Self-Regulatory Organizations; International Securities Exchange, LLC; Order Approving Proposed Rule Change Regarding Registration, Qualification, and Continuing Education Requirements for Members and Associated Persons, 7884-7888 [2011-3032]

Download as PDF jlentini on DSKJ8SOYB1PROD with NOTICES 7884 Federal Register / Vol. 76, No. 29 / Friday, February 11, 2011 / Notices Market Dominant Multi-Service Agreements with Foreign Postal Operators 1 product and two functionally equivalent agreements, Strategic Bilateral Agreement Between United States Postal Service and Koninklijke TNT Post BV and TNT Post Pakketservice Benelux BV (TNT Agreement), and the China Post Group—United States Postal Service Letter Post Bilateral Agreement (CPG) Agreement. The Postal Service and HongKong Post, the postal operator for Hong Kong, are parties to the instant agreement, which covers inbound Letter Post in the form of letters, flats, small packets, bags, and International Registered Mail service for Letter Post. Id. at 2–3. As in the current agreement with CPG in Docket No. R2010–6, the instant agreement also establishes an ancillary service for delivery confirmation scanning with Letter Post small packets. Id. at 3. The Postal Service states its filings comply with 39 CFR 3010.40 et seq. for the implementation of a negotiated service agreement. The Notice identifies performance attributes associated with the agreement, e.g., sortations for routing to the Postal Service’s International Service Centers based on destination ZIP Codes, and delivery confirmation service for Letter Post small packets that includes separation of the pieces for efficiency in processing. Notice at 3–4. Under 39 CFR 3010.43, the Postal Service is required to submit a data collection plan. The Postal Service indicates that it intends to report information on this agreement through its Annual Compliance Report. While indicating its willingness to provide information on mail flows within the annual compliance review process, the Postal Service proposes that no special data collection plan be established for this agreement. With respect to performance measurement, it requests that the Commission exempt this agreement from separate reporting requirements under 39 CFR 3055.3 as determined in Order No. 549 for the agreements in Docket Nos. R2010–5 and R2010–6. Id. at 5–6. Functional equivalency. The Postal Service advances reasons why the agreement is functionally equivalent to the previously filed TNT and CPG agreements and contains the same attributes and methodology. Id. at 7–9. It asserts that the instant agreement fits within the Mail Classification Schedule language for Inbound Multi-Service Agreements with the Foreign Postal Operators 1 product. Additionally, it states that it includes similar terms and conditions, e.g., is with a foreign postal VerDate Mar<15>2010 18:55 Feb 10, 2011 Jkt 223001 operator, conforms to a common description, and relates to rates for Letter Post tendered from the postal operator’s territory with accompanying ancillary services. Id. at 7–8. The Postal Service identifies specific terms that distinguish the instant agreement from the two existing agreements. Id. at 8–9. These include term, settlement charges and explanations, mail restrictions, and details on disclaimers, barcoding, and software. The Postal Service contends that the instant agreement is nonetheless functionally equivalent to existing agreements and ‘‘[t]he Postal Service does not consider that the specified differences affect either the fundamental service the Postal Service is offering or the fundamental structure of the contracts.’’ Id. at 9. In its Notice, the Postal Service maintains that certain portions of the agreement, prices, and related financial information should remain under seal. Id. at 1, Attachment 1. The Postal Service concludes that the inbound portion of the bilateral agreement with HongKong Post should be added as a functionally equivalent agreement under the Inbound Market Dominant Multi-Service Agreements with Foreign Postal Operators 1 product. Id. at 10. II. Notice of Filings Interested persons may submit comments on whether the Postal Service’s filings in the captioned dockets are consistent with the policies of 39 U.S.C. 3622 and 39 CFR part 3010.40. Comments are due no later than February 14, 2011.3 The public portions of these filings can be accessed via the Commission’s Web site (https:// www.prc.gov). The Commission appoints Kenneth Moeller to serve as Public Representative in this docket. III. Ordering Paragraphs It is ordered: 1. The Commission establishes Docket No. R2011–4 to consider matters raised by the Postal Service’s Notice. 2. Pursuant to 39 U.S.C. 505, Kenneth Moeller is appointed to serve as officer of the Commission (Public Representative) to represent the interests of the general public in this proceeding. 3 To provide interested persons sufficient time to comment in these proceedings, the Commission finds it appropriate to waive the 10-day comment period specified in 39 CFR 3010.44(a)(5). The modest extension will not prejudice either party to the agreement given the 45 days’ advance notice required for Type 2 rate adjustments. PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 3. Comments by interested persons in this proceeding are due no later than February 14, 2011. 4. The Secretary shall arrange for publication of this order in the Federal Register. By the Commission. Ruth Ann Abrams, Acting Secretary. [FR Doc. 2011–3166 Filed 2–10–11; 8:45 am] BILLING CODE 7710–FW–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–63843; File No. SR–ISE– 2010–115] Self-Regulatory Organizations; International Securities Exchange, LLC; Order Approving Proposed Rule Change Regarding Registration, Qualification, and Continuing Education Requirements for Members and Associated Persons February 4, 2011. I. Introduction On December 1, 2010, the International Securities Exchange, LLC (‘‘Exchange’’ or ‘‘ISE’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’),1 and Rule 19b–4 thereunder,2 a proposed rule change to extend registration, qualification, and continuing education requirements to all associated persons of its members. The proposed rule change was published for comment in the Federal Register on December 21, 2010.3 The Commission received one comment letter on the proposal.4 This order approves the proposed rule change. II. Background The ISE’s rules governing registration, examination, and continuing education requirements for associated persons of ISE members 5 currently apply to 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 63554 (December 15, 2010), 75 FR 80091 (‘‘Notice’’). 4 See Letter from James McHale, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association, to Elizabeth M. Murphy, Secretary, Commission (dated January 19, 2011) (‘‘SIFMA Letter’’). 5 Under ISE Rule 100(a)(3), the term ‘‘associated person’’ or ‘‘person associated with a member’’ means any partner, officer, director or branch manager of a member (or any person occupying a similar status or performing similar functions), any person directly or indirectly controlling, controlled by, or under common control with a member or any employee of a member. ISE noted that an 2 17 E:\FR\FM\11FEN1.SGM 11FEN1 Federal Register / Vol. 76, No. 29 / Friday, February 11, 2011 / Notices associated persons who conduct a public customer business. They are subject to Chapter 6 of the ISE’s rules, Doing Business with the Public. Associated persons of member organizations register with the Exchange via the Uniform Application for Securities Industry Registration or Transfer (‘‘Form U4’’) through the Financial Industry Regulatory Authority’s (‘‘FINRA’’) Central Registration Depository System (‘‘Web CRD’’), and must pass the General Securities Representative examination (‘‘Series 7’’) to function as representatives if accepting orders from non-member customers.6 Options principals engaged in the supervision of options sales practices, must also pass the Registered Options Principal examination (‘‘Series 4’’) or the General Securities Sales Supervisor examination (‘‘Series 9/10’’).7 Rule 604, Continuing Education for Registered Persons, sets out the continuing education requirements for associated persons of members that conduct business with the public. jlentini on DSKJ8SOYB1PROD with NOTICES III. Description of the Proposal ISE proposes to amend its rules regarding registration, examination, and continuing education of associated persons to make them substantially similar to the registration, examination, and continuing education requirements of FINRA. Specifically, ISE proposes to require all associated persons of members, regardless of whether they conduct a public customer or proprietary securities business, to register, qualify and comply with continuing education requirements. Proposed Rule 313 establishes the qualification and registration requirements for associated persons of members, including registration requirements for the Chief Compliance Officer (‘‘CCO’’) of each member and for the Financial/Operations Principal (‘‘FINOP’’) of each member subject to Rule 15c3–1 of the Exchange Act.8 Proposed Rule 313 cross-references the existing registration, qualification and continuing education requirements set forth in Chapter 6,9 as well as the forms that must be filed to register or terminate the registration of an associated person.10 organization could fall within the scope of this definition, but the Exchange is not intending to require registration by an organization. See Notice, p. 13; 75 FR 80091, at 80094. 6 See ISE Rule 602. 7 See ISE Rule 601. 8 17 CFR 240.15c3–1. 9 See rules 601–603. 10 See proposed Rule 313(d) and Supplementary Material to Rule 313.03. VerDate Mar<15>2010 18:55 Feb 10, 2011 Jkt 223001 Proposed Rule 313(a)(1) will require registration and qualification by associated persons engaged or to be engaged in the securities business of a member.11 The associated persons must be registered with the Exchange in the category of registration appropriate to the function to be performed as prescribed by the Exchange. Under proposed Rule 313 all associated persons that are not already registered in Web CRD must register (i.e., complete a Form U4) 12 and pass a qualification examination.13 Proposed Rule 313(b) requires the designation of a FINOP 14 by each member that is subject to Exchange Act Rule 15c3–1,15 and proposed Rule 313(c) requires the designation of a CCO by each member. The FINOP and CCO are required to register and pass an appropriate qualification examination.16 The Exchange proposes to include a limited exemption from the requirement to pass the CCO qualification examination.17 Each member must register with ISE every associated person acting in the capacity of a sole proprietor, officer, partner, director, FINOP, or CCO.18 11 An associated person is engaged in the securities business of a member if (i) the associated person conducts proprietary trading, acts as a market-maker, effects transactions on behalf of a broker-dealer account, supervises or monitors proprietary trading, market-making or brokerage activities on behalf of the broker-dealer, supervises or conducts training for those engaged in proprietary trading, market-making or brokerage activities on behalf of a broker-dealer account; or (ii) the associated person engages in the management of any associated person identified as an officer, partner or director. See proposed Supplementary Material to Rule 313.06. An individual with an indirect ownership interest in a member that is engaged in the securities business of such member is required to register under proposed Rule 313. 12 See proposed Supplementary Material to Rule 313.01. 13 ISE is working with other options selfregulatory organizations (‘‘SROs’’) to develop an examination for associated persons who previously have not been required to register under SRO rules (e.g., proprietary traders). See Notice, p. 16; 75 FR 80091, at 80095. See also Securities Exchange Act Release No. 63314 (November 12, 2010), 75 FR 70957 (November 19, 2010) (‘‘CBOE Registration Order’’). 14 The duties of a FINOP include assuring that the member complies with applicable financial and operational requirements under SRO rules and the Exchange Act. 15 17 CFR 240.15c3–1. 16 Proposed Rule 313(b) establishes the Series 27 examination as the qualification examination for a FINOP. The qualification examination for a CCO is the Series 14 examination. See proposed Rule 313(c) and Notice, p. 18; 75 FR 80091, at 80095. 17 See proposed Rule 313(c). 18 See proposed Supplementary Material to Rule 313.07. This requirement is consistent with FINRA’s registration requirement for Principals (NASD Rule 1021). Under ISE’s proposed rules, anyone functioning as a principal must register as such with the Exchange via a Form U4 through PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 7885 These associated persons must register as a principal on a Form U4 and pass principal qualification examinations. In addition, an associated person who is engaged in the supervision or monitoring of proprietary trading, market-making or brokerage activities and/or who is engaged in the supervision or training of those engaged in proprietary trading, market-making or brokerage activities will need to register and pass a principal qualification examination.19 Thus, all individuals who supervise the securities business of a member, or who oversee associated persons of the member, must register and pass a principal qualification examination.20 In addition, the Exchange requires each member to have at least two individuals registered as principals who qualify as such by passing the relevant principal examination.21 Proposed Supplementary Material to Rule 313.07 exempts members that are sole proprietors from this requirement. The Exchange may waive the requirement to have two principals if the member conclusively demonstrates that only one officer, partner or director is required.22 The ability to waive this registration requirement is consistent with similar FINRA rules regarding principal registration.23 ISE is also proposing to allow a member that conducts only proprietary trading 24 and has 25 or fewer registered persons to have only FINRA’s Web CRD. (Generally, all principals must qualify as representatives before qualifying as principals.) ISE did not use the term ‘‘Principal’’ in the proposed rules to avoid confusion with existing terms, such as ‘‘Options Principal.’’ In this order the Commission refers to such persons as principals. 19 Id. 20 If an ISE rule does not specify the examination that will qualify an associated person for a particular category of registration, once the ISE has determined the appropriate examination for that category, the ISE will file a proposed rule change indicating the appropriate examination. 21 This requirement is consistent with the registration requirement set forth in NASD Rule 1021. See proposed Supplementary Material to Rule 313.07. 22 The Commission expects this waiver to be used in very limited circumstances. 23 See NASD Rule 1021(e). 24 For purposes of this requirement, a member is considered to conduct only proprietary trading if it has the following characteristics: (i) The member is not required by Section 15(b)(8) of the Exchange Act to become a FINRA member and is a member of another registered securities exchange not registered solely under Section 6(g) of the Exchange Act; (ii) all funds used or proposed to be used by the member are the member’s own capital, traded through the member’s own accounts; (iii) the member does not, and will not, have customers; and (iv) all persons registered on behalf of the member acting or to be acting in the capacity of a trader must be owners of, employees of, or contractors to the member. See proposed Supplementary Material to Rule 313.07. E:\FR\FM\11FEN1.SGM 11FEN1 7886 Federal Register / Vol. 76, No. 29 / Friday, February 11, 2011 / Notices jlentini on DSKJ8SOYB1PROD with NOTICES one officer or partner registered and subject to a principal examination.25 Proposed Rule 313(a)(1) states that a member shall not maintain a registration with the ISE for any person (1) who is no longer active in the member’s securities business; (2) who is no longer functioning in the registered capacity; or (3) where the sole purpose is to avoid an examination requirement. A member cannot register any person where there is no intent to employ that person in the member’s securities business. However, a member may maintain or make application for the registration of an individual who performs legal, compliance, internal audit, back-office operations, or similar functions for the member, or a person who performs administrative support functions for registered personnel, or a person engaged in the securities business of a foreign securities affiliate or subsidiary of the member. Proposed Rule 313(a)(2) identifies several categories of associated persons that are exempt from these additional registration requirements, which include (i) associated persons functioning solely and exclusively in a clerical or ministerial capacity; (ii) associated persons that are not actively engaged in the securities business; (iii) associated persons functioning solely and exclusively to meet a need for nominal corporate officers or for capital participation; and (iv) associated persons whose functions are solely and exclusively related to transactions in commodities, transactions in security futures and/or effecting transactions on the floor of another national securities exchange and who are registered as floor members with such exchange.26 Proposed Rule 313(e) sets forth the requirements for examinations where there is a lapse in registration.27 Specifically, an associated person is required to pass the appropriate qualification examination for the category of registration if the associated person’s registration has been revoked by the Exchange as a disciplinary sanction or if his most recent registration has been terminated for a period of two or more years. Proposed Supplementary Material to Rule 313.05 permits the Exchange to waive the qualification examination requirement in exceptional 25 See proposed Supplementary Material to Rule 313.07. This requirement is substantially similar to NASDAQ Rule 1021(e)(1). 26 This rule is substantially similar to NASD Rule 1060. 27 This rule is substantially similar to NASD rules 1021(c) and 1031(c). VerDate Mar<15>2010 18:55 Feb 10, 2011 Jkt 223001 circumstances where good cause is shown.28 Proposed Supplementary Material to Rule 313.03 requires any member that discharges or terminates the employment or retention of an individual required to register under proposed Rule 313 to comply with the termination requirements, including the filing of a Form U5, set forth in Rule 601(c) and Rule 603. Proposed Supplementary Material to Rule 313.04 requires associated persons required to register under proposed Rule 313 to satisfy the continuing education requirements set forth in Rule 604, or any other applicable continuing education requirements as prescribed by ISE.29 The Exchange is adding a provision detailing the procedures required for in-house delivery of the regulatory element. The required procedures address responsibility for the continuing education program, site, technology, and supervision requirements, and administration of the program. Members are required to file a letter of attestation signed by a senior officer or partner with their Designated Examining Authority, confirming the establishment of the required procedures, and must annually represent that all required procedures have been continuously maintained. These modifications will conform ISE’s continuing education requirements to those of other SROs.30 Finally, ISE proposes to make nonsubstantive changes to ISE Rule 601 (Registration of Options Principals), Rule 602 (Registration of Representatives) and Rule 603 28 See NASD Rule 1070 (Qualification Examinations and Waiver of Requirements) and NYSE Rule 345 (Employees—Registration, Approval, Records). In determining whether a waiver shall be granted, the Exchange considers, among other things, previous industry employment, training and/or the successful completion of similar qualification examinations of other self-regulatory organizations. The Commission believes this waiver authority should be used sparingly and expects ISE to maintain records of waivers granted and to utilize careful judgment in granting waivers. Under the proposed Rule, associated persons whose activities are limited solely to the transaction of business on the floor of another exchange will be subject to the continuing education requirements set forth in Rule 604 or any other continuing education requirements prescribed by the Exchange. 29 If the ISE prescribes different or additional continuing education requirements it must file a proposed rule change. 30 E.g., NASD Rule 1120; CBOE Rule 9.3A. See CBOE Registration Order, supra note 13. Also, while the Exchange does not have a floor, for consistency with other SRO rules, the Exchange also proposes to delete language that excludes those people whose activities are limited solely to the transaction of business on a floor from the definition of ‘‘registered person’’ for purposes of Rule 604. PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 (Termination of Registered Persons) to define and reference certain terms consistently within these rules and with proposed Rule 313.31 IV. Comment Letter The Commission received one comment letter on the proposed rule change.32 The commenter asserts that the proposed rule change is overly broad in that it appears to impose registration, examination and continuing education requirements on associated persons in addition to those solely engaged in proprietary trading. The commenter also requested interpretive guidance and suggested several exemptions for associated persons from the new examination requirements. The commenter requested confirmation that principals who are engaged in or supervise aspects of a member’s securities business, other than proprietary trading, are not required to comply with the new registration, examination and continuing education requirements. These principals are already registered and qualified as general securities principals under ISE’s rules. The ISE rules require associated persons to be registered in the category of registration appropriate to the function they perform, as prescribed by the Exchange. The intent of the proposed rule change is to ensure that all persons engaged in the securities business of member firms are subject to registration, examination and continuing education requirements. If the persons described by the commenter are already registered as general securities principals, then the Commission expects that they would not have to register under the new registration category as they are already qualified pursuant to ISE rules. Similarly, Series 7 licensed persons who conduct a retail business and are subject to continuing education requirements, would not need to register in the new registration category.33 Additionally, the commenter proposed that the ISE accept the Series 31 See Notice, p. 21; 75 FR 80091, at 80096. supra note 4. 33 The commenter also raised certain questions solely pertinent to CBOE’s filing and requested guidance regarding whether ‘‘risk managers’’ would be required to register under that SRO’s new requirements. Although this comment is outside of the scope of this proposal, the Commission notes that CBOE rules exempt certain associated persons engaged in delineated activities from the new registration, examination and continuing education requirements. Unless a risk manager or associated person who has access to an exchange is specifically exempted from registering, those persons must register, pass an appropriate examination, and comply with continuing education requirements. 32 See E:\FR\FM\11FEN1.SGM 11FEN1 Federal Register / Vol. 76, No. 29 / Friday, February 11, 2011 / Notices jlentini on DSKJ8SOYB1PROD with NOTICES 24 examination as an alternative to the Series 14 examination for Chief Compliance Officers, and that the ISE should exempt from the Series 14 requirement Chief Compliance Officers with a current Series 24 license who have held the Series 24 license for a minimum of three years and have no regulatory history. The commenter also suggested that individuals with no regulatory history who currently hold the Series 24 and either the Series 9/10 or the Series 4 for a minimum of three years should not have to take a new trading examination, and that the same should apply to individuals with no regulatory history who are currently Series 7 as well as Series 9/10 or Series 4 licensed for a minimum of three years. The commenter also asked whether ISE will view the examination for proprietary traders being developed as a prerequisite to the Series 24 and the Series 9/10. The Commission notes that ISE has the authority to waive the applicable qualification examination requirement and accept other standards as evidence of an applicant’s qualifications for registration, if the applicant demonstrates good cause. The Commission understands that the new examination will serve as a prerequisite to the Series 24 and the Series 9/10 examinations for principals who are engaged solely in proprietary trading. Finally, the commenter is concerned that ISE members will not have the opportunity to comment on the new examination. The Commission notes that any new examination created will be subject to the filing requirements of Section 19(b) of the Act and, as such, will be published in the Federal Register for comment. V. Discussion and Commission Findings In order to meet its obligations under Section 6 of the Act 34 to enforce compliance by member firms 35 and their associated persons with the Act, the rules thereunder, and the Exchange’s own rules, an exchange must have baseline registration and examination requirements for all persons conducting business on an exchange, as well as for those supervising the activity. In addition, an exchange should have continuing education requirements for registered persons to help ensure that members and persons associated with their 34 Section 6 requires exchanges to have the ability to enforce compliance by their members and associated persons with the Federal securities laws and with their own rules. 15 U.S.C. 78f. 35 Brokers and dealers are required to supervise the activities of their associated persons. See Section 15(b)(4)(E) of the Act. VerDate Mar<15>2010 18:55 Feb 10, 2011 Jkt 223001 members are up to date on amendments to the Exchange’s rules and the securities laws, rules, and regulations that govern their activities. Furthermore, the Exchange must have the information necessary to know if an associated person of a member firm is subject to a statutory disqualification.36 This information is elicited by the Form U4, which is used by most SROs to register associated persons. The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.37 Specifically, the Commission finds that the proposal is consistent with Section 6(b)(5) of the Act,38 which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, 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. The Commission believes that the proposed rule change is also consistent with Section 6(c)(3)(B) of the Act,39 which authorizes exchanges to prescribe standards of training, experience and competence for persons associated with exchange members, and gives exchanges the authority to bar a natural person from becoming a member or a person associated with a member, if the person does not meet the standards of training, experience and competence prescribed in the rules of the exchange. ISE’s proposed rule change requires all associated persons of member organizations engaged in a securities business on ISE, as well as those who supervise, train or otherwise oversee those who do, to register with the Exchange via the Form U4, qualify by passing an appropriate examination, and comply with continuing education requirements. The Commission believes that ISE’s requirements help ensure that 36 See Section 6(c)(2) of the Act and Rule 19h– 1 under the Act. The Commission believes that it is important that certain registration information, such as whether an associated person is subject to a statutory disqualification, be available to exchanges and other regulators, including the Commission and the State securities regulators, through WebCRD as well as members of the public through BrokerCheck, which derives information from WebCRD. 37 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 38 15 U.S.C. 78f(b)(5). 39 15 U.S.C. 78f(c)(3)(B). PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 7887 all associated persons who transact business on ISE, including those engaged in proprietary trading, are subject to appropriate registration, qualification, and continuing education requirements and is consistent with the Act. These requirements bolster the integrity of the Exchange by helping to ensure that all associated persons engaged in a securities business are, and will continue to be, properly trained and qualified to perform their functions, will be supervised, and can be identified by regulators. The Commission understands that the ISE is working with the other options exchanges to develop an exam for proprietary traders. The Commission expects the exam to be filed with the Commission no later than May 12, 2011.40 If the exam is not filed by that time, the Commission expects ISE to require all associated persons engaged in the securities business of a member to promptly take and pass the Series 7 examination. The requirement for each member to have a CCO who must register and pass the Series 14 and a FINOP who must register and pass the Series 27 is appropriate based on the heightened level of accountability inherent in the duty of overseeing compliance by an Exchange member, and in the oversight and preparation of financial reports, and the oversight of those employed in financial and operational capacities at each firm. Additionally, the Commission believes that the requirement that all principals register through WebCRD and pass principal exams appropriately reflects the enhanced responsibility entrusted to principals. The requirement that members have at least two principals responsible for oversight of member organization activity on ISE, who must be registered as such and pass a principal exam, should help ISE strengthen the regulation of its member firms, and prepare those individuals for their responsibilities. The nature of the firm, however, may dictate that more than two principals are needed to provide appropriate supervision. The Commission also believes ISE’s proposed exceptions from the abovediscussed general requirements are appropriate. Any member seeking an exception from the two principal requirements must provide evidence that conclusively indicates to the Exchange that only one principal is necessary. The Commission expects this authority to be used sparingly, because 40 Associated persons of ISE members will have 90 days from the date the examination becomes available to take and pass the examination. E:\FR\FM\11FEN1.SGM 11FEN1 7888 Federal Register / Vol. 76, No. 29 / Friday, February 11, 2011 / Notices jlentini on DSKJ8SOYB1PROD with NOTICES such persons oversee the operations of member firms and provide the first line of defense in ensuring that member firms are complying with the rules of the exchange as well as the Federal securities laws. In addition, ISE may waive the qualification examination requirement in exceptional cases where the applicant has demonstrated that good cause exists to grant the waiver. The Commission also expects this authority to be used sparingly. Finally, the Commission notes that these exceptions are substantively the same as exceptions provided in similar rules at other SROs.41 The Commission believes the restrictions on registration that bar a member from maintaining a registration with ISE (1) persons no longer active in the member’s securities business, (2) persons no longer functioning in the registered capacity, or (3) avoidance of an examination requirement, are appropriate. These limitations should help ensure that only persons qualified for their category of registration who are engaged in a securities business are able to transact business on the ISE. The Commission notes that ISE has exempted several categories of associated persons from the new registration requirements. These persons would not be considered to be actively engaged in a securities business unless they are registered on the floor of another exchange, in which case they would not have to register with ISE.42 The Commission understands that ISE’s proposed rule change applies to all associated persons conducting a securities business, on a proprietary or agency basis, on ISE. The Commission believes ISE’s proposed provision requiring any person whose registration has been revoked by the Exchange as a disciplinary sanction, or whose most recent registration as a principal or representative has been terminated for a period of two or more years immediately preceding the date of receipt by the Exchange of a new application, to pass the qualification examination appropriate to such person’s category of registration is appropriate. This requirement should help to ensure that an associated person’s qualifications are current.43 41 See, e.g., FINRA Rule 1070(d) and NASDAQ Rule 1070(d). 42 See Notice, p. 17; 75 FR 80095. Such persons must comply with Section 15(b)(8) of the Exchange Act. 43 Additionally, the Commission believes that the proposed revisions to Rules 601 (Registration of Options Principals) 602 (Registration of Representatives), and 603 (Termination of Registered Persons) to update certain references VerDate Mar<15>2010 18:55 Feb 10, 2011 Jkt 223001 ISE’s proposed rule change will help ensure that all associated persons of members transacting business on ISE, as well as those who supervise, train or otherwise oversee those who do, will be registered with, and qualified by, the Exchange and will be subject to continuing education requirements. The proposal will enhance ISE’s ability to ensure an effective supervisory structure for those conducting business on ISE. The requirements apply broadly and are intended to help close a regulatory gap which has resulted in varying registration, qualification, and supervision requirements across markets. The Commission believes that the changes proposed by ISE to its rules will strengthen the regulatory structure of the Exchange and should enhance the ability of its members to comply with the Exchange’s rules as well as with the Federal securities laws. Additionally, the Commission believes that the proposed rule change is consistent with the principles of Section 11A(a)(1)(22) of the Act in that it seeks to assure fair competition among brokers and dealers and among exchange markets. The Commission believes that the proposed rule change will promote uniformity of regulation across markets, thus reducing opportunities for regulatory arbitrage. ISE’s proposed rule change helps ensure that all persons conducting a securities business through ISE are appropriately supervised, as is required under the Exchange Act. VI. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,44 that the proposed rule change (SR–ISE–2010– 115), be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.45 Cathy H. Ahn, Deputy Secretary. [FR Doc. 2011–3032 Filed 2–10–11; 8:45 am] BILLING CODE 8011–01–P pertaining to registration and termination forms, as well as to WebCRD and FINRA, will provide clarity to ISE’s rules, enabling regulators, members, and the general public to better understand the rules. 44 15 U.S.C. 78s(b)(2). 45 17 CFR 200.30–3(a)(12). PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–63860; File No. SR–Phlx– 2010–176] Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order Granting Approval of Proposed Rule Change Relating to Listing and Trading of Alpha Index Options February 7, 2011. I. Introduction On December 10, 2010, NASDAQ OMX PHLX LLC (the ‘‘Exchange’’ or ‘‘Phlx’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 a proposed rule change to amend certain of its rules to provide for the listing and trading of options on NASDAQ OMX (‘‘Nasdaq’’) Alpha IndexesSM (the ‘‘Alpha Indexes’’) on the Exchange’s electronic trading platform for options. The proposed rule change was published for comment in the Federal Register on December 27, 2010.2 The Commission received no comment letters on the proposed rule change. This order approves the proposed rule change. II. Description The Exchange proposes to list and trade cash-settled, European-style options on Alpha Indexes. Index Design and Composition Alpha Indexes measure relative total returns of one stock and one exchangetraded fund share (‘‘ETF’’) underlying options which are also traded on the Exchange (each such combination of two components is referred to as an ‘‘Alpha Pair’’).3 The first component identified in an Alpha Pair (the ‘‘Target Component’’) is measured against the second component identified in the Alpha Pair (the ‘‘Benchmark Component’’). The Exchange proposes to list and trade Alpha Index options only on the following Alpha Pairs: AAPL/SPY, AMZN/SPY, CSCO/SPY, F/SPY, GE/ SPY, GOOG/SPY, HPQ/SPY, IBM/SPY, INTC/SPY, KO/SPY, MRK/SPY, MSFT/ SPY, ORCL/SPY, PFE/SPY, RIMM/SPY, T/SPY, TGT/SPY, VZ/SPY and WMT/ SPY. The Exchange represents that it will not list Alpha Index options on any other Alpha Pairs without filing a 1 15 U.S.C. 78s(b)(1). Securities Exchange Act Release No. 63575 (December 17, 2010), 75 FR 81320 (‘‘Notice’’). 3 The total return measures performance (rate of return) of price appreciation plus dividends over a given evaluation period. 2 See E:\FR\FM\11FEN1.SGM 11FEN1

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SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 76, Number 29 (Friday, February 11, 2011)]
[Notices]
[Pages 7884-7888]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-3032]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63843; File No. SR-ISE-2010-115]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Approving Proposed Rule Change Regarding Registration, 
Qualification, and Continuing Education Requirements for Members and 
Associated Persons

February 4, 2011.

I. Introduction

    On December 1, 2010, the International Securities Exchange, LLC 
(``Exchange'' or ``ISE'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Exchange Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to extend registration, 
qualification, and continuing education requirements to all associated 
persons of its members. The proposed rule change was published for 
comment in the Federal Register on December 21, 2010.\3\ The Commission 
received one comment letter on the proposal.\4\ This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 63554 (December 15, 
2010), 75 FR 80091 (``Notice'').
    \4\ See Letter from James McHale, Managing Director and 
Associate General Counsel, Securities Industry and Financial Markets 
Association, to Elizabeth M. Murphy, Secretary, Commission (dated 
January 19, 2011) (``SIFMA Letter'').
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II. Background

    The ISE's rules governing registration, examination, and continuing 
education requirements for associated persons of ISE members \5\ 
currently apply to

[[Page 7885]]

associated persons who conduct a public customer business. They are 
subject to Chapter 6 of the ISE's rules, Doing Business with the 
Public. Associated persons of member organizations register with the 
Exchange via the Uniform Application for Securities Industry 
Registration or Transfer (``Form U4'') through the Financial Industry 
Regulatory Authority's (``FINRA'') Central Registration Depository 
System (``Web CRD''), and must pass the General Securities 
Representative examination (``Series 7'') to function as 
representatives if accepting orders from non-member customers.\6\ 
Options principals engaged in the supervision of options sales 
practices, must also pass the Registered Options Principal examination 
(``Series 4'') or the General Securities Sales Supervisor examination 
(``Series 9/10'').\7\ Rule 604, Continuing Education for Registered 
Persons, sets out the continuing education requirements for associated 
persons of members that conduct business with the public.
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    \5\ Under ISE Rule 100(a)(3), the term ``associated person'' or 
``person associated with a member'' means any partner, officer, 
director or branch manager of a member (or any person occupying a 
similar status or performing similar functions), any person directly 
or indirectly controlling, controlled by, or under common control 
with a member or any employee of a member. ISE noted that an 
organization could fall within the scope of this definition, but the 
Exchange is not intending to require registration by an 
organization. See Notice, p. 13; 75 FR 80091, at 80094.
    \6\ See ISE Rule 602.
    \7\ See ISE Rule 601.
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III. Description of the Proposal

    ISE proposes to amend its rules regarding registration, 
examination, and continuing education of associated persons to make 
them substantially similar to the registration, examination, and 
continuing education requirements of FINRA. Specifically, ISE proposes 
to require all associated persons of members, regardless of whether 
they conduct a public customer or proprietary securities business, to 
register, qualify and comply with continuing education requirements.
    Proposed Rule 313 establishes the qualification and registration 
requirements for associated persons of members, including registration 
requirements for the Chief Compliance Officer (``CCO'') of each member 
and for the Financial/Operations Principal (``FINOP'') of each member 
subject to Rule 15c3-1 of the Exchange Act.\8\ Proposed Rule 313 cross-
references the existing registration, qualification and continuing 
education requirements set forth in Chapter 6,\9\ as well as the forms 
that must be filed to register or terminate the registration of an 
associated person.\10\
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    \8\ 17 CFR 240.15c3-1.
    \9\ See rules 601-603.
    \10\ See proposed Rule 313(d) and Supplementary Material to Rule 
313.03.
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    Proposed Rule 313(a)(1) will require registration and qualification 
by associated persons engaged or to be engaged in the securities 
business of a member.\11\ The associated persons must be registered 
with the Exchange in the category of registration appropriate to the 
function to be performed as prescribed by the Exchange. Under proposed 
Rule 313 all associated persons that are not already registered in Web 
CRD must register (i.e., complete a Form U4) \12\ and pass a 
qualification examination.\13\
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    \11\ An associated person is engaged in the securities business 
of a member if (i) the associated person conducts proprietary 
trading, acts as a market-maker, effects transactions on behalf of a 
broker-dealer account, supervises or monitors proprietary trading, 
market-making or brokerage activities on behalf of the broker-
dealer, supervises or conducts training for those engaged in 
proprietary trading, market-making or brokerage activities on behalf 
of a broker-dealer account; or (ii) the associated person engages in 
the management of any associated person identified as an officer, 
partner or director. See proposed Supplementary Material to Rule 
313.06.
     An individual with an indirect ownership interest in a member 
that is engaged in the securities business of such member is 
required to register under proposed Rule 313.
    \12\ See proposed Supplementary Material to Rule 313.01.
    \13\ ISE is working with other options self-regulatory 
organizations (``SROs'') to develop an examination for associated 
persons who previously have not been required to register under SRO 
rules (e.g., proprietary traders). See Notice, p. 16; 75 FR 80091, 
at 80095. See also Securities Exchange Act Release No. 63314 
(November 12, 2010), 75 FR 70957 (November 19, 2010) (``CBOE 
Registration Order'').
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    Proposed Rule 313(b) requires the designation of a FINOP \14\ by 
each member that is subject to Exchange Act Rule 15c3-1,\15\ and 
proposed Rule 313(c) requires the designation of a CCO by each member. 
The FINOP and CCO are required to register and pass an appropriate 
qualification examination.\16\ The Exchange proposes to include a 
limited exemption from the requirement to pass the CCO qualification 
examination.\17\
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    \14\ The duties of a FINOP include assuring that the member 
complies with applicable financial and operational requirements 
under SRO rules and the Exchange Act.
    \15\ 17 CFR 240.15c3-1.
    \16\ Proposed Rule 313(b) establishes the Series 27 examination 
as the qualification examination for a FINOP. The qualification 
examination for a CCO is the Series 14 examination. See proposed 
Rule 313(c) and Notice, p. 18; 75 FR 80091, at 80095.
    \17\ See proposed Rule 313(c).
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    Each member must register with ISE every associated person acting 
in the capacity of a sole proprietor, officer, partner, director, 
FINOP, or CCO.\18\ These associated persons must register as a 
principal on a Form U4 and pass principal qualification examinations. 
In addition, an associated person who is engaged in the supervision or 
monitoring of proprietary trading, market-making or brokerage 
activities and/or who is engaged in the supervision or training of 
those engaged in proprietary trading, market-making or brokerage 
activities will need to register and pass a principal qualification 
examination.\19\ Thus, all individuals who supervise the securities 
business of a member, or who oversee associated persons of the member, 
must register and pass a principal qualification examination.\20\
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    \18\ See proposed Supplementary Material to Rule 313.07. This 
requirement is consistent with FINRA's registration requirement for 
Principals (NASD Rule 1021). Under ISE's proposed rules, anyone 
functioning as a principal must register as such with the Exchange 
via a Form U4 through FINRA's Web CRD. (Generally, all principals 
must qualify as representatives before qualifying as principals.)
    ISE did not use the term ``Principal'' in the proposed rules to 
avoid confusion with existing terms, such as ``Options Principal.'' 
In this order the Commission refers to such persons as principals.
    \19\ Id.
    \20\ If an ISE rule does not specify the examination that will 
qualify an associated person for a particular category of 
registration, once the ISE has determined the appropriate 
examination for that category, the ISE will file a proposed rule 
change indicating the appropriate examination.
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    In addition, the Exchange requires each member to have at least two 
individuals registered as principals who qualify as such by passing the 
relevant principal examination.\21\ Proposed Supplementary Material to 
Rule 313.07 exempts members that are sole proprietors from this 
requirement. The Exchange may waive the requirement to have two 
principals if the member conclusively demonstrates that only one 
officer, partner or director is required.\22\ The ability to waive this 
registration requirement is consistent with similar FINRA rules 
regarding principal registration.\23\ ISE is also proposing to allow a 
member that conducts only proprietary trading \24\ and has 25 or fewer 
registered persons to have only

[[Page 7886]]

one officer or partner registered and subject to a principal 
examination.\25\ Proposed Rule 313(a)(1) states that a member shall not 
maintain a registration with the ISE for any person (1) who is no 
longer active in the member's securities business; (2) who is no longer 
functioning in the registered capacity; or (3) where the sole purpose 
is to avoid an examination requirement. A member cannot register any 
person where there is no intent to employ that person in the member's 
securities business. However, a member may maintain or make application 
for the registration of an individual who performs legal, compliance, 
internal audit, back-office operations, or similar functions for the 
member, or a person who performs administrative support functions for 
registered personnel, or a person engaged in the securities business of 
a foreign securities affiliate or subsidiary of the member.
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    \21\ This requirement is consistent with the registration 
requirement set forth in NASD Rule 1021. See proposed Supplementary 
Material to Rule 313.07.
    \22\ The Commission expects this waiver to be used in very 
limited circumstances.
    \23\ See NASD Rule 1021(e).
    \24\ For purposes of this requirement, a member is considered to 
conduct only proprietary trading if it has the following 
characteristics: (i) The member is not required by Section 15(b)(8) 
of the Exchange Act to become a FINRA member and is a member of 
another registered securities exchange not registered solely under 
Section 6(g) of the Exchange Act; (ii) all funds used or proposed to 
be used by the member are the member's own capital, traded through 
the member's own accounts; (iii) the member does not, and will not, 
have customers; and (iv) all persons registered on behalf of the 
member acting or to be acting in the capacity of a trader must be 
owners of, employees of, or contractors to the member. See proposed 
Supplementary Material to Rule 313.07.
    \25\ See proposed Supplementary Material to Rule 313.07. This 
requirement is substantially similar to NASDAQ Rule 1021(e)(1).
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    Proposed Rule 313(a)(2) identifies several categories of associated 
persons that are exempt from these additional registration 
requirements, which include (i) associated persons functioning solely 
and exclusively in a clerical or ministerial capacity; (ii) associated 
persons that are not actively engaged in the securities business; (iii) 
associated persons functioning solely and exclusively to meet a need 
for nominal corporate officers or for capital participation; and (iv) 
associated persons whose functions are solely and exclusively related 
to transactions in commodities, transactions in security futures and/or 
effecting transactions on the floor of another national securities 
exchange and who are registered as floor members with such 
exchange.\26\
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    \26\ This rule is substantially similar to NASD Rule 1060.
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    Proposed Rule 313(e) sets forth the requirements for examinations 
where there is a lapse in registration.\27\ Specifically, an associated 
person is required to pass the appropriate qualification examination 
for the category of registration if the associated person's 
registration has been revoked by the Exchange as a disciplinary 
sanction or if his most recent registration has been terminated for a 
period of two or more years.
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    \27\ This rule is substantially similar to NASD rules 1021(c) 
and 1031(c).
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    Proposed Supplementary Material to Rule 313.05 permits the Exchange 
to waive the qualification examination requirement in exceptional 
circumstances where good cause is shown.\28\
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    \28\ See NASD Rule 1070 (Qualification Examinations and Waiver 
of Requirements) and NYSE Rule 345 (Employees--Registration, 
Approval, Records).
    In determining whether a waiver shall be granted, the Exchange 
considers, among other things, previous industry employment, 
training and/or the successful completion of similar qualification 
examinations of other self-regulatory organizations. The Commission 
believes this waiver authority should be used sparingly and expects 
ISE to maintain records of waivers granted and to utilize careful 
judgment in granting waivers. Under the proposed Rule, associated 
persons whose activities are limited solely to the transaction of 
business on the floor of another exchange will be subject to the 
continuing education requirements set forth in Rule 604 or any other 
continuing education requirements prescribed by the Exchange.
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    Proposed Supplementary Material to Rule 313.03 requires any member 
that discharges or terminates the employment or retention of an 
individual required to register under proposed Rule 313 to comply with 
the termination requirements, including the filing of a Form U5, set 
forth in Rule 601(c) and Rule 603.
    Proposed Supplementary Material to Rule 313.04 requires associated 
persons required to register under proposed Rule 313 to satisfy the 
continuing education requirements set forth in Rule 604, or any other 
applicable continuing education requirements as prescribed by ISE.\29\ 
The Exchange is adding a provision detailing the procedures required 
for in-house delivery of the regulatory element. The required 
procedures address responsibility for the continuing education program, 
site, technology, and supervision requirements, and administration of 
the program. Members are required to file a letter of attestation 
signed by a senior officer or partner with their Designated Examining 
Authority, confirming the establishment of the required procedures, and 
must annually represent that all required procedures have been 
continuously maintained. These modifications will conform ISE's 
continuing education requirements to those of other SROs.\30\
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    \29\ If the ISE prescribes different or additional continuing 
education requirements it must file a proposed rule change.
    \30\ E.g., NASD Rule 1120; CBOE Rule 9.3A. See CBOE Registration 
Order, supra note 13. Also, while the Exchange does not have a 
floor, for consistency with other SRO rules, the Exchange also 
proposes to delete language that excludes those people whose 
activities are limited solely to the transaction of business on a 
floor from the definition of ``registered person'' for purposes of 
Rule 604.
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    Finally, ISE proposes to make non-substantive changes to ISE Rule 
601 (Registration of Options Principals), Rule 602 (Registration of 
Representatives) and Rule 603 (Termination of Registered Persons) to 
define and reference certain terms consistently within these rules and 
with proposed Rule 313.\31\
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    \31\ See Notice, p. 21; 75 FR 80091, at 80096.
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IV. Comment Letter

    The Commission received one comment letter on the proposed rule 
change.\32\ The commenter asserts that the proposed rule change is 
overly broad in that it appears to impose registration, examination and 
continuing education requirements on associated persons in addition to 
those solely engaged in proprietary trading. The commenter also 
requested interpretive guidance and suggested several exemptions for 
associated persons from the new examination requirements.
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    \32\ See supra note 4.
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    The commenter requested confirmation that principals who are 
engaged in or supervise aspects of a member's securities business, 
other than proprietary trading, are not required to comply with the new 
registration, examination and continuing education requirements. These 
principals are already registered and qualified as general securities 
principals under ISE's rules. The ISE rules require associated persons 
to be registered in the category of registration appropriate to the 
function they perform, as prescribed by the Exchange. The intent of the 
proposed rule change is to ensure that all persons engaged in the 
securities business of member firms are subject to registration, 
examination and continuing education requirements. If the persons 
described by the commenter are already registered as general securities 
principals, then the Commission expects that they would not have to 
register under the new registration category as they are already 
qualified pursuant to ISE rules. Similarly, Series 7 licensed persons 
who conduct a retail business and are subject to continuing education 
requirements, would not need to register in the new registration 
category.\33\
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    \33\ The commenter also raised certain questions solely 
pertinent to CBOE's filing and requested guidance regarding whether 
``risk managers'' would be required to register under that SRO's new 
requirements. Although this comment is outside of the scope of this 
proposal, the Commission notes that CBOE rules exempt certain 
associated persons engaged in delineated activities from the new 
registration, examination and continuing education requirements. 
Unless a risk manager or associated person who has access to an 
exchange is specifically exempted from registering, those persons 
must register, pass an appropriate examination, and comply with 
continuing education requirements.
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    Additionally, the commenter proposed that the ISE accept the Series

[[Page 7887]]

24 examination as an alternative to the Series 14 examination for Chief 
Compliance Officers, and that the ISE should exempt from the Series 14 
requirement Chief Compliance Officers with a current Series 24 license 
who have held the Series 24 license for a minimum of three years and 
have no regulatory history. The commenter also suggested that 
individuals with no regulatory history who currently hold the Series 24 
and either the Series 9/10 or the Series 4 for a minimum of three years 
should not have to take a new trading examination, and that the same 
should apply to individuals with no regulatory history who are 
currently Series 7 as well as Series 9/10 or Series 4 licensed for a 
minimum of three years. The commenter also asked whether ISE will view 
the examination for proprietary traders being developed as a 
prerequisite to the Series 24 and the Series 9/10.
    The Commission notes that ISE has the authority to waive the 
applicable qualification examination requirement and accept other 
standards as evidence of an applicant's qualifications for 
registration, if the applicant demonstrates good cause. The Commission 
understands that the new examination will serve as a prerequisite to 
the Series 24 and the Series 9/10 examinations for principals who are 
engaged solely in proprietary trading.
    Finally, the commenter is concerned that ISE members will not have 
the opportunity to comment on the new examination. The Commission notes 
that any new examination created will be subject to the filing 
requirements of Section 19(b) of the Act and, as such, will be 
published in the Federal Register for comment.

V. Discussion and Commission Findings

    In order to meet its obligations under Section 6 of the Act \34\ to 
enforce compliance by member firms \35\ and their associated persons 
with the Act, the rules thereunder, and the Exchange's own rules, an 
exchange must have baseline registration and examination requirements 
for all persons conducting business on an exchange, as well as for 
those supervising the activity. In addition, an exchange should have 
continuing education requirements for registered persons to help ensure 
that members and persons associated with their members are up to date 
on amendments to the Exchange's rules and the securities laws, rules, 
and regulations that govern their activities. Furthermore, the Exchange 
must have the information necessary to know if an associated person of 
a member firm is subject to a statutory disqualification.\36\ This 
information is elicited by the Form U4, which is used by most SROs to 
register associated persons.
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    \34\ Section 6 requires exchanges to have the ability to enforce 
compliance by their members and associated persons with the Federal 
securities laws and with their own rules. 15 U.S.C. 78f.
    \35\ Brokers and dealers are required to supervise the 
activities of their associated persons. See Section 15(b)(4)(E) of 
the Act.
    \36\ See Section 6(c)(2) of the Act and Rule 19h-1 under the 
Act. The Commission believes that it is important that certain 
registration information, such as whether an associated person is 
subject to a statutory disqualification, be available to exchanges 
and other regulators, including the Commission and the State 
securities regulators, through WebCRD as well as members of the 
public through BrokerCheck, which derives information from WebCRD.
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    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\37\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\38\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, 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. The 
Commission believes that the proposed rule change is also consistent 
with Section 6(c)(3)(B) of the Act,\39\ which authorizes exchanges to 
prescribe standards of training, experience and competence for persons 
associated with exchange members, and gives exchanges the authority to 
bar a natural person from becoming a member or a person associated with 
a member, if the person does not meet the standards of training, 
experience and competence prescribed in the rules of the exchange.
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    \37\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \38\ 15 U.S.C. 78f(b)(5).
    \39\ 15 U.S.C. 78f(c)(3)(B).
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    ISE's proposed rule change requires all associated persons of 
member organizations engaged in a securities business on ISE, as well 
as those who supervise, train or otherwise oversee those who do, to 
register with the Exchange via the Form U4, qualify by passing an 
appropriate examination, and comply with continuing education 
requirements. The Commission believes that ISE's requirements help 
ensure that all associated persons who transact business on ISE, 
including those engaged in proprietary trading, are subject to 
appropriate registration, qualification, and continuing education 
requirements and is consistent with the Act. These requirements bolster 
the integrity of the Exchange by helping to ensure that all associated 
persons engaged in a securities business are, and will continue to be, 
properly trained and qualified to perform their functions, will be 
supervised, and can be identified by regulators.
    The Commission understands that the ISE is working with the other 
options exchanges to develop an exam for proprietary traders. The 
Commission expects the exam to be filed with the Commission no later 
than May 12, 2011.\40\ If the exam is not filed by that time, the 
Commission expects ISE to require all associated persons engaged in the 
securities business of a member to promptly take and pass the Series 7 
examination.
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    \40\ Associated persons of ISE members will have 90 days from 
the date the examination becomes available to take and pass the 
examination.
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    The requirement for each member to have a CCO who must register and 
pass the Series 14 and a FINOP who must register and pass the Series 27 
is appropriate based on the heightened level of accountability inherent 
in the duty of overseeing compliance by an Exchange member, and in the 
oversight and preparation of financial reports, and the oversight of 
those employed in financial and operational capacities at each firm.
    Additionally, the Commission believes that the requirement that all 
principals register through WebCRD and pass principal exams 
appropriately reflects the enhanced responsibility entrusted to 
principals. The requirement that members have at least two principals 
responsible for oversight of member organization activity on ISE, who 
must be registered as such and pass a principal exam, should help ISE 
strengthen the regulation of its member firms, and prepare those 
individuals for their responsibilities. The nature of the firm, 
however, may dictate that more than two principals are needed to 
provide appropriate supervision.
    The Commission also believes ISE's proposed exceptions from the 
above-discussed general requirements are appropriate. Any member 
seeking an exception from the two principal requirements must provide 
evidence that conclusively indicates to the Exchange that only one 
principal is necessary. The Commission expects this authority to be 
used sparingly, because

[[Page 7888]]

such persons oversee the operations of member firms and provide the 
first line of defense in ensuring that member firms are complying with 
the rules of the exchange as well as the Federal securities laws. In 
addition, ISE may waive the qualification examination requirement in 
exceptional cases where the applicant has demonstrated that good cause 
exists to grant the waiver. The Commission also expects this authority 
to be used sparingly. Finally, the Commission notes that these 
exceptions are substantively the same as exceptions provided in similar 
rules at other SROs.\41\
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    \41\ See, e.g., FINRA Rule 1070(d) and NASDAQ Rule 1070(d).
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    The Commission believes the restrictions on registration that bar a 
member from maintaining a registration with ISE (1) persons no longer 
active in the member's securities business, (2) persons no longer 
functioning in the registered capacity, or (3) avoidance of an 
examination requirement, are appropriate. These limitations should help 
ensure that only persons qualified for their category of registration 
who are engaged in a securities business are able to transact business 
on the ISE.
    The Commission notes that ISE has exempted several categories of 
associated persons from the new registration requirements. These 
persons would not be considered to be actively engaged in a securities 
business unless they are registered on the floor of another exchange, 
in which case they would not have to register with ISE.\42\ The 
Commission understands that ISE's proposed rule change applies to all 
associated persons conducting a securities business, on a proprietary 
or agency basis, on ISE.
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    \42\ See Notice, p. 17; 75 FR 80095. Such persons must comply 
with Section 15(b)(8) of the Exchange Act.
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    The Commission believes ISE's proposed provision requiring any 
person whose registration has been revoked by the Exchange as a 
disciplinary sanction, or whose most recent registration as a principal 
or representative has been terminated for a period of two or more years 
immediately preceding the date of receipt by the Exchange of a new 
application, to pass the qualification examination appropriate to such 
person's category of registration is appropriate. This requirement 
should help to ensure that an associated person's qualifications are 
current.\43\
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    \43\ Additionally, the Commission believes that the proposed 
revisions to Rules 601 (Registration of Options Principals) 602 
(Registration of Representatives), and 603 (Termination of 
Registered Persons) to update certain references pertaining to 
registration and termination forms, as well as to WebCRD and FINRA, 
will provide clarity to ISE's rules, enabling regulators, members, 
and the general public to better understand the rules.
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    ISE's proposed rule change will help ensure that all associated 
persons of members transacting business on ISE, as well as those who 
supervise, train or otherwise oversee those who do, will be registered 
with, and qualified by, the Exchange and will be subject to continuing 
education requirements. The proposal will enhance ISE's ability to 
ensure an effective supervisory structure for those conducting business 
on ISE. The requirements apply broadly and are intended to help close a 
regulatory gap which has resulted in varying registration, 
qualification, and supervision requirements across markets. The 
Commission believes that the changes proposed by ISE to its rules will 
strengthen the regulatory structure of the Exchange and should enhance 
the ability of its members to comply with the Exchange's rules as well 
as with the Federal securities laws.
    Additionally, the Commission believes that the proposed rule change 
is consistent with the principles of Section 11A(a)(1)(22) of the Act 
in that it seeks to assure fair competition among brokers and dealers 
and among exchange markets. The Commission believes that the proposed 
rule change will promote uniformity of regulation across markets, thus 
reducing opportunities for regulatory arbitrage. ISE's proposed rule 
change helps ensure that all persons conducting a securities business 
through ISE are appropriately supervised, as is required under the 
Exchange Act.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\44\ that the proposed rule change (SR-ISE-2010-115), be, and 
hereby is, approved.
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    \44\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\45\
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    \45\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-3032 Filed 2-10-11; 8:45 am]
BILLING CODE 8011-01-P

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