liquidity, and speculative nature of the products; and] [(xi) Reserved] [(xii)] (H) a description of the communications and operational systems the Applicant will employ to conduct business [with customers or other members] and the plans and procedures the Applicant will employ to ensure business continuity, including: system capacity to handle the anticipated level of usage; contingency plans in the event of systems or other technological or communications problems or failures [that may impede customer usage or firm order entry or execution]; system redundancies; disaster recovery plans; and system security; [disclosures to be made to potential and existing customers who may use such systems; and supervisory or customer protection measures that may apply to customer use of, or access to, such systems;] [(F)] (I) a copy of any decision or order by a federal or state authority or self-regulatory organization taking permanent or temporary adverse action with respect to a registration or licensing determination regarding the Applicant or an Associated Person; [(G) Reserved] [(H)] (J) a statement indicating whether the Applicant is currently, or PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 has been in the last ten years, the subject of any investigation or disciplinary proceeding conducted by any self-regulatory organization, the foreign equivalent of a self-regulatory organization, a foreign or international securities exchange, a contract market designated pursuant to the Commodity Exchange Act or any substantially equivalent foreign statute or regulation, a futures association registered under the Commodity Exchange Act or any substantially similar foreign statute or regulation, the Commission or any other ‘‘appropriate regulatory agency’’ (as defined in the Act), the Commodity Futures Trading Commission, or any state financial regulatory agency regarding the Applicant’s activities that [documentation of any of the following events, unless the event] has not been reported to the Central Registration Depository, together with all relevant details, including any sanctions imposed;[:] (K) a statement indicating whether any person listed on Schedule A of the Applicant’s Form BD is currently, or has been in the last ten years, the subject of any investigation or disciplinary proceeding conducted by any selfregulatory organization, the foreign equivalent of a self-regulatory organization, a foreign or international securities exchange, a contract market designated pursuant to the Commodity Exchange Act or any substantially equivalent foreign statute or regulation, a futures association registered under the Commodity Exchange Act or any substantially similar foreign statute or regulation, the Commission or any other ‘‘appropriate regulatory agency’’, the Commodity Futures Trading Commission, or any state financial regulatory agency regarding the Applicant’s activities that has not been reported to the Central Registration Depository, together with all relevant details, including any sanctions imposed; [(i) a regulatory action against or investigation of the Applicant or an Associated Person by the Commission, the Commodity Futures Trading Commission, a federal, state, or foreign regulatory agency, or a self-regulatory organization that is pending, adjudicated, or settled;] [(ii) an investment-related civil action for damages or an injunction against the Applicant or an Associated Person that is pending, adjudicated, or settled;] [(iii) an investment-related customer complaint or arbitration that is required to be reported on Form U4;] [(iv) a criminal action (other than a minor traffic violation) against the Applicant or an Associated Person that E:\FR\FM\06NON1.SGM 06NON1 mstockstill on PROD1PC66 with NOTICES Federal Register / Vol. 72, No. 214 / Tuesday, November 6, 2007 / Notices is pending, adjudicated, or that has resulted in a guilty or no contest plea; and] [(v) a copy of any document evidencing a termination for cause or a permitted resignation after investigation of an alleged violation of a federal or state securities law, a rule or regulation thereunder, a self-regulatory organization rule, or an industry standard of conduct;] [(I) a description of any remedial action, such as special training, continuing education requirements, or heightened supervision, imposed on an Associated Person by a state or federal authority or self-regulatory organization;] [(J) a written acknowledgment that heightened supervisory procedures and special educational programs may be required pursuant to NASD Notice to Members 97–19 (as incorporated by reference into Nasdaq IM–3010) for an Associated Person whose record reflects disciplinary actions or sales practice events;] [(K)] (L) a copy of [final or proposed contracts with banks, clearing entities, or service bureaus, and a general description of any other final or proposed contracts]any contract or agreement with another broker-dealer, a bank, a clearing entity, a service bureau or a similar entity to provide the Applicant with services regarding the execution or clearance and settlement of transactions effected on Nasdaq; [(L)] (M) if the Applicant proposes to make markets on Nasdaq, a description of the source and amount of Applicant’s capital to support its market making activities on Nasdaq, and the source of any additional capital that may become necessary [a description of the nature and source of Applicant’s capital with supporting documentation, the risk to net capital presented by the Applicant’s proposed business activities, and any arrangement for additional capital should a business need arise]; [(M)] (N) a description of the financial controls to be employed by the Applicant with respect to Nasdaq Rule 3011; [(N) a description of the Applicant’s supervisory system and a copy of its written supervisory procedures] (O) a copy of the Applicant’s written supervisory procedures with respect to the activities identified in paragraph (a)(1)(D); [(O) a description of the number, experience, and qualifications of supervisors and principals and the number, experience, and qualifications of persons to be supervised by such personnel] (P) a list of the persons conducting the Applicant’s market VerDate Aug<31>2005 16:55 Nov 05, 2007 Jkt 214001 making and other trading activities, and a list of the persons responsible for such persons’ supervision, together with the CRD number (if applicable) or a copy of Form U–4 for each such person; [(P) Reserved] [(Q) Reserved] [(R)] (Q) if not previously provided to FINRA, a[n NASD] FINRA Entitlement Program Agreement and Terms of Use and an Account Administration Entitlement Form; [(S)] (R) a copy of the Applicant’s most recent ‘‘FOCUS Report’’ (Form X– 17A–5) filed with the SEC pursuant to SEC Rule 17a–5 (the most current Parts I, II, and III, as applicable); (S) all examination reports and corresponding responses regarding the Applicant for the previous two years from the self-regulatory organizations of which it is a member; (T) an agreement to comply with the federal securities laws, the rules and regulations thereunder, the Nasdaq Rules, and all rulings, orders, directions, and decisions issued and sanctions imposed under the Nasdaq Rules; (U) an agreement to pay such dues, assessments, and other charges in the manner and amount as from time to time shall be fixed pursuant to the Nasdaq Rules; and (V) such other reasonable information with respect to the applicant as Nasdaq may require. Each Applicant and Nasdaq member shall ensure that its membership application with Nasdaq is kept current at all times by supplementary amendments via electronic process or such other process as Nasdaq may prescribe. Such amendments to the application shall be filed with Nasdaq not later than [30]15 business days after the applicant or Nasdaq member learns of the facts or circumstances giving rise to the need for the amendment. The Applicant shall promptly notify the Department in writing of any material adverse change in its financial condition. [(3)] (2) [Electronic Filings] Uniform Registration Forms Upon approval of the Applicant’s Account Administrator Entitlement Form, the Applicant shall submit its Forms U4 for each Associated Person who is required to be registered under the Rules, any amendments to its Forms BD or U4, and any Form U5 electronically via Web CRD. [(4)] (3) Rejection of Application That Is Not Substantially Complete If the Department determines within [30]15 business days after the filing of an application that the application is not substantially complete, the Department may reject the application PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 62711 and deem it not to have been filed. In such case, within the [30]15 day period, the Department shall serve a written notice on the Applicant of the Department’s determination and the reasons therefor. Nasdaq shall refund the application fees, if any, in accordance with the provisions of the Nasdaq Rules governing such fees. If the Applicant determines to continue to seek membership, the Applicant shall submit a new application and any required fee under this Rule. [(5)] (4) [Request For] Additional Documents Or Information Within [30] 15 business days after the filing of an application, the Department shall serve an initial request for any additional information or documents necessary to render a decision on the application. The Department may serve subsequent requests for additional information or documents at any time during the membership application process. Unless otherwise agreed by the Department and the Applicant, the Applicant shall file any additional information and documents with the Department within [60] 15 business days after service of the Department’s [initial] request [and 30 days after service of any subsequent request]. [(6)] (5) Applicants That Are Members of an Association or Another Exchange (A) Applicants for Nasdaq membership that are also simultaneously applying for [NASD] FINRA membership may file one application with [the NASD]FINRA in compliance with the NASD Rule 1010 Series; however, Nasdaq will not take action on the application for Nasdaq membership until the applicant is an active member of [the NASD]FINRA. (B) Applicants that are members of another registered national securities exchange or association must submit a complete application form containing all of the required items of information listed in Rule 1013(a)[(2)](1). (C) An applicant that is an approved [NASD]FINRA member shall have the option to apply to become a Nasdaq member and to register with Nasdaq all associated persons of the firm whose registrations with the firm are approved with FINRA[the NASD] in categories recognized by Nasdaq rules through an expedited process by submitting a Waive-in Membership Application Form and a Nasdaq Membership Agreement. (b) Membership Interview (1) Optional [Requirement for] Interview Before the Department serves its decision on an application for new E:\FR\FM\06NON1.SGM 06NON1 62712 Federal Register / Vol. 72, No. 214 / Tuesday, November 6, 2007 / Notices membership in Nasdaq, the Department [shall]may conduct a membership interview with a representative or representatives of the Applicant if the Department determines that an interview is necessary to clarify aspects of an application. (2) Service of Notice At least seven days before [the] a membership interview, the Department shall serve on the Applicant a written notice that specifies the date and time of the interview and the representative or representatives of the Applicant who are required to participate in the interview. The Department shall serve the notice by facsimile or overnight courier. The Applicant and the Department may agree to a shorter or longer period for notice or a different method of service under this subparagraph. mstockstill on PROD1PC66 with NOTICES (3) Time Unless the Department directs otherwise for good cause shown, any membership interview shall be scheduled to occur within [90]60 days after the filing of an application or within [60]15 business days after the filing of all additional information or documents requested, whichever is later. (4) Place The membership interview shall be conducted in a location specified by Nasdaq. [(5) Updated Financial Documents] [On or before the date of the membership interview, an Applicant shall file an updated trial balance and computation of net capital. The Applicant shall prepare such documents as of a date that is within 45 days before the date of the membership interview, unless the Applicant and the Department agree on a longer period. The Applicant shall promptly notify the Department in writing of any material adverse change in its financial condition that occurs before a decision constituting final action of Nasdaq is served on the Applicant.] [(6)] (5) Review of Standards for Admission During [the] any membership interview, the Department shall review the application and the bases for denial of [standards for admission to] membership with the Applicant’s representative or representatives. [(7)] (6) Information From Other Sources During [the]any membership interview, the Department shall provide to the Applicant’s representative or representatives any information or VerDate Aug<31>2005 16:55 Nov 05, 2007 Jkt 214001 document that the Department has obtained from the Central Registration Depository or a source other than the Applicant and upon which the Department intends to base its decision under Rule 1014. If the Department does not conduct a membership interview, receives such information or document after the membership interview, or decides to base its decision on such information after the membership interview, the Department shall promptly serve the information or document and an explanation thereof on the Applicant. The Applicant may submit such materials as it may deem relevant with respect to such information or document at any time prior to the service of a decision under Rule 1014. 1014. Department Decision (a) [Standards for Admission] Bases for Denial of Membership After considering the completed application, [the membership interview,] other information and documents provided by the Applicant, other information and documents obtained by the Department, and the public interest and the protection of investors, the Department shall approve the application unless the Department determines that such information or documents provide a basis for denial of membership: (1) [t]The Department [shall determine whether the Applicant meets each of the following standards:]may deny (or condition) approval of an Applicant for the same reasons that the Securities and Exchange Commission may deny or revoke a broker or dealer registration and for those reasons required or allowed under the Act; (2) Without limiting the generality of the foregoing, the Department may deny (or condition) approval of an Applicant when the Applicant directly or indirectly: (A) is unable to satisfactorily demonstrate its present capacity to adhere to all applicable Nasdaq and Commission policies, rules, and regulations, including, without limitation, those concerning recordkeeping, reporting, finance, and trading procedures; (B) has previously violated, and there is a reasonable likelihood such Applicant will again engage in acts or practices violative of, any applicable Nasdaq or Commission policies, rules and regulations, including, without limitation, those concerning recordkeeping, reporting, finance and trading procedures or those rules of other self- PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 regulatory organizations of which such Applicant is or was a member; (C) has engaged, and there is a reasonable likelihood such Applicant will again engage, in acts or practices inconsistent with just and equitable principles of trade; (D) is not in compliance with the SEC’s net capital rule (17 CFR. 240.15c3–1), or has financial difficulties involving an amount that is more than 5% of the Applicant’s net worth; (E) has been itself, or is the successor to an entity which has been subject to any bankruptcy proceeding, receivership or arrangement for the benefit of creditors within the past three years; (F) has engaged in an established pattern of failure to pay just debts; (G) does not have such licenses and registrations as are required by governmental authorities and selfregulatory organizations; or (H) is unable satisfactorily to demonstrate reasonably adequate systems capacity and capability. [(1) The application and all supporting documents are complete and accurate.] [(2) The Applicant and its Associated Persons have all licenses and registrations required by state and federal authorities and self-regulatory organizations.] [(3) The Applicant and its Associated Persons are capable of complying with the federal securities laws, the rules and regulations thereunder, and the Nasdaq Rules, including observing high standards of commercial honor and just and equitable principles of trade. In determining whether this standard is met, the Department shall take into consideration whether:] [(A) a state or federal authority or selfregulatory organization has taken permanent or temporary adverse action with respect to a registration or licensing determination regarding the Applicant or an Associated Person;] [(B) an Applicant’s or Associated Person’s record reflects a sales practice event, a pending arbitration, or a pending private civil action;] [(C) an Applicant or Associated Person is the subject of a pending, adjudicated, or settled regulatory action or investigation by the Commission, the Commodity Futures Trading Commission, a federal, state, or foreign regulatory agency, or a self-regulatory organization; an adjudicated, or settled investment-related private civil action for damages or an injunction; or a criminal action (other than a minor traffic violation) that is pending, adjudicated, or that has resulted in a guilty or no contest plea; or an E:\FR\FM\06NON1.SGM 06NON1 mstockstill on PROD1PC66 with NOTICES Federal Register / Vol. 72, No. 214 / Tuesday, November 6, 2007 / Notices Applicant, its control persons, principals, registered representatives, other Associated Persons, any lender of 5% or more of the Applicant’s net capital, or any other member with respect to which any of these persons is or was a control person or a 5% lender of its net capital is subject to unpaid arbitration awards, other adjudicated customer awards, or unpaid arbitration settlements;] [(D) an Associated Person was terminated for cause or permitted to resign after an investigation of an alleged violation of a federal or state securities law, a rule or regulation thereunder, a self-regulatory organization rule, or industry standard of conduct;] [(E) a state or federal authority or selfregulatory organization has imposed a remedial action, such as special training, continuing education requirements, or heightened supervision, on an Associated Person; and] [(F) a state or federal authority or selfregulatory organization has provided information indicating that the Applicant or an Associated Person otherwise poses a threat to public investors.] [(4) The Applicant has established all contractual or other arrangements and business relationships with banks, clearing corporations, service bureaus, or others necessary to:] [(A) initiate the operations described in the Applicant’s application, considering the nature and scope of operations and the number of personnel; and] [(B) comply with the federal securities laws, the rules and regulations thereunder, and the Nasdaq Rules.] [(5) The Applicant has or has adequate plans to obtain facilities that are sufficient to:] [(A) initiate the operations described in the Applicant’s application, considering the nature and scope of operations and the number of personnel; and] [(B) comply with the federal securities laws, the rules and regulations thereunder, and the Nasdaq Rules.] [(6) The communications and operational systems that the Applicant intends to employ for the purpose of conducting business with customers and other members are adequate and provide reasonably for business continuity in each area set forth in Rule 1013(a)(2)(E)(xii);] [(7) The Applicant is capable of maintaining a level of net capital in excess of the minimum net capital requirements set forth in SEC Rule 15c3–1 adequate to support the VerDate Aug<31>2005 16:55 Nov 05, 2007 Jkt 214001 Applicant’s intended business operations on a continuing basis, based on information filed under Rule 1013. The Department may impose a reasonably determined higher net capital requirement for the initiation of operations after considering:] [(A) the amount of net capital sufficient to avoid early warning level reporting requirements, such as SEC Rule 17a–11;] [(B) the amount of capital necessary to meet expenses net of revenues for at least twelve months, based on reliable projections agreed to by the Applicant and the Department;] [(C) any planned market making activities, the number of markets to be made, the type and volatility of products, and the anticipated maximum inventory positions;] [(D) any plan to enter into other contractual commitments, such as underwritings or other securities-related activities;] [(E) any plan to distribute or maintain securities products in proprietary positions, and the risks, volatility, degree of liquidity, and speculative nature of the products; and] [(F) any other activity that the Applicant will engage in that reasonably could have a material impact on net capital within the first twelve months of business operations.] [(8) The Applicant has financial controls to ensure compliance with the federal securities laws, the rules and regulations thereunder, and the Nasdaq Rules.] [(9) The Applicant has compliance, supervisory, operational, and internal control practices and standards that are consistent with practices and standards regularly employed in the investment banking or securities business, taking into account the nature and scope of Applicant’s proposed business.] [(10) The Applicant has a supervisory system, including written supervisory procedures, internal operating procedures (including operational and internal controls), and compliance procedures designed to prevent and detect, to the extent practicable, violations of the federal securities laws, the rules and regulations thereunder, and the Nasdaq Rules. In evaluating the adequacy of a supervisory system, the Department shall consider the overall nature and scope of the Applicant’s intended business operations and shall consider whether:] [(A) the number, location, experience, and qualifications of supervisory personnel are adequate in light of the number, location, experience, and qualifications of persons to be supervised; the Central Registration PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 62713 Depository record or other disciplinary history of supervisory personnel and persons to be supervised; and the number and locations of the offices that the Applicant intends to open and the nature and scope of business to be conducted at each office;] [(B) the Applicant has identified specific Associated Persons to supervise and discharge each of the functions in the Applicant’s business plan, and to supervise each of the Applicant’s intended offices, whether or not such offices are required to be registered under the Nasdaq Rules;] [(C) the Applicant has identified the functions to be performed by each Associated Person and has adopted procedures to assure the registration with Nasdaq and applicable states of all persons whose functions are subject to such registration requirements;] [(D) each Associated Person identified in the business plan to discharge a supervisory function has at least one year of direct experience or two years of related experience in the subject area to be supervised;] [(E) the Applicant will solicit retail or institutional business;] [(F) the Applicant will recommend securities to customers;] [(G) the location or part-time status of a supervisor or principal will affect such person’s ability to be an effective supervisor;] [(H) the Applicant should be required to place one or more Associated Persons under heightened supervision pursuant to NASD Notice to Members 97–19 (as incorporated by reference into Nasdaq IM–3010);] [(I) any remedial action, such as special training or continuing education requirements or heightened supervision, has been imposed on an Associated Person by a state or federal authority or self-regulatory organization; and] [(J) any other condition that will have a material impact on the Applicant’s ability to detect and prevent violations of the federal securities laws, the rules and regulations thereunder, and the Nasdaq Rules.] [(11) The Applicant has a recordkeeping system that enables Applicant to comply with federal, state, and self-regulatory organization recordkeeping requirements and a staff that is sufficient in qualifications and number to prepare and preserve required records.] [(12) The Applicant has completed a training needs assessment and has a written training plan that complies with the continuing education requirements imposed by the federal securities laws, the rules and regulations thereunder, and the Nasdaq Rules.] E:\FR\FM\06NON1.SGM 06NON1 62714 Federal Register / Vol. 72, No. 214 / Tuesday, November 6, 2007 / Notices [(13) Nasdaq does not possess any information indicating that the Applicant may circumvent, evade, or otherwise avoid compliance with the federal securities laws, the rules and regulations thereunder, or the Nasdaq Rules.] [(14) The application and all supporting documents otherwise are consistent with the federal securities laws, the rules and regulations thereunder, and the Nasdaq Rules.] [(15)] (3) The Department will not approve an Applicant unless [T]the Applicant is a member of another registered securities exchange or association that is not registered solely under Section 6(g) or Section 15A(k) of the Securities Exchange Act of 1934. An Applicant that will transact business with the public must be a member of [the NASD]FINRA. mstockstill on PROD1PC66 with NOTICES (b) Granting or Denying Application (1) [In reviewing an application for membership, the Department shall consider whether the Applicant and its Associated Persons meet each of the standards in paragraph (a). Where the Department determines that the Applicant or its Associated Persons are the subject of any of the events set forth in Rule 1014(a)(3)(A) and (C) through (E), a presumption exists that the application should be denied. The Applicant may overcome the presumption by demonstrating that it can meet each of the standards in paragraph (a), notwithstanding the existence of any of the events set forth in Rule 1014(a)(3)(A) and (C) through (E).] [(2) If the Department determines that the Applicant meets each of the standards in paragraph (a), the Department shall grant the application for membership.] [(3)] Unless [If] the Department determines that there is a basis for denying (or conditioning) approval of the [Applicant] application under [does not meet one or more of] the [standards] bases for denial in paragraph (a) [in whole or in part], the Department shall approve the application for membership. If the Department does not approve the application, the Department shall: (A) grant the application subject to one or more restrictions reasonably designed to address a specific financial, operational, supervisory, disciplinary, investor protection, or other regulatory concern [based on the standards for admission in Rule 1014(a)]; or (B) deny the application. VerDate Aug<31>2005 16:55 Nov 05, 2007 Jkt 214001 (c) Decision (1) Time The Department shall serve a written decision on the membership application within [30] 15 business days after the conclusion of the membership interview (if any) or after the filing of [additional] all required information or documents, whichever is later. (2) Content If the Department denies the application or grants the application subject to restrictions, the decision shall explain in detail the reason for denial or restriction, referencing the applicable [standard or standards]bases in paragraph (a). [If the Department grants the application subject to restrictions, the decision shall explain in detail the reason for each restriction, referencing the applicable standard or standards in paragraph (a) upon which the restriction is based and identify the specific financial, operational, supervisory, disciplinary, investor protection, or other regulatory concern that the restriction is designed to address and the manner in which the restriction is reasonably designed to address the concern.] aside, and state whether a hearing is requested. The Applicant simultaneously shall file by first-class mail a copy of the request with the Department. (b)–(i) No change. (j) Decision (1) No change. (2) Contents The decision shall include: (A) a description of the Department’s decision, including its rationale; (B) a description of the principal issues raised in the review; (C) a summary of the evidence on each issue; and (D) a statement whether the Department’s decision is affirmed, modified, or reversed, and a rationale therefor that references the [applicable standards] bases for denial in Rule 1014. (3)–(4) No change. * * * * * 1017. Application for Approval of Change in Ownership, Control, or Business Operations (a) No change. (b) Filing and Content of Application (3) Failure to Serve Decision If the Department fails to serve a decision within [180] 90 days after the filing of an application (or 120 days if the Department has opted to conduct a membership interview) or such later date as the Department and the Applicant have agreed in writing, the Applicant may file a written request with the Nasdaq Board requesting that the Nasdaq Board direct the Department to serve a decision. Within seven days after the filing of such a request, the Nasdaq Board shall direct the Department to serve its written decision immediately or to show good cause for an extension of time. If the Department shows good cause for an extension of time, the Nasdaq Board may extend the [180] 90-day (or 120-day) time limit by not more than [90] 45 days. (d)–(g) No change. (1) No change. (2) The application shall describe in detail the change in ownership, control, or business operations and include a business plan, pro forma financials, an organizational chart, and written supervisory procedures reflecting the change. (A) No change. (B) If the application requests the removal or modification of a membership agreement restriction, the application also shall: (i) present facts showing that the circumstances that gave rise to the restriction have changed; and (ii) state with specificity why the restriction should be modified or removed in light of [the standards set forth in Rule 1014 and] the articulated rationale for the imposition of the restriction. (C) No change. 1015. Review by Nasdaq Review Council (c) Effecting Change and Imposition of Interim Restrictions (a) Initiation of Review by Applicant Within 25 days after service of a decision under Rule 1014 or 1017, an Applicant may file a written request for review with the Nasdaq Review Council. A request for review shall state with specificity why the Applicant believes that the Department’s decision is inconsistent with the [membership standards]bases for denial set forth in Rule 1014, or otherwise should be set (1) A member shall file an application for approval of a change in ownership or control at least 30 days prior to such change. A member may effect a change in ownership or control prior to the conclusion of the proceeding, but the Department may place new interim restrictions on the member [based on the standards in Rule 1014,] pending final Department action. (2)–(3) No change. PO 00000 Frm 00092 Fmt 4703 Sfmt 4703 E:\FR\FM\06NON1.SGM 06NON1 Federal Register / Vol. 72, No. 214 / Tuesday, November 6, 2007 / Notices (d) Rejection Of Application That Is Not Substantially Complete If the Department determines within [30]15 business days after the filing of an application that the application is not substantially complete, the Department may reject the application and deem it not to have been filed. In such case, within the [30]15 day period, the Department shall serve a written notice on the Applicant of the Department’s determination and the reasons therefor. If the Applicant determines to continue to apply for approval of a change in ownership, control, or business operations, the Applicant shall submit a new application under this Rule. (e) Request for Additional Documents and Information Within [30]15 business days after the filing of an application, the Department shall serve a request for any additional information or documents necessary to render a decision on the application. The Department may request additional information or documents at any time during the application process. Unless otherwise agreed to by the Department and the Applicant, the Applicant shall file such additional information or documents with the Department within [30]15 business days after the Department’s request. mstockstill on PROD1PC66 with NOTICES (f) Membership Interview (1) The Department may require the Applicant to participate in a membership interview within [30]15 business days after the filing of the application, or if the Department requests additional information or documents, within [30]15 business days after the filing of the additional information or documents by the Applicant. (2)–(4) No change. (g) Department Decision (1) The Department shall consider the application, the membership interview, other information and documents provided by the Applicant or obtained by the Department, the public interest, and the protection of investors. [In rendering a decision on an application submitted under Rule 1017(a), the Department shall consider whether the Applicant and its Associated Persons meet each of the standards in Rule 1014(a). Where the Department determines that the Applicant or its Associated Person are the subject of any of the events set forth in Rule 1014(a)(3)(A) and (C) through (E), a presumption exists that the application should be denied. The Applicant may overcome the presumption by VerDate Aug<31>2005 16:55 Nov 05, 2007 Jkt 214001 demonstrating that it can meet each of the standards in Rule 1014(a), notwithstanding the existence of any of the events set forth in Rule 1014(a)(3)(A) and (C) through (E).] Unless the Department determines that there is a basis for denying (or conditioning) approval of the Applicant under the bases for denial in Rule 1014(a), the Department shall approve an application submitted under Rule 1017(a). (A) In rendering a decision on an application for approval of a change in ownership or control, or an application for approval of a material change in business operations that does not involve modification or removal of a membership agreement restriction, the Department shall determine if there would be a basis for denying (or conditioning) approval of the Applicant [would continue to meet] under the [standards]bases for denail in Rule 1014(a) upon approval of the application. (B) In rendering a decision on an application requesting the modification or removal of a membership agreement restriction, the Department shall consider whether maintenance of the restriction is appropriate in light of: (i) [the standards set forth in Rule 1014;] [(ii)] the circumstances that gave rise to the imposition of the restriction; [(iii)](ii) the Applicant’s operations since the restriction was imposed; [(iv)](iii) any change in ownership or control or supervisors and principals; and [(v)](iv) any new evidence submitted in connection with the application. (2) The Department shall serve a written decision on the application within [30] 15 business days after the conclusion of the membership interview or the filing of additional information or documents, whichever is later. If the Department does not require the Applicant to participate in a membership interview or request additional information or documents, the Department shall serve a written decision within [45] 20 business days after the filing of the application under paragraph (a). The decision shall state whether the application is granted or denied in whole or in part, and shall provide a rationale for the Department’s decision, referencing the applicable standard in Rule 1014. (3) If the Department fails to serve a decision within [180] 90 days after filing of an application or such later date as the Department and the Applicant have agreed in writing, the Applicant may file a written request with the Nasdaq Board requesting that the Nasdaq Board PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 62715 direct the Department to issue a decision. Within seven days after the filing of such a request, the Nasdaq Board shall direct the Department to issue a written decision immediately or to show good cause for an extension of time. If the Department shows good cause for an extension of time, the Nasdaq Board may extend the time limit for issuing a decision by not more than [30] 15 business days. (4) Notwithstanding anything in this Rule 1017 to the contrary: (A) in the event that a Nasdaq member that is also a FINRA member submits an application for approval under this Rule and such member is also required to submit an application under NASD Rule 1017, the Department shall not be required to serve a written decision under this rule until 10 business days after FINRA serves a written decision; and (B) in the event that a proposed change in ownership, control, or business operations by a Nasdaq member requires such member to become a member of FINRA, the Department shall not be required to serve a written decision under this rule until 10 business days after the Nasdaq member becomes a FINRA member. (4) No change. (h)–(k) No change. * * * * * 1020. Registration of Principals 1021. Registration Requirements (a)–(d) No change. (e) Requirement of Two Registered Principals for Members (1) A Nasdaq member, except a sole proprietorship, shall have at least two officers or partners who are registered as principals with respect to each aspect of the member’s investment banking and securities business pursuant to the applicable provisions of Rule 1022; provided, however, that a proprietary trading firm with 25 or fewer registered representatives shall only be required to have one officer or partner who is registered as a principal. This requirement applies to persons seeking admission as members and existing members. (2)–(3) No change. * * * * * 1032. Categories of Representative Registration (a)–(e) No change. (f) Limited Representative—Equity Trader (1) Each person associated with a member who is included within the E:\FR\FM\06NON1.SGM 06NON1 62716 Federal Register / Vol. 72, No. 214 / Tuesday, November 6, 2007 / Notices definition of a representative as defined in Rule 1011 must register with Nasdaq as a Limited Representative—Equity Trader if, with respect to transactions in equity, preferred or convertible debt securities on Nasdaq, such person is engaged in proprietary trading, the execution of transactions on an agency basis, or the direct supervision of such activities, other than any person associated with (A) a member whose trading activities are conducted principally on behalf of an investment company that is registered with the Commission pursuant to the Investment Company Act of 1940 and that controls, is controlled by or is under common control, with the member, or (B) a proprietary trading firm. (2) No change. (g)–(h) No change. * * * * * 1130. Reliance on Current Membership List The Nasdaq Secretary shall keep a currently accurate and complete membership roll, containing the name and address of each Nasdaq member, and the name and address of the executive representative of each Nasdaq member. In any case where a membership has been terminated, such fact shall be recorded together with the date on which the membership ceased. The membership roll of Nasdaq shall at all times be available to all members of Nasdaq, to all governmental authorities, and to the general public; provided, however, that the names and addresses of executive representatives shall not be available to members or the general public. For the purpose of complying with pertinent Rules, a member shall be entitled to rely on such membership roll. * * * * * mstockstill on PROD1PC66 with NOTICES 1150. Executive Representative Each Nasdaq member shall appoint and certify to the Secretary of Nasdaq one ‘‘executive representative’’ who shall represent, vote, and act for the Nasdaq member in all the affairs of Nasdaq; provided, however, that other representatives of a Nasdaq member may also serve on the Nasdaq Board or committees of Nasdaq or otherwise take part in the affairs of Nasdaq. If a Nasdaq member is also a member of FINRA, the Nasdaq executive representative shall be the same person appointed to serve as the FINRA executive representative. A Nasdaq member may change its executive representative or appoint a substitute for its executive representative upon giving notice thereof to the Nasdaq Secretary via VerDate Aug<31>2005 16:55 Nov 05, 2007 Jkt 214001 electronic process or such other process as Nasdaq may prescribe. An executive representative of a Nasdaq member or a substitute shall be a member of senior management and registered principal of the Nasdaq member. Each executive representative shall maintain an Internet electronic mail account for communication with Nasdaq and shall update firm contact information as prescribed by Nasdaq. Each member shall review and, if necessary, update its executive representative designation and contact information within 17 business days after the end of each calendar quarter. * * * * * 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 the Statutory Basis for, the Proposed Rule Change 1. Purpose Nasdaq is proposing to amend its 1000 Series rules governing the process for applying to become a member of Nasdaq. When Nasdaq first adopted membership rules as an exchange in 2006, it based Rules 1013 and 1014, which stipulate the content of a membership application and the standards for review and approval, primarily on corresponding rules of the then National Association of Securities Dealers (‘‘NASD’’).3 However, Nasdaq also adopted Rule 1013(a)(6)(C), which allows any FINRA member in good standing to become a Nasdaq member through an expedited waive-in application. This approach reflected the fact that (i) the Nasdaq market had formerly been operated as a facility of NASD and virtually all Nasdaq market participants were NASD members, and (ii) FINRA’s subsidiary, NASD 3 In late July 2007, NASD changed its name to the Financial Industry Regulatory Authority (‘‘FINRA’’). Accordingly, we use the term NASD in this filing only (i) when referring to period of time before the name change, and (ii) with respect to rules that are still officially designated by FINRA as ‘‘NASD rules.’’ PO 00000 Frm 00094 Fmt 4703 Sfmt 4703 Regulation, is party to a regulatory services agreement with Nasdaq, under which FINRA, among other things, processes membership applications for Nasdaq. Accordingly, it was felt that maintaining similar rules would facilitate efficient review of applications by non-FINRA members, since FINRA members would become Nasdaq members through the expedited waivein process. As a result of section 15(b)(8) of the Act 4 and the exemption therefrom provided by Rule 15b9–1 under the Act,5 moreover, a potential Nasdaq member must also be a member of FINRA unless it (i) carries no customer accounts, and (ii) has annual gross income derived from purchases and sales of securities otherwise than on an exchange of which it is a member in an amount no greater than $1000. Nasdaq underscored this requirement in its own Rule 1014, which provides that an applicant for membership that will transact business with the public must be a member of FINRA. Accordingly, the only applicants for Nasdaq membership using the full membership application process have been, and logically will continue to be, proprietary trading firms that are not, and are not required to become, members of FINRA. Because the Nasdaq application process is derived directly from FINRA rules, however, it is not well suited to review of these applicants, because FINRA rules focus extensively on a member’s relationship with its customers. Nasdaq Rule 1014 also provides that an applicant for Nasdaq membership must already be a member either of FINRA or of another national securities exchange. As a result, all applicants for membership in Nasdaq already have an Examining Authority for purposes of Rule 15c3–1 under the Act 6 when they apply. Although there is nothing that would prevent Nasdaq from becoming a member’s Examining Authority at a later date if the Commission so designated it, Nasdaq believes that its membership application rules should reflect the applicant’s current status with respect to another self-regulatory organization (‘‘SRO’’), and therefore do not need to require the same degree of financial information about the applicant as would be the case if the applicant had not previously been a member of an SRO. Nasdaq is not, however, proposing to reduce the regulatory scrutiny to which applicants are subject to a level below that provided by other SROs; rather, 4 15 U.S.C. 78o(b)(8). CFR 240.15b9–1. 6 17 CFR 240.15c3–1. 5 17 E:\FR\FM\06NON1.SGM 06NON1 mstockstill on PROD1PC66 with NOTICES Federal Register / Vol. 72, No. 214 / Tuesday, November 6, 2007 / Notices Nasdaq seeks merely to redirect the focus of the process away from procedures derived from FINRA’s role as primary regulator of firms with public customers and its status as Examining Authority for a large percentage of U.S. broker-dealers. In drafting its new proposed procedures, Nasdaq has reviewed the application procedures of other exchanges— principally NYSE Arca, Inc. and the International Securities Exchange, LLC—and has adopted standards that it believes are well designed to allow an evaluation of applicant’s ability to comply with Nasdaq and SEC Rules. As the framework for the new process, Nasdaq is proposing to define the term ‘‘proprietary trading firm’’ to mean an applicant for membership with the following characteristics: (i) The Applicant is not required to become a FINRA member under section 15(b)(8) of the Act but is a member of another registered securities exchange not registered solely under section 6(g) of the Act; (ii) all funds used or proposed to be used by the Applicant for trading are the Applicant’s own capital, traded through the Applicant’s own accounts; (iii) the Applicant does not, and will not have ‘‘customers,’’ as that term is defined in Nasdaq Rule 0120(g); and (iv) all Principals and Representatives of the Applicant acting or to be acting in the capacity of a trader must be owners of, employees of, or contractors to the Applicant. Nasdaq also proposes to amend the definition of ‘‘material change in business operations’’ in Rule 1011 to include ‘‘adding business activities that would cause a proprietary trading firm no longer to meet the definition of that term. * * *’’ As a result, if a firm became a member based on its status as a proprietary trading firm but then sought to expand its activities to include dealings with customers, the member would be required to undergo an assessment and obtain approval of this change under Rule 1017. As currently reflected in that Rule, a material change in business operations requires an application that describes in detail the change in ownership, control, or business operations and include a business plan, pro forma financials, an organizational chart, and written supervisory procedures reflecting the change. Under the new application process, an applicant would be required to submit the following information in its application: • A copy of the Applicant’s current Form BD; • An original Nasdaq-approved fingerprint card for each Associated Person who will be subject to Rule 17f– VerDate Aug<31>2005 16:55 Nov 05, 2007 Jkt 214001 62717 2 under the Act and for whom a fingerprint card has not been filed with another SRO; • Nasdaq’s application fee, as provided in Nasdaq Rule 7001; • A description of the Applicant’s proposed trading activities on Nasdaq, such as the types of securities it will trade, whether it will be a market maker, an order entry firm, and/or engage in block trading activities, and the extent to which the Applicant is conducting such activities as a member of other SRO(s); • A copy of the Applicant’s most recent audited financial statements and a description of any material changes in the Applicant’s financial condition since the date of the financial statements; • An organizational chart; • The intended location of the Applicant’s principal place of business and all other offices, if any, whether or not such offices would be required to be registered under the Nasdaq Rules, and the names of the persons who will be in charge of each office;7 • A description of the communications and operational systems the Applicant will employ to conduct business and the plans the procedures, the Applicant will employ to ensure business continuity, including: system capacity to handle the anticipated level of usage; contingency plans in the event of systems or other technological or communications problems or failures; system redundancies; disaster recovery plans; and system security; • A copy of any decision or order by a federal or state authority or selfregulatory organization taking permanent or temporary adverse action with respect to a registration or licensing determination regarding the Applicant or an Associated Person; • A statement indicating whether the Applicant is currently, or has been in the last ten years, the subject of any investigation or disciplinary proceeding conducted by any self-regulatory organization, the foreign equivalent of a self-regulatory organization, a foreign or international securities exchange, a contract market designated pursuant to the Commodity Exchange Act or any substantially equivalent foreign statute or regulation, a futures association registered under the Commodity Exchange Act or any substantially similar foreign statute or regulation, the Commission or any other ‘‘appropriate regulatory agency’’ (as defined in the Act), the Commodity Futures Trading Commission, or any state financial regulatory agency regarding the Applicant’s activities that has not been reported to the Central Registration Depository, together with all relevant details, including any sanctions imposed; • A statement indicating whether any person listed on Schedule A of the Applicant’s Form BD 8 is currently, or has been in the last ten years, the subject of any investigation or disciplinary proceeding conducted by any self-regulatory organization, the foreign equivalent of a self-regulatory organization, a foreign or international securities exchange, a contract market designated pursuant to the Commodity Exchange Act or any substantially equivalent foreign statute or regulation, a futures association registered under the Commodity Exchange Act or any substantially similar foreign statute or regulation, the Commission or any other ‘‘appropriate regulatory agency’’, the Commodity Futures Trading Commission, or any state financial regulatory agency regarding the Applicant’s activities that has not been reported to the Central Registration Depository, together with all relevant details, including any sanctions imposed; • A copy of any contract or agreement with another broker-dealer, a bank, a clearing entity, a service bureau or a similar entity to provide the Applicant with services regarding the execution or clearance and settlement of transactions effected on Nasdaq; • If the Applicant proposes to make markets on Nasdaq, a description of the source and amount of Applicant’s capital to support its market making activities on Nasdaq, and the source of any additional capital that may become necessary; • A description of the financial controls to be employed by the Applicant with respect to Nasdaq Rule 3011, which governs anti-money laundering controls; • A copy of the Applicant’s written supervisory procedures with respect to the Applicant’s proposed trading activities on Nasdaq; • A list of the persons conducting the Applicant’s market making and other trading activities, and a list of the persons responsible for such persons’ supervision, together with the CRD number (if applicable) or a copy of Form U–4 for each such person; • Unless previously provided to FINRA, a FINRA Entitlement Program Agreement and Terms of Use and an 7 For most proprietary trading firms, there would be only one office. 8 The direct owners and executive officers of the Applicant. PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 E:\FR\FM\06NON1.SGM 06NON1 62718 Federal Register / Vol. 72, No. 214 / Tuesday, November 6, 2007 / Notices mstockstill on PROD1PC66 with NOTICES Account Administration Entitlement Form; 9 • A copy of the Applicant’s most recent ‘‘FOCUS Report’’ (Form X–17A– 5) filed with the Commission pursuant to Rule 17a–5 under the Act (the most current Parts I, II, and III, as applicable); • All examination reports and corresponding responses regarding the Applicant for the previous two years from the self-regulatory organizations of which it is a member; • An agreement to comply with the federal securities laws, the rules and regulations thereunder, the Nasdaq Rules, and all rulings, orders, directions, and decisions issued and sanctions imposed under the Nasdaq Rules; • An agreement to pay such dues, assessments, and other charges in the manner and amount as from time to time shall be fixed pursuant to the Nasdaq Rules; and • Such other reasonable information with respect to the applicant as Nasdaq may require. In addition, as currently provided by Rule 1013, an applicant is required to submit its Forms U4 for each Associated Person who is required to be registered under Nasdaq Rules and any required amendments to its Forms BD or U4. As under the current rule, Applicants must keep their application current by submitting amendments if facts and circumstances change. Without limiting the generality of this requirement, Applicants must promptly notify the Department of any material adverse change in financial condition. Nasdaq is also amending Rule 1014 to replace the specific findings that must be made prior to admission of a FINRA member with more general bases for denial of membership. Specifically, the revised rule would provide that the Nasdaq Membership Department 10 shall approve an application unless there is a basis for denying or conditioning approval.11 The rule further provides that the Department may deny (or condition) approval of an Applicant for the same reasons that the Commission may deny or revoke a broker or dealer registration and for those reasons required or allowed under the Act. Without limiting the generality of the foregoing, the amended rule lists specific bases upon which the Department may deny (or condition) approval of an Applicant. These bases 9 Needed for use of FINRA’s CRD system. term includes FINRA staff acting on Nasdaq’s behalf. 11 A similar change would be made in Rule 1017, providing that an application for a material change in business operations shall be approved unless there is a basis for denying it under the standards in Rule 1014. 10 The VerDate Aug<31>2005 16:55 Nov 05, 2007 Jkt 214001 include the inability of the Applicant to satisfactorily demonstrate capacity to adhere to applicable Nasdaq and Commission policies, rules, and regulations, including, those concerning record-keeping, reporting, finance, and trading procedures. For example, an Applicant whose written supervisory procedures did not adequately describe the means by which the firm would assure compliance by its traders with applicable market rules would be denied on that basis. Similarly, past rule violations would be a basis for denial if the firm had not taken adequate steps to guard against recurring offenses. Other bases for denial would include factors indicative of financial difficulties, such as not being in compliance with the Commission’s net capital rule; having financial difficulties involving an amount that is more than 5% of the Applicant’s net worth; being subject to a current or recent bankruptcy proceeding; or engaging in an established pattern of failure to pay just debts. Finally, denial could be based on failure to have required governmental and SRO registrations, or being unable to demonstrate reasonably adequate systems capability and capacity. The revised rule will continue to provide that the Department will not approve an Applicant unless the Applicant is a member of another registered securities exchange or association that is not registered solely with respect to futures based on single stocks or narrow indexes; and that an Applicant that will transact business with the public must be a member of FINRA. The proposed rule change also makes conforming changes to provisions of Rule 1014, 1015, and 1017 that refer to the standards for admission in Rule 1014. The proposed rule change also reduces the time allotted for various aspects of review, both for initial applications and for changes of ownership, control and business operations under Rule 1017. This change reflects the fact that all applicants will be proprietary trading firms, whose operations are less complex than those of firms with customers that are required to become FINRA members, and are also members of other SROs that serve as their Examining Authority. In addition, FINRA may conduct review of Nasdaq member applications under the revised rule using personnel located in the Washington, DC area, rather than using personnel at FINRA district offices as had previously been the case; centralizing review has the potential to reduce the time needed to process applications. However, with respect to a PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 FINRA member or a firm that is required to become a FINRA member due to a change in ownership, control, or business operations, the rule is being amended to provide that the Department is not required to take action on an application for approval under Rule 1017 until FINRA has acted on the comparable application under its rule or the firm has become a FINRA member, as applicable. Similarly, the proposed rule change would make the membership interview for the initial application process optional at the discretion of the Department, since the interview process does not exist under the rules of most SROs and is of less importance with respect to proprietary trading firms. However, the Department would retain discretion to require an interview if determined necessary to clarify aspects of an application, in which case the time allotted for completion of the application review process by the Department would be expanded accordingly. In recognition of the lower risk profile presented by a small member that does not interact with customers, Nasdaq is also amending Rule 1021 to provide that a proprietary trading firm with 25 or fewer registered representatives is required to have only one, rather than two registered principals. Similarly, Nasdaq proposes to eliminate the requirement that traders for proprietary trading firms register as equity traders under Rule 1032(f). FINRA’s Series 55 exam, which is required for registration as an equity trader, continues to have a predominant focus on the over-thecounter market and the complexities of FINRA trade reporting rules applicable to it, as well as rules relating to customers. Because a proprietary trading firm is not, by definition, required to be a FINRA member, Nasdaq believes that requiring traders for these firms to register in this capacity requires them to master a body of knowledge with little relevance to their actual participation in the market. Accordingly, Nasdaq believes that it constitutes an unwarranted regulatory burden.12 Finally, Nasdaq proposes to amend Rules 1130 and 1150 to simplify Nasdaq and member recordkeeping with regard to executive representatives of Nasdaq members that are also FINRA members by requiring that a firm’s executive representative under Nasdaq rules be the same as its executive representative under FINRA rules. In keeping with 12 If a proprietary trading firm opted to become a FINRA member even though it was not required to, its traders would be required to take the Series 55 exam and register as equity traders under FINRA rules. E:\FR\FM\06NON1.SGM 06NON1 Federal Register / Vol. 72, No. 214 / Tuesday, November 6, 2007 / Notices FINRA policies, moreover, Nasdaq is amending the rule to stipulate that the identity of the executive representative is non-public information. This restriction ensures that personal contact information for executive representatives is not used for improper purposes. 2. Statutory Basis Nasdaq believes that the proposed rule change is consistent with the provisions of section 6 of the Act,13 in general, and with section 6(b)(5) of the Act,14 in particular, in that the proposal is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. B. Self-Regulatory Organization’s Statement on Burden on Competition 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. 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. 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 Nasdaq 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. mstockstill on PROD1PC66 with NOTICES IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments 14 15 U.S.C. 78f. U.S.C. 78f(b)(5). VerDate Aug<31>2005 16:55 Nov 05, 2007 [Release No. 34–56726; File No. SR–NYSE– 2007–96] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Rule 80A (Index Arbitrage Trading Restrictions) Paper Comments 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 25, 2007, the New York Stock Exchange LLC (‘‘NYSE’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been substantially prepared by the Exchange. The NYSE filed the proposal pursuant to Section 19(b)(3)(A) of the Act 3 and Rule 19b–4(f)(6) thereunder,4 which renders it effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NASDAQ–2007–085. This file number should be included on the subject line if e-mail is used. 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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of Nasdaq. 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–2007–085 and should be submitted on or before November 27, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.15 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–21740 Filed 11–5–07; 8:45 am] 15 17 Jkt 214001 SECURITIES AND EXCHANGE COMMISSION • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–NASDAQ–2007–085 on the subject line. PO 00000 CFR 200.30–3(a)(12). Frm 00097 Fmt 4703 October 31, 2007. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange is proposing to rescind NYSE Rule 80A (Index Arbitrage Trading Restrictions) to eliminate order entry restrictions on certain index arbitrage orders entered on the Exchange. The text of the proposed rule change is available on the NYSE’s Web site (http://www.nyse.com), at the NYSE, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 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. 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A). 4 17 CFR 240.19b–4(f)(6). 2 17 BILLING CODE 8011–01–P 13 15 62719 Sfmt 4703 E:\FR\FM\06NON1.SGM 06NON1

Agencies

[Federal Register Volume 72, Number 214 (Tuesday, November 6, 2007)]
[Notices]
[Pages 62709-62719]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-21740]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56722; File No. SR-NASDAQ-2007-085]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change Amending Nasdaq's Membership 
Application Rules

October 31, 2007.
    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 30, 2007, The NASDAQ Stock Market LLC (``Nasdaq'') 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 substantially prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change modifies Nasdaq's membership application 
procedures. Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in [brackets].
* * * * *

1010. Membership Proceedings

1011. Definitions

    Unless otherwise provided, terms used in the Rule 1000 Series shall 
have the meaning as defined in Rule 0120.
    (a)-(f) No change.
    (g) ``material change in business operations''.
    The term ``material change in business operations'' includes, but 
is not limited to:
    (1) removing or modifying a membership agreement restriction;
    (2) market making, underwriting, or acting as a dealer for the 
first time; [and]
    (3) adding business activities that require a higher minimum net 
capital under SEC Rule 15c3-1; and
    (4) adding business activities that would cause a proprietary 
trading firm no longer to meet the definition of that term contained in 
this rule.
    (h)-(n) No change.

(o) ``Proprietary Trading Firm''

    The term ``proprietary trading firm'' means an Applicant with the 
following characteristics:
    (1) the Applicant is not required by Section 15(b)(8) of the Act to 
become a FINRA member but is a member of another registered securities 
exchange not registered solely under Section 6(g) of the Act;
    (2) all funds used or proposed to be used by the Applicant for 
trading are the Applicant's own capital, traded through the Applicant's 
own accounts;
    (3) the Applicant does not, and will not have ``customers,'' as 
that term is defined in Nasdaq Rule 0120(g); and
    (4) all Principals and Representatives of the Applicant acting or 
to be acting in the capacity of a trader must be owners of, employees 
of, or contractors to the Applicant.

1012. General Provisions

    (a) No change.
(b) Lapse of Application
    (1) Absent a showing of good cause, an application filed under Rule 
1013 or 1017 shall lapse if an Applicant fails to:
    (A) respond fully within [60] 15 business days after service of an 
initial written request for information or documents under Rule 1013, 
[within 30 days after service of] an initial written request for 
information or documents under Rule 1017, [within 30 days after service 
of] or a subsequent written request for information or documents under 
Rule 1013 or 1017, or within such other time period agreed to by the 
Department and the Applicant;
    (B) appear at or otherwise participate in a scheduled membership 
interview pursuant to Rule 1013(b) or 1017(f), if required; or
    [(C)] file an executed membership agreement under Rule 1014(d) or 
[Rule] 1017(g)(4) within 25 days after service of the agreement, or 
within such other period agreed to by the Department and the Applicant.
    (2) If an Applicant wishes to continue to seek membership or 
approval of a

[[Page 62710]]

change in ownership, control, or business operations, then the 
Applicant shall be required to submit a new application under Rule 1013 
or 1017, respectively, and any required fee. Nasdaq shall not refund 
any fee for a lapsed application.
    (c)-(d) No change.
(e) Computation of Time
(1) Calendar Day
    In the Rule 1010 Series, ``day'' means calendar day, unless 
otherwise specified.
(2) Formula
    In computing a period of time under the Rule 1010 Series, the day 
of the act, event, default, or lapse from which the period of time 
designated begins to run shall not be included. The last day of the 
period so computed shall be included unless it is a Saturday, Sunday, 
or Federal holiday, in which event the period runs until the end of the 
next day that is not a Saturday, Sunday, or Federal holiday. 
Intermediate Saturdays, Sundays, and Federal holidays shall be excluded 
from the computation when the period prescribed is ten days or less or 
when the term ``business day'' is used.
    (f)-(j) No change.
1013. New Member Application [and Interview]
(a) Filing of Application
    (1) Where to File; Contents
    An Applicant for Nasdaq membership shall file its application with 
the Department in accordance with this Rule. An Applicant shall submit 
an application that includes:
[(2) Contents]
    [The application shall include:]
    (A) a copy of the Applicant's current Form BD;
    (B) an original Nasdaq-approved fingerprint card for each 
Associated Person who will be subject to SEC Rule 17f-2 and for whom a 
fingerprint card has not been filed with another self-regulatory 
organization;
[(C) Reserved]
    [(D)] (C) a check for such fee as may be required under the Nasdaq 
Rules;
    [(E)] (D) a description of the Applicant's proposed trading 
activities on Nasdaq, such as the types of securities it will trade, 
whether it will be a market maker, an order entry firm, and/or engage 
in block trading activities, and the extent to which the Applicant is 
conducting such activities as a member of other SRO(s); [business 
information that describes the Applicant's operations and that 
includes:]
    [(i)] (E) [a trial balance and computation of net capital, each of 
which has been prepared as of a date that is within 30 days before the 
filing date of the application]a copy of the Applicant's most recent 
audited financial statements and a description of any material changes 
in the Applicant's financial condition since the date of the financial 
statements;
    [(ii) Reserved]
    [(iii)] (F) an organizational chart;
    [(iv)] (G) the intended location of the Applicant's principal place 
of business and all other offices, if any, whether or not such offices 
would be required to be registered under the Nasdaq Rules, and the 
names of the persons who will be in charge of each office;
    [(v) a list of the types of securities to be offered and sold and 
the types of retail or institutional customers to be solicited;]
    [(vi) Reserved]
    [(vii) Reserved]
    [(viii) the number of markets to be made, if any, the type and 
volatility of the products, and the anticipated maximum inventory 
positions;]
    [(ix) Reserved]
    [(x) any plan to distribute or maintain securities products in 
proprietary positions, and the risks, volatility, degree of liquidity, 
and speculative nature of the products; and]
    [(xi) Reserved]
    [(xii)] (H) a description of the communications and operational 
systems the Applicant will employ to conduct business [with customers 
or other members] and the plans and procedures the Applicant will 
employ to ensure business continuity, including: system capacity to 
handle the anticipated level of usage; contingency plans in the event 
of systems or other technological or communications problems or 
failures [that may impede customer usage or firm order entry or 
execution]; system redundancies; disaster recovery plans; and system 
security; [disclosures to be made to potential and existing customers 
who may use such systems; and supervisory or customer protection 
measures that may apply to customer use of, or access to, such 
systems;]
    [(F)] (I) a copy of any decision or order by a federal or state 
authority or self-regulatory organization taking permanent or temporary 
adverse action with respect to a registration or licensing 
determination regarding the Applicant or an Associated Person;
    [(G) Reserved]
    [(H)] (J) a statement indicating whether the Applicant is 
currently, or has been in the last ten years, the subject of any 
investigation or disciplinary proceeding conducted by any self-
regulatory organization, the foreign equivalent of a self-regulatory 
organization, a foreign or international securities exchange, a 
contract market designated pursuant to the Commodity Exchange Act or 
any substantially equivalent foreign statute or regulation, a futures 
association registered under the Commodity Exchange Act or any 
substantially similar foreign statute or regulation, the Commission or 
any other ``appropriate regulatory agency'' (as defined in the Act), 
the Commodity Futures Trading Commission, or any state financial 
regulatory agency regarding the Applicant's activities that 
[documentation of any of the following events, unless the event] has 
not been reported to the Central Registration Depository, together with 
all relevant details, including any sanctions imposed;[:]
    (K) a statement indicating whether any person listed on Schedule A 
of the Applicant's Form BD is currently, or has been in the last ten 
years, the subject of any investigation or disciplinary proceeding 
conducted by any self-regulatory organization, the foreign equivalent 
of a self-regulatory organization, a foreign or international 
securities exchange, a contract market designated pursuant to the 
Commodity Exchange Act or any substantially equivalent foreign statute 
or regulation, a futures association registered under the Commodity 
Exchange Act or any substantially similar foreign statute or 
regulation, the Commission or any other ``appropriate regulatory 
agency'', the Commodity Futures Trading Commission, or any state 
financial regulatory agency regarding the Applicant's activities that 
has not been reported to the Central Registration Depository, together 
with all relevant details, including any sanctions imposed;
    [(i) a regulatory action against or investigation of the Applicant 
or an Associated Person by the Commission, the Commodity Futures 
Trading Commission, a federal, state, or foreign regulatory agency, or 
a self-regulatory organization that is pending, adjudicated, or 
settled;]
    [(ii) an investment-related civil action for damages or an 
injunction against the Applicant or an Associated Person that is 
pending, adjudicated, or settled;]
    [(iii) an investment-related customer complaint or arbitration that 
is required to be reported on Form U4;]
    [(iv) a criminal action (other than a minor traffic violation) 
against the Applicant or an Associated Person that

[[Page 62711]]

is pending, adjudicated, or that has resulted in a guilty or no contest 
plea; and]
    [(v) a copy of any document evidencing a termination for cause or a 
permitted resignation after investigation of an alleged violation of a 
federal or state securities law, a rule or regulation thereunder, a 
self-regulatory organization rule, or an industry standard of conduct;]
    [(I) a description of any remedial action, such as special 
training, continuing education requirements, or heightened supervision, 
imposed on an Associated Person by a state or federal authority or 
self-regulatory organization;]
    [(J) a written acknowledgment that heightened supervisory 
procedures and special educational programs may be required pursuant to 
NASD Notice to Members 97-19 (as incorporated by reference into Nasdaq 
IM-3010) for an Associated Person whose record reflects disciplinary 
actions or sales practice events;]
    [(K)] (L) a copy of [final or proposed contracts with banks, 
clearing entities, or service bureaus, and a general description of any 
other final or proposed contracts]any contract or agreement with 
another broker-dealer, a bank, a clearing entity, a service bureau or a 
similar entity to provide the Applicant with services regarding the 
execution or clearance and settlement of transactions effected on 
Nasdaq;
    [(L)] (M) if the Applicant proposes to make markets on Nasdaq, a 
description of the source and amount of Applicant's capital to support 
its market making activities on Nasdaq, and the source of any 
additional capital that may become necessary [a description of the 
nature and source of Applicant's capital with supporting documentation, 
the risk to net capital presented by the Applicant's proposed business 
activities, and any arrangement for additional capital should a 
business need arise];
    [(M)] (N) a description of the financial controls to be employed by 
the Applicant with respect to Nasdaq Rule 3011;
    [(N) a description of the Applicant's supervisory system and a copy 
of its written supervisory procedures] (O) a copy of the Applicant's 
written supervisory procedures with respect to the activities 
identified in paragraph (a)(1)(D);
    [(O) a description of the number, experience, and qualifications of 
supervisors and principals and the number, experience, and 
qualifications of persons to be supervised by such personnel] (P) a 
list of the persons conducting the Applicant's market making and other 
trading activities, and a list of the persons responsible for such 
persons' supervision, together with the CRD number (if applicable) or a 
copy of Form U-4 for each such person;
    [(P) Reserved]
    [(Q) Reserved]
    [(R)] (Q) if not previously provided to FINRA, a[n NASD] FINRA 
Entitlement Program Agreement and Terms of Use and an Account 
Administration Entitlement Form;
    [(S)] (R) a copy of the Applicant's most recent ``FOCUS Report'' 
(Form X-17A-5) filed with the SEC pursuant to SEC Rule 17a-5 (the most 
current Parts I, II, and III, as applicable);
    (S) all examination reports and corresponding responses regarding 
the Applicant for the previous two years from the self-regulatory 
organizations of which it is a member;
    (T) an agreement to comply with the federal securities laws, the 
rules and regulations thereunder, the Nasdaq Rules, and all rulings, 
orders, directions, and decisions issued and sanctions imposed under 
the Nasdaq Rules;
    (U) an agreement to pay such dues, assessments, and other charges 
in the manner and amount as from time to time shall be fixed pursuant 
to the Nasdaq Rules; and
    (V) such other reasonable information with respect to the applicant 
as Nasdaq may require.
    Each Applicant and Nasdaq member shall ensure that its membership 
application with Nasdaq is kept current at all times by supplementary 
amendments via electronic process or such other process as Nasdaq may 
prescribe. Such amendments to the application shall be filed with 
Nasdaq not later than [30]15 business days after the applicant or 
Nasdaq member learns of the facts or circumstances giving rise to the 
need for the amendment. The Applicant shall promptly notify the 
Department in writing of any material adverse change in its financial 
condition.
    [(3)] (2) [Electronic Filings] Uniform Registration Forms
    Upon approval of the Applicant's Account Administrator Entitlement 
Form, the Applicant shall submit its Forms U4 for each Associated 
Person who is required to be registered under the Rules, any amendments 
to its Forms BD or U4, and any Form U5 electronically via Web CRD.
    [(4)] (3) Rejection of Application That Is Not Substantially 
Complete
    If the Department determines within [30]15 business days after the 
filing of an application that the application is not substantially 
complete, the Department may reject the application and deem it not to 
have been filed. In such case, within the [30]15 day period, the 
Department shall serve a written notice on the Applicant of the 
Department's determination and the reasons therefor. Nasdaq shall 
refund the application fees, if any, in accordance with the provisions 
of the Nasdaq Rules governing such fees. If the Applicant determines to 
continue to seek membership, the Applicant shall submit a new 
application and any required fee under this Rule.
    [(5)] (4) [Request For] Additional Documents Or Information
    Within [30] 15 business days after the filing of an application, 
the Department shall serve an initial request for any additional 
information or documents necessary to render a decision on the 
application. The Department may serve subsequent requests for 
additional information or documents at any time during the membership 
application process.
    Unless otherwise agreed by the Department and the Applicant, the 
Applicant shall file any additional information and documents with the 
Department within [60] 15 business days after service of the 
Department's [initial] request [and 30 days after service of any 
subsequent request].
    [(6)] (5) Applicants That Are Members of an Association or Another 
Exchange
    (A) Applicants for Nasdaq membership that are also simultaneously 
applying for [NASD] FINRA membership may file one application with [the 
NASD]FINRA in compliance with the NASD Rule 1010 Series; however, 
Nasdaq will not take action on the application for Nasdaq membership 
until the applicant is an active member of [the NASD]FINRA.
    (B) Applicants that are members of another registered national 
securities exchange or association must submit a complete application 
form containing all of the required items of information listed in Rule 
1013(a)[(2)](1).
    (C) An applicant that is an approved [NASD]FINRA member shall have 
the option to apply to become a Nasdaq member and to register with 
Nasdaq all associated persons of the firm whose registrations with the 
firm are approved with FINRA[the NASD] in categories recognized by 
Nasdaq rules through an expedited process by submitting a Waive-in 
Membership Application Form and a Nasdaq Membership Agreement.
(b) Membership Interview
(1) Optional [Requirement for] Interview
    Before the Department serves its decision on an application for new

[[Page 62712]]

membership in Nasdaq, the Department [shall]may conduct a membership 
interview with a representative or representatives of the Applicant if 
the Department determines that an interview is necessary to clarify 
aspects of an application.
(2) Service of Notice
    At least seven days before [the] a membership interview, the 
Department shall serve on the Applicant a written notice that specifies 
the date and time of the interview and the representative or 
representatives of the Applicant who are required to participate in the 
interview. The Department shall serve the notice by facsimile or 
overnight courier. The Applicant and the Department may agree to a 
shorter or longer period for notice or a different method of service 
under this subparagraph.
(3) Time
    Unless the Department directs otherwise for good cause shown, any 
membership interview shall be scheduled to occur within [90]60 days 
after the filing of an application or within [60]15 business days after 
the filing of all additional information or documents requested, 
whichever is later.
(4) Place
    The membership interview shall be conducted in a location specified 
by Nasdaq.
    [(5) Updated Financial Documents]
    [On or before the date of the membership interview, an Applicant 
shall file an updated trial balance and computation of net capital. The 
Applicant shall prepare such documents as of a date that is within 45 
days before the date of the membership interview, unless the Applicant 
and the Department agree on a longer period. The Applicant shall 
promptly notify the Department in writing of any material adverse 
change in its financial condition that occurs before a decision 
constituting final action of Nasdaq is served on the Applicant.]
    [(6)] (5) Review of Standards for Admission
    During [the] any membership interview, the Department shall review 
the application and the bases for denial of [standards for admission 
to] membership with the Applicant's representative or representatives.
    [(7)] (6) Information From Other Sources
    During [the]any membership interview, the Department shall provide 
to the Applicant's representative or representatives any information or 
document that the Department has obtained from the Central Registration 
Depository or a source other than the Applicant and upon which the 
Department intends to base its decision under Rule 1014. If the 
Department does not conduct a membership interview, receives such 
information or document after the membership interview, or decides to 
base its decision on such information after the membership interview, 
the Department shall promptly serve the information or document and an 
explanation thereof on the Applicant. The Applicant may submit such 
materials as it may deem relevant with respect to such information or 
document at any time prior to the service of a decision under Rule 
1014.

1014. Department Decision

(a) [Standards for Admission] Bases for Denial of Membership
    After considering the completed application, [the membership 
interview,] other information and documents provided by the Applicant, 
other information and documents obtained by the Department, and the 
public interest and the protection of investors, the Department shall 
approve the application unless the Department determines that such 
information or documents provide a basis for denial of membership:
    (1) [t]The Department [shall determine whether the Applicant meets 
each of the following standards:]may deny (or condition) approval of an 
Applicant for the same reasons that the Securities and Exchange 
Commission may deny or revoke a broker or dealer registration and for 
those reasons required or allowed under the Act;
    (2) Without limiting the generality of the foregoing, the 
Department may deny (or condition) approval of an Applicant when the 
Applicant directly or indirectly:
    (A) is unable to satisfactorily demonstrate its present capacity to 
adhere to all applicable Nasdaq and Commission policies, rules, and 
regulations, including, without limitation, those concerning record-
keeping, reporting, finance, and trading procedures;
    (B) has previously violated, and there is a reasonable likelihood 
such Applicant will again engage in acts or practices violative of, any 
applicable Nasdaq or Commission policies, rules and regulations, 
including, without limitation, those concerning record-keeping, 
reporting, finance and trading procedures or those rules of other self-
regulatory organizations of which such Applicant is or was a member;
    (C) has engaged, and there is a reasonable likelihood such 
Applicant will again engage, in acts or practices inconsistent with 
just and equitable principles of trade;
    (D) is not in compliance with the SEC's net capital rule (17 CFR. 
240.15c3-1), or has financial difficulties involving an amount that is 
more than 5% of the Applicant's net worth;
    (E) has been itself, or is the successor to an entity which has 
been subject to any bankruptcy proceeding, receivership or arrangement 
for the benefit of creditors within the past three years;
    (F) has engaged in an established pattern of failure to pay just 
debts;
    (G) does not have such licenses and registrations as are required 
by governmental authorities and self-regulatory organizations; or
    (H) is unable satisfactorily to demonstrate reasonably adequate 
systems capacity and capability.
    [(1) The application and all supporting documents are complete and 
accurate.]
    [(2) The Applicant and its Associated Persons have all licenses and 
registrations required by state and federal authorities and self-
regulatory organizations.]
    [(3) The Applicant and its Associated Persons are capable of 
complying with the federal securities laws, the rules and regulations 
thereunder, and the Nasdaq Rules, including observing high standards of 
commercial honor and just and equitable principles of trade. In 
determining whether this standard is met, the Department shall take 
into consideration whether:]
    [(A) a state or federal authority or self-regulatory organization 
has taken permanent or temporary adverse action with respect to a 
registration or licensing determination regarding the Applicant or an 
Associated Person;]
    [(B) an Applicant's or Associated Person's record reflects a sales 
practice event, a pending arbitration, or a pending private civil 
action;]
    [(C) an Applicant or Associated Person is the subject of a pending, 
adjudicated, or settled regulatory action or investigation by the 
Commission, the Commodity Futures Trading Commission, a federal, state, 
or foreign regulatory agency, or a self-regulatory organization; an 
adjudicated, or settled investment-related private civil action for 
damages or an injunction; or a criminal action (other than a minor 
traffic violation) that is pending, adjudicated, or that has resulted 
in a guilty or no contest plea; or an

[[Page 62713]]

Applicant, its control persons, principals, registered representatives, 
other Associated Persons, any lender of 5% or more of the Applicant's 
net capital, or any other member with respect to which any of these 
persons is or was a control person or a 5% lender of its net capital is 
subject to unpaid arbitration awards, other adjudicated customer 
awards, or unpaid arbitration settlements;]
    [(D) an Associated Person was terminated for cause or permitted to 
resign after an investigation of an alleged violation of a federal or 
state securities law, a rule or regulation thereunder, a self-
regulatory organization rule, or industry standard of conduct;]
    [(E) a state or federal authority or self-regulatory organization 
has imposed a remedial action, such as special training, continuing 
education requirements, or heightened supervision, on an Associated 
Person; and]
    [(F) a state or federal authority or self-regulatory organization 
has provided information indicating that the Applicant or an Associated 
Person otherwise poses a threat to public investors.]
    [(4) The Applicant has established all contractual or other 
arrangements and business relationships with banks, clearing 
corporations, service bureaus, or others necessary to:]
    [(A) initiate the operations described in the Applicant's 
application, considering the nature and scope of operations and the 
number of personnel; and]
    [(B) comply with the federal securities laws, the rules and 
regulations thereunder, and the Nasdaq Rules.]
    [(5) The Applicant has or has adequate plans to obtain facilities 
that are sufficient to:]
    [(A) initiate the operations described in the Applicant's 
application, considering the nature and scope of operations and the 
number of personnel; and]
    [(B) comply with the federal securities laws, the rules and 
regulations thereunder, and the Nasdaq Rules.]
    [(6) The communications and operational systems that the Applicant 
intends to employ for the purpose of conducting business with customers 
and other members are adequate and provide reasonably for business 
continuity in each area set forth in Rule 1013(a)(2)(E)(xii);]
    [(7) The Applicant is capable of maintaining a level of net capital 
in excess of the minimum net capital requirements set forth in SEC Rule 
15c3-1 adequate to support the Applicant's intended business operations 
on a continuing basis, based on information filed under Rule 1013. The 
Department may impose a reasonably determined higher net capital 
requirement for the initiation of operations after considering:]
    [(A) the amount of net capital sufficient to avoid early warning 
level reporting requirements, such as SEC Rule 17a-11;]
    [(B) the amount of capital necessary to meet expenses net of 
revenues for at least twelve months, based on reliable projections 
agreed to by the Applicant and the Department;]
    [(C) any planned market making activities, the number of markets to 
be made, the type and volatility of products, and the anticipated 
maximum inventory positions;]
    [(D) any plan to enter into other contractual commitments, such as 
underwritings or other securities-related activities;]
    [(E) any plan to distribute or maintain securities products in 
proprietary positions, and the risks, volatility, degree of liquidity, 
and speculative nature of the products; and]
    [(F) any other activity that the Applicant will engage in that 
reasonably could have a material impact on net capital within the first 
twelve months of business operations.]
    [(8) The Applicant has financial controls to ensure compliance with 
the federal securities laws, the rules and regulations thereunder, and 
the Nasdaq Rules.]
    [(9) The Applicant has compliance, supervisory, operational, and 
internal control practices and standards that are consistent with 
practices and standards regularly employed in the investment banking or 
securities business, taking into account the nature and scope of 
Applicant's proposed business.]
    [(10) The Applicant has a supervisory system, including written 
supervisory procedures, internal operating procedures (including 
operational and internal controls), and compliance procedures designed 
to prevent and detect, to the extent practicable, violations of the 
federal securities laws, the rules and regulations thereunder, and the 
Nasdaq Rules. In evaluating the adequacy of a supervisory system, the 
Department shall consider the overall nature and scope of the 
Applicant's intended business operations and shall consider whether:]
    [(A) the number, location, experience, and qualifications of 
supervisory personnel are adequate in light of the number, location, 
experience, and qualifications of persons to be supervised; the Central 
Registration Depository record or other disciplinary history of 
supervisory personnel and persons to be supervised; and the number and 
locations of the offices that the Applicant intends to open and the 
nature and scope of business to be conducted at each office;]
    [(B) the Applicant has identified specific Associated Persons to 
supervise and discharge each of the functions in the Applicant's 
business plan, and to supervise each of the Applicant's intended 
offices, whether or not such offices are required to be registered 
under the Nasdaq Rules;]
    [(C) the Applicant has identified the functions to be performed by 
each Associated Person and has adopted procedures to assure the 
registration with Nasdaq and applicable states of all persons whose 
functions are subject to such registration requirements;]
    [(D) each Associated Person identified in the business plan to 
discharge a supervisory function has at least one year of direct 
experience or two years of related experience in the subject area to be 
supervised;]
    [(E) the Applicant will solicit retail or institutional business;]
    [(F) the Applicant will recommend securities to customers;]
    [(G) the location or part-time status of a supervisor or principal 
will affect such person's ability to be an effective supervisor;]
    [(H) the Applicant should be required to place one or more 
Associated Persons under heightened supervision pursuant to NASD Notice 
to Members 97-19 (as incorporated by reference into Nasdaq IM-3010);]
    [(I) any remedial action, such as special training or continuing 
education requirements or heightened supervision, has been imposed on 
an Associated Person by a state or federal authority or self-regulatory 
organization; and]
    [(J) any other condition that will have a material impact on the 
Applicant's ability to detect and prevent violations of the federal 
securities laws, the rules and regulations thereunder, and the Nasdaq 
Rules.]
    [(11) The Applicant has a recordkeeping system that enables 
Applicant to comply with federal, state, and self-regulatory 
organization recordkeeping requirements and a staff that is sufficient 
in qualifications and number to prepare and preserve required records.]
    [(12) The Applicant has completed a training needs assessment and 
has a written training plan that complies with the continuing education 
requirements imposed by the federal securities laws, the rules and 
regulations thereunder, and the Nasdaq Rules.]

[[Page 62714]]

    [(13) Nasdaq does not possess any information indicating that the 
Applicant may circumvent, evade, or otherwise avoid compliance with the 
federal securities laws, the rules and regulations thereunder, or the 
Nasdaq Rules.]
    [(14) The application and all supporting documents otherwise are 
consistent with the federal securities laws, the rules and regulations 
thereunder, and the Nasdaq Rules.]
    [(15)] (3) The Department will not approve an Applicant unless 
[T]the Applicant is a member of another registered securities exchange 
or association that is not registered solely under Section 6(g) or 
Section 15A(k) of the Securities Exchange Act of 1934. An Applicant 
that will transact business with the public must be a member of [the 
NASD]FINRA.
(b) Granting or Denying Application
    (1) [In reviewing an application for membership, the Department 
shall consider whether the Applicant and its Associated Persons meet 
each of the standards in paragraph (a). Where the Department determines 
that the Applicant or its Associated Persons are the subject of any of 
the events set forth in Rule 1014(a)(3)(A) and (C) through (E), a 
presumption exists that the application should be denied. The Applicant 
may overcome the presumption by demonstrating that it can meet each of 
the standards in paragraph (a), notwithstanding the existence of any of 
the events set forth in Rule 1014(a)(3)(A) and (C) through (E).]
    [(2) If the Department determines that the Applicant meets each of 
the standards in paragraph (a), the Department shall grant the 
application for membership.]
    [(3)] Unless [If] the Department determines that there is a basis 
for denying (or conditioning) approval of the [Applicant] application 
under [does not meet one or more of] the [standards] bases for denial 
in paragraph (a) [in whole or in part], the Department shall approve 
the application for membership. If the Department does not approve the 
application, the Department shall:
    (A) grant the application subject to one or more restrictions 
reasonably designed to address a specific financial, operational, 
supervisory, disciplinary, investor protection, or other regulatory 
concern [based on the standards for admission in Rule 1014(a)]; or
    (B) deny the application.
(c) Decision
(1) Time
    The Department shall serve a written decision on the membership 
application within [30] 15 business days after the conclusion of the 
membership interview (if any) or after the filing of [additional] all 
required information or documents, whichever is later.
(2) Content
    If the Department denies the application or grants the application 
subject to restrictions, the decision shall explain in detail the 
reason for denial or restriction, referencing the applicable [standard 
or standards]bases in paragraph (a). [If the Department grants the 
application subject to restrictions, the decision shall explain in 
detail the reason for each restriction, referencing the applicable 
standard or standards in paragraph (a) upon which the restriction is 
based and identify the specific financial, operational, supervisory, 
disciplinary, investor protection, or other regulatory concern that the 
restriction is designed to address and the manner in which the 
restriction is reasonably designed to address the concern.]
(3) Failure to Serve Decision
    If the Department fails to serve a decision within [180] 90 days 
after the filing of an application (or 120 days if the Department has 
opted to conduct a membership interview) or such later date as the 
Department and the Applicant have agreed in writing, the Applicant may 
file a written request with the Nasdaq Board requesting that the Nasdaq 
Board direct the Department to serve a decision. Within seven days 
after the filing of such a request, the Nasdaq Board shall direct the 
Department to serve its written decision immediately or to show good 
cause for an extension of time. If the Department shows good cause for 
an extension of time, the Nasdaq Board may extend the [180] 90-day (or 
120-day) time limit by not more than [90] 45 days.
    (d)-(g) No change.

1015. Review by Nasdaq Review Council

(a) Initiation of Review by Applicant
    Within 25 days after service of a decision under Rule 1014 or 1017, 
an Applicant may file a written request for review with the Nasdaq 
Review Council. A request for review shall state with specificity why 
the Applicant believes that the Department's decision is inconsistent 
with the [membership standards]bases for denial set forth in Rule 1014, 
or otherwise should be set aside, and state whether a hearing is 
requested. The Applicant simultaneously shall file by first-class mail 
a copy of the request with the Department.
    (b)-(i) No change.
(j) Decision
    (1) No change.
(2) Contents
    The decision shall include:
    (A) a description of the Department's decision, including its 
rationale;
    (B) a description of the principal issues raised in the review;
    (C) a summary of the evidence on each issue; and
    (D) a statement whether the Department's decision is affirmed, 
modified, or reversed, and a rationale therefor that references the 
[applicable standards] bases for denial in Rule 1014.
    (3)-(4) No change.
* * * * *

1017. Application for Approval of Change in Ownership, Control, or 
Business Operations

    (a) No change.
(b) Filing and Content of Application
    (1) No change.
    (2) The application shall describe in detail the change in 
ownership, control, or business operations and include a business plan, 
pro forma financials, an organizational chart, and written supervisory 
procedures reflecting the change.
    (A) No change.
    (B) If the application requests the removal or modification of a 
membership agreement restriction, the application also shall:
    (i) present facts showing that the circumstances that gave rise to 
the restriction have changed; and
    (ii) state with specificity why the restriction should be modified 
or removed in light of [the standards set forth in Rule 1014 and] the 
articulated rationale for the imposition of the restriction.
    (C) No change.
(c) Effecting Change and Imposition of Interim Restrictions
    (1) A member shall file an application for approval of a change in 
ownership or control at least 30 days prior to such change. A member 
may effect a change in ownership or control prior to the conclusion of 
the proceeding, but the Department may place new interim restrictions 
on the member [based on the standards in Rule 1014,] pending final 
Department action.
    (2)-(3) No change.

[[Page 62715]]

(d) Rejection Of Application That Is Not Substantially Complete
    If the Department determines within [30]15 business days after the 
filing of an application that the application is not substantially 
complete, the Department may reject the application and deem it not to 
have been filed. In such case, within the [30]15 day period, the 
Department shall serve a written notice on the Applicant of the 
Department's determination and the reasons therefor. If the Applicant 
determines to continue to apply for approval of a change in ownership, 
control, or business operations, the Applicant shall submit a new 
application under this Rule.
(e) Request for Additional Documents and Information
    Within [30]15 business days after the filing of an application, the 
Department shall serve a request for any additional information or 
documents necessary to render a decision on the application. The 
Department may request additional information or documents at any time 
during the application process. Unless otherwise agreed to by the 
Department and the Applicant, the Applicant shall file such additional 
information or documents with the Department within [30]15 business 
days after the Department's request.
(f) Membership Interview
    (1) The Department may require the Applicant to participate in a 
membership interview within [30]15 business days after the filing of 
the application, or if the Department requests additional information 
or documents, within [30]15 business days after the filing of the 
additional information or documents by the Applicant.
    (2)-(4) No change.
(g) Department Decision
    (1) The Department shall consider the application, the membership 
interview, other information and documents provided by the Applicant or 
obtained by the Department, the public interest, and the protection of 
investors. [In rendering a decision on an application submitted under 
Rule 1017(a), the Department shall consider whether the Applicant and 
its Associated Persons meet each of the standards in Rule 1014(a). 
Where the Department determines that the Applicant or its Associated 
Person are the subject of any of the events set forth in Rule 
1014(a)(3)(A) and (C) through (E), a presumption exists that the 
application should be denied. The Applicant may overcome the 
presumption by demonstrating that it can meet each of the standards in 
Rule 1014(a), notwithstanding the existence of any of the events set 
forth in Rule 1014(a)(3)(A) and (C) through (E).] Unless the Department 
determines that there is a basis for denying (or conditioning) approval 
of the Applicant under the bases for denial in Rule 1014(a), the 
Department shall approve an application submitted under Rule 1017(a).
    (A) In rendering a decision on an application for approval of a 
change in ownership or control, or an application for approval of a 
material change in business operations that does not involve 
modification or removal of a membership agreement restriction, the 
Department shall determine if there would be a basis for denying (or 
conditioning) approval of the Applicant [would continue to meet] under 
the [standards]bases for denail in Rule 1014(a) upon approval of the 
application.
    (B) In rendering a decision on an application requesting the 
modification or removal of a membership agreement restriction, the 
Department shall consider whether maintenance of the restriction is 
appropriate in light of:
    (i) [the standards set forth in Rule 1014;]
    [(ii)] the circumstances that gave rise to the imposition of the 
restriction;
    [(iii)](ii) the Applicant's operations since the restriction was 
imposed;
    [(iv)](iii) any change in ownership or control or supervisors and 
principals; and
    [(v)](iv) any new evidence submitted in connection with the 
application.
    (2) The Department shall serve a written decision on the 
application within [30] 15 business days after the conclusion of the 
membership interview or the filing of additional information or 
documents, whichever is later. If the Department does not require the 
Applicant to participate in a membership interview or request 
additional information or documents, the Department shall serve a 
written decision within [45] 20 business days after the filing of the 
application under paragraph (a). The decision shall state whether the 
application is granted or denied in whole or in part, and shall provide 
a rationale for the Department's decision, referencing the applicable 
standard in Rule 1014.
    (3) If the Department fails to serve a decision within [180] 90 
days after filing of an application or such later date as the 
Department and the Applicant have agreed in writing, the Applicant may 
file a written request with the Nasdaq Board requesting that the Nasdaq 
Board direct the Department to issue a decision. Within seven days 
after the filing of such a request, the Nasdaq Board shall direct the 
Department to issue a written decision immediately or to show good 
cause for an extension of time. If the Department shows good cause for 
an extension of time, the Nasdaq Board may extend the time limit for 
issuing a decision by not more than [30] 15 business days.
    (4) Notwithstanding anything in this Rule 1017 to the contrary:
    (A) in the event that a Nasdaq member that is also a FINRA member 
submits an application for approval under this Rule and such member is 
also required to submit an application under NASD Rule 1017, the 
Department shall not be required to serve a written decision under this 
rule until 10 business days after FINRA serves a written decision; and
    (B) in the event that a proposed change in ownership, control, or 
business operations by a Nasdaq member requires such member to become a 
member of FINRA, the Department shall not be required to serve a 
written decision under this rule until 10 business days after the 
Nasdaq member becomes a FINRA member.
    (4) No change.
    (h)-(k) No change.
* * * * *

1020. Registration of Principals

1021. Registration Requirements

    (a)-(d) No change.
(e) Requirement of Two Registered Principals for Members
    (1) A Nasdaq member, except a sole proprietorship, shall have at 
least two officers or partners who are registered as principals with 
respect to each aspect of the member's investment banking and 
securities business pursuant to the applicable provisions of Rule 1022; 
provided, however, that a proprietary trading firm with 25 or fewer 
registered representatives shall only be required to have one officer 
or partner who is registered as a principal. This requirement applies 
to persons seeking admission as members and existing members.
    (2)-(3) No change.
* * * * *

1032. Categories of Representative Registration

    (a)-(e) No change.
(f) Limited Representative--Equity Trader
    (1) Each person associated with a member who is included within the

[[Page 62716]]

definition of a representative as defined in Rule 1011 must register 
with Nasdaq as a Limited Representative--Equity Trader if, with respect 
to transactions in equity, preferred or convertible debt securities on 
Nasdaq, such person is engaged in proprietary trading, the execution of 
transactions on an agency basis, or the direct supervision of such 
activities, other than any person associated with (A) a member whose 
trading activities are conducted principally on behalf of an investment 
company that is registered with the Commission pursuant to the 
Investment Company Act of 1940 and that controls, is controlled by or 
is under common control, with the member, or (B) a proprietary trading 
firm.
    (2) No change.
    (g)-(h) No change.
* * * * *

1130. Reliance on Current Membership List

    The Nasdaq Secretary shall keep a currently accurate and complete 
membership roll, containing the name and address of each Nasdaq member, 
and the name and address of the executive representative of each Nasdaq 
member. In any case where a membership has been terminated, such fact 
shall be recorded together with the date on which the membership 
ceased. The membership roll of Nasdaq shall at all times be available 
to all members of Nasdaq, to all governmental authorities, and to the 
general public; provided, however, that the names and addresses of 
executive representatives shall not be available to members or the 
general public. For the purpose of complying with pertinent Rules, a 
member shall be entitled to rely on such membership roll.
* * * * *

1150. Executive Representative

    Each Nasdaq member shall appoint and certify to the Secretary of 
Nasdaq one ``executive representative'' who shall represent, vote, and 
act for the Nasdaq member in all the affairs of Nasdaq; provided, 
however, that other representatives of a Nasdaq member may also serve 
on the Nasdaq Board or committees of Nasdaq or otherwise take part in 
the affairs of Nasdaq. If a Nasdaq member is also a member of FINRA, 
the Nasdaq executive representative shall be the same person appointed 
to serve as the FINRA executive representative. A Nasdaq member may 
change its executive representative or appoint a substitute for its 
executive representative upon giving notice thereof to the Nasdaq 
Secretary via electronic process or such other process as Nasdaq may 
prescribe. An executive representative of a Nasdaq member or a 
substitute shall be a member of senior management and registered 
principal of the Nasdaq member. Each executive representative shall 
maintain an Internet electronic mail account for communication with 
Nasdaq and shall update firm contact information as prescribed by 
Nasdaq. Each member shall review and, if necessary, update its 
executive representative designation and contact information within 17 
business days after the end of each calendar quarter.
* * * * *

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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Nasdaq is proposing to amend its 1000 Series rules governing the 
process for applying to become a member of Nasdaq. When Nasdaq first 
adopted membership rules as an exchange in 2006, it based Rules 1013 
and 1014, which stipulate the content of a membership application and 
the standards for review and approval, primarily on corresponding rules 
of the then National Association of Securities Dealers (``NASD'').\3\ 
However, Nasdaq also adopted Rule 1013(a)(6)(C), which allows any FINRA 
member in good standing to become a Nasdaq member through an expedited 
waive-in application. This approach reflected the fact that (i) the 
Nasdaq market had formerly been operated as a facility of NASD and 
virtually all Nasdaq market participants were NASD members, and (ii) 
FINRA's subsidiary, NASD Regulation, is party to a regulatory services 
agreement with Nasdaq, under which FINRA, among other things, processes 
membership applications for Nasdaq. Accordingly, it was felt that 
maintaining similar rules would facilitate efficient review of 
applications by non-FINRA members, since FINRA members would become 
Nasdaq members through the expedited waive-in process.
---------------------------------------------------------------------------

    \3\ In late July 2007, NASD changed its name to the Financial 
Industry Regulatory Authority (``FINRA''). Accordingly, we use the 
term NASD in this filing only (i) when referring to period of time 
before the name change, and (ii) with respect to rules that are 
still officially designated by FINRA as ``NASD rules.''
---------------------------------------------------------------------------

    As a result of section 15(b)(8) of the Act \4\ and the exemption 
therefrom provided by Rule 15b9-1 under the Act,\5\ moreover, a 
potential Nasdaq member must also be a member of FINRA unless it (i) 
carries no customer accounts, and (ii) has annual gross income derived 
from purchases and sales of securities otherwise than on an exchange of 
which it is a member in an amount no greater than $1000. Nasdaq 
underscored this requirement in its own Rule 1014, which provides that 
an applicant for membership that will transact business with the public 
must be a member of FINRA. Accordingly, the only applicants for Nasdaq 
membership using the full membership application process have been, and 
logically will continue to be, proprietary trading firms that are not, 
and are not required to become, members of FINRA. Because the Nasdaq 
application process is derived directly from FINRA rules, however, it 
is not well suited to review of these applicants, because FINRA rules 
focus extensively on a member's relationship with its customers.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78o(b)(8).
    \5\ 17 CFR 240.15b9-1.
---------------------------------------------------------------------------

    Nasdaq Rule 1014 also provides that an applicant for Nasdaq 
membership must already be a member either of FINRA or of another 
national securities exchange. As a result, all applicants for 
membership in Nasdaq already have an Examining Authority for purposes 
of Rule 15c3-1 under the Act \6\ when they apply. Although there is 
nothing that would prevent Nasdaq from becoming a member's Examining 
Authority at a later date if the Commission so designated it, Nasdaq 
believes that its membership application rules should reflect the 
applicant's current status with respect to another self-regulatory 
organization (``SRO''), and therefore do not need to require the same 
degree of financial information about the applicant as would be the 
case if the applicant had not previously been a member of an SRO.
---------------------------------------------------------------------------

    \6\ 17 CFR 240.15c3-1.
---------------------------------------------------------------------------

    Nasdaq is not, however, proposing to reduce the regulatory scrutiny 
to which applicants are subject to a level below that provided by other 
SROs; rather,

[[Page 62717]]

Nasdaq seeks merely to redirect the focus of the process away from 
procedures derived from FINRA's role as primary regulator of firms with 
public customers and its status as Examining Authority for a large 
percentage of U.S. broker-dealers. In drafting its new proposed 
procedures, Nasdaq has reviewed the application procedures of other 
exchanges--principally NYSE Arca, Inc. and the International Securities 
Exchange, LLC--and has adopted standards that it believes are well 
designed to allow an evaluation of applicant's ability to comply with 
Nasdaq and SEC Rules.
    As the framework for the new process, Nasdaq is proposing to define 
the term ``proprietary trading firm'' to mean an applicant for 
membership with the following characteristics: (i) The Applicant is not 
required to become a FINRA member under section 15(b)(8) of the Act but 
is a member of another registered securities exchange not registered 
solely under section 6(g) of the Act; (ii) all funds used or proposed 
to be used by the Applicant for trading are the Applicant's own 
capital, traded through the Applicant's own accounts; (iii) the 
Applicant does not, and will not have ``customers,'' as that term is 
defined in Nasdaq Rule 0120(g); and (iv) all Principals and 
Representatives of the Applicant acting or to be acting in the capacity 
of a trader must be owners of, employees of, or contractors to the 
Applicant. Nasdaq also proposes to amend the definition of ``material 
change in business operations'' in Rule 1011 to include ``adding 
business activities that would cause a proprietary trading firm no 
longer to meet the definition of that term. * * *'' As a result, if a 
firm became a member based on its status as a proprietary trading firm 
but then sought to expand its activities to include dealings with 
customers, the member would be required to undergo an assessment and 
obtain approval of this change under Rule 1017. As currently reflected 
in that Rule, a material change in business operations requires an 
application that describes in detail the change in ownership, control, 
or business operations and include a business plan, pro forma 
financials, an organizational chart, and written supervisory procedures 
reflecting the change.
    Under the new application process, an applicant would be required 
to submit the following information in its application:
     A copy of the Applicant's current Form BD;
     An original Nasdaq-approved fingerprint card for each 
Associated Person who will be subject to Rule 17f-2 under the Act and 
for whom a fingerprint card has not been filed with another SRO;
     Nasdaq's application fee, as provided in Nasdaq Rule 7001;
     A description of the Applicant's proposed trading 
activities on Nasdaq, such as the types of securities it will trade, 
whether it will be a market maker, an order entry firm, and/or engage 
in block trading activities, and the extent to which the Applicant is 
conducting such activities as a member of other SRO(s);
     A copy of the Applicant's most recent audited financial 
statements and a description of any material changes in the Applicant's 
financial condition since the date of the financial statements;
     An organizational chart;
     The intended location of the Applicant's principal place 
of business and all other offices, if any, whether or not such offices 
would be required to be registered under the Nasdaq Rules, and the 
names of the persons who will be in charge of each office;\7\
---------------------------------------------------------------------------

    \7\ For most proprietary trading firms, there would be only one 
office.
---------------------------------------------------------------------------

     A description of the communications and operational 
systems the Applicant will employ to conduct business and the plans the 
procedures, the Applicant will employ to ensure business continuity, 
including: system capacity to handle the anticipated level of usage; 
contingency plans in the event of systems or other technological or 
communications problems or failures; system redundancies; disaster 
recovery plans; and system security;
     A copy of any decision or order by a federal or state 
authority or self-regulatory organization taking permanent or temporary 
adverse action with respect to a registration or licensing 
determination regarding the Applicant or an Associated Person;
     A statement indicating whether the Applicant is currently, 
or has been in the last ten years, the subject of any investigation or 
disciplinary proceeding conducted by any self-regulatory organization, 
the foreign equivalent of a self-regulatory organization, a foreign or 
international securities exchange, a contract market designated 
pursuant to the Commodity Exchange Act or any substantially equivalent 
foreign statute or regulation, a futures association registered under 
the Commodity Exchange Act or any substantially similar foreign statute 
or regulation, the Commission or any other ``appropriate regulatory 
agency'' (as defined in the Act), the Commodity Futures Trading 
Commission, or any state financial regulatory agency regarding the 
Applicant's activities that has not been reported to the Central 
Registration Depository, together with all relevant details, including 
any sanctions imposed;
     A statement indicating whether any person listed on 
Schedule A of the Applicant's Form BD \8\ is currently, or has been in 
the last ten years, the subject of any investigation or disciplinary 
proceeding conducted by any self-regulatory organization, the foreign 
equivalent of a self-regulatory organization, a foreign or 
international securities exchange, a contract market designated 
pursuant to the Commodity Exchange Act or any substantially equivalent 
foreign statute or regulation, a futures association registered under 
the Commodity Exchange Act or any substantially similar foreign statute 
or regulation, the Commission or any other ``appropriate regulatory 
agency'', the Commodity Futures Trading Commission, or any state 
financial regulatory agency regarding the Applicant's activities that 
has not been reported to the Central Registration Depository, together 
with all relevant details, including any sanctions imposed;
---------------------------------------------------------------------------

    \8\ The direct owners and executive officers of the Applicant.
---------------------------------------------------------------------------

     A copy of any contract or agreement with another broker-
dealer, a bank, a clearing entity, a service bureau or a similar entity 
to provide the Applicant with services regarding the execution or 
clearance and settlement of transactions effected on Nasdaq;
     If the Applicant proposes to make markets on Nasdaq, a 
description of the source and amount of Applicant's capital to support 
its market making activities on Nasdaq, and the source of any 
additional capital that may become necessary;
     A description of the financial controls to be employed by 
the Applicant with respect to Nasdaq Rule 3011, which governs anti-
money laundering controls;
     A copy of the Applicant's written supervisory procedures 
with respect to the Applicant's proposed trading activities on Nasdaq;
     A list of the persons conducting the Applicant's market 
making and other trading activities, and a list of the persons 
responsible for such persons' supervision, together with the CRD number 
(if applicable) or a copy of Form U-4 for each such person;
     Unless previously provided to FINRA, a FINRA Entitlement 
Program Agreement and Terms of Use and an

[[Page 62718]]

Account Administration Entitlement Form; \9\
---------------------------------------------------------------------------

    \9\ Needed for use of FINRA's CRD system.
---------------------------------------------------------------------------

     A copy of the Applicant's most recent ``FOCUS Report'' 
(Form X-17A-5) filed with the Commission pursuant to Rule 17a-5 under 
the Act (the most current Parts I, II, and III, as applicable);
     All examination reports and corresponding responses 
regarding the Applicant for the previous two years from the self-
regulatory organizations of which it is a member;
     An agreement to comply with the federal securities laws, 
the rules and regulations thereunder, the Nasdaq Rules, and all 
rulings, orders, directions, and decisions issued and sanctions imposed 
under the Nasdaq Rules;
     An agreement to pay such dues, assessments, and other 
charges in the manner and amount as from time to time shall be fixed 
pursuant to the Nasdaq Rules; and
     Such other reasonable information with respect to the 
applicant as Nasdaq may require.
    In addition, as currently provided by Rule 1013, an applicant is 
required to submit its Forms U4 for each Associated Person who is 
required to be registered under Nasdaq Rules and any required 
amendments to its Forms BD or U4. As under the current rule, Applicants 
must keep their application current by submitting amendments if facts 
and circumstances change. Without limiting the generality of this 
requirement, Applicants must promptly notify the Department of any 
material adverse change in financial condition.
    Nasdaq is also amending Rule 1014 to replace the specific findings 
that must be made prior to admission of a FINRA member with more 
general bases for denial of membership. Specifically, the revised rule 
would provide that the Nasdaq Membership Department \10\ shall approve 
an application unless there is a basis for denying or conditioning 
approval.\11\ The rule further provides that the Department may deny 
(or condition) approval of an Applicant for the same reasons that the 
Commission may deny or revoke a broker or dealer registration and for 
those reasons required or allowed under the Act. Without limiting the 
generality of the foregoing, the amended rule lists specific bases upon 
which the Department may deny (or condition) approval of an Applicant. 
These bases include the inability of the Applicant to satisfactorily 
demonstrate capacity to adhere to applicable Nasdaq and Commission 
policies, rules, and regulations, including, those concerning record-
keeping, reporting, finance, and trading procedures. For example, an 
Applicant whose written supervisory procedures did not adequately 
describe the means by which the firm would assure compliance by its 
traders with applicable market rules would be denied on that basis. 
Similarly, past rule violations would be a basis for denial if the firm 
had not taken adequate steps to guard against recurring offenses.
---------------------------------------------------------------------------

    \10\ The term includes FINRA staff acting on Nasdaq's behalf.
    \11\ A similar change would be made in Rule 1017, providing that 
an application for a material change