Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing of Proposed Rule Change To Amend Registration and Qualification Requirements, 13668-13675 [2012-5555]
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Federal Register / Vol. 77, No. 45 / Wednesday, March 7, 2012 / Notices
[FR Doc. 2012–5453 Filed 3–6–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66506; File No. SR–CME–
2012–01]
Self-Regulatory Organizations;
Chicago Mercantile Exchange, Inc.;
Order Approving Proposed Rule
Change To Amend Rules Relating to
Credit Default Swap Guaranty Fund
March 2, 2012
I. Introduction
On January 23, 2012, Chicago
Mercantile Exchange Inc. (‘‘CME’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change SR–CME–2012–01
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder.2
The proposed rule change was
published for comment in the Federal
Register on February 1, 2012.3 The
Commission received no comment
letters regarding the proposal. For the
reasons discussed below, the
Commission is granting approval of the
proposed rule change.
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II. Description
The rule change would replace CME’s
‘‘aggregate performance bond
requirement’’ standard, which
determines how CME calculates each
CDS Clearing Member’s allocation to the
CDS Guaranty Fund, with a new
standard that CME believes better
allocates tail risk. Currently CME rules
provide that each CDS Clearing
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Securities Exchange Act Release No. 34–66250
(January 26, 2012), 77 FR 5070 (February 1, 2012).
In its filing with the Commission, CME included
statements concerning the purpose of and basis for
the proposed rule change. The text of these
statements is incorporated into the discussion of the
proposed rule change in Section II below.
2 17
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Member’s allocation to the CDS
Guaranty Fund will be the greater of (i)
$50,000,000 and (ii) its proportionate
share of the 90-day trailing average of its
aggregate performance bond
requirements and average gross notional
open interest outstanding at the Clearing
House. The proposal would change the
CDS Guaranty Fund so that the
allocation will be made on the basis of
each CDS Clearing Member’s potential
residual loss (‘‘PRL’’). PRL is a stress
test of the tail risk CDS Clearing
Member portfolios bring to the market.
CME is also proposing to make
conforming changes to its CDS Manual
of Operations.
III. Discussion
Section 19(b)(2)(B) of the Act directs
the Commission to approve a proposed
rule change of a self-regulatory
organization if it finds that such
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to such organization.4 In
particular, Section 17A(b)(3)(F) 5 of the
Act requires, among other things, that
the rules of a clearing agency be
designed to assure the safeguarding of
securities and funds which are in the
custody or control of the clearing agency
or for which it is responsible.
The proposed rule change would
allow CME to change the method used
for calculating individual CDS Clearing
Member contributions to the CDS
Guaranty Fund and is designed to more
accurately align the allocation of its CDS
Guaranty Fund requirement to CDS
Clearing Members based on the risk
presented by each such member. Thus,
the proposed rule change to change
CME’s CDS Guaranty Fund allocation is
consistent with the requirement in
Section 17A(b)(3)(F) that CME safeguard
the securities and funds which are in
the custody or control of CME or for
which it is responsible.
4 15
5 15
PO 00000
U.S.C. 78s(b)(2)(B).
U.S.C. 78q–1(b)(3)(F).
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IV. Conclusion
On the basis of the foregoing, the
Commission finds that the proposal is
consistent with the requirements of the
Act and in particular with the
requirements of Section 17A of the Act
and the rules and regulations
thereunder.
It Is Therefore Ordered, pursuant to
Section 19(b)(2) 6 of the Act, that the
proposed rule change (File No. SR–
CME–2012–01) be, and hereby is,
approved.7
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.8
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–5513 Filed 3–6–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66497; File No. SR–Phlx–
2012–23]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change To
Amend Registration and Qualification
Requirements
March 1, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1, and Rule 19b–4 2 thereunder,
notice is hereby given that on February
16, 2012, NASDAQ OMX PHLX LLC
(‘‘Phlx’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III below, which Items have been
prepared by the Exchange. The
6 15
U.S.C. 78s(b)(2).
approving the proposed rule change, the
Commission considered the proposal’s impact on
efficiency, competition and capital formation. 15
U.S.C. 78c(f).
8 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
7 In
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BILLING CODE 8011–01–C
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Federal Register / Vol. 77, No. 45 / Wednesday, March 7, 2012 / Notices
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 Exchange proposes to delete Rule
604 as well as amend and adopt several
new rules governing the registration and
qualification of members and persons
associated with 3 member organizations,
as described below. The text of the
proposed rule change is available on the
Exchange’s Web site at https://
www.nasdaqtrader.com/
micro.aspx?id=PHLXRulefilings, at the
principal office of the Exchange, 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.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to strengthen the Exchange’s
current registration provisions in a
number of ways. In 2010,4 in connection
with the Exchange’s proposal to launch
the Exchange’s equity trading platform
for NMS Stocks, NASDAQ OMX PSX
(‘‘PSX’’),5 the Exchange amended Rule
604 to adopt paragraph (h) to govern the
registration of representatives and
Supplementary Material .04 to Rule 604
regarding the specific category of such
registration. In addition, with respect to
principal registration, the Exchange
adopted paragraph (g), Principal
Registration, and Supplementary
Material .01–.03 governing the specific
categories of principal registration, to
require that every member organization
covered by those rules have at least two
registered principals as well as a
Financial/Operations Principal. The
Exchange also adopted paragraph (i) to
establish which persons are exempt
from registration. These provisions
became applicable only to PSX users
pursuant to paragraph (f). In that filing,
the Exchange stated:
‘‘The Exchange intends to separately revise
its registration and qualification rules related
to activity other than business conducted on
PSX, including its options business. The
Exchange understands that other selfregulatory organizations are expected to
adopt a framework that requires more
fulsome registration and qualification
requirements clearly spelled out in rules. The
Exchange supports the Commission’s
commitment to ensure that such rules are
adopted by all self-regulatory organizations
on a consistent basis.’’
Accordingly, the Exchange is now
proposing to extend the principal and
representative registration requirements
of Rule 604(g) and (h) to all members,
member organizations and associated
persons by adopting Rules 611–616 to
replace Rule 604. As a result of the new
registration requirements, additional
persons will become subject to the
Exchange’s continuing education
requirement in Rule 640.
Background and Current Requirements
Currently, Rules 604(a)–(e) apply to
all member organizations and generally
require the Series 7 examination for
Registered Representatives,6 off-floor
traders 7 and persons compensated
directly or indirectly for the solicitation
or handling of business in securities
who are not otherwise required to
register with the Exchange by Rule
604(a).8 Furthermore, Rule 604(f)
provides that members and persons
associated with member organizations
that are registered with the Exchange for
the purpose of trading NMS Stocks 9
through the facilities of the Exchange,
which is the PSX platform, are subject
to the provisions of Rule 604(g) and (h)
governing principal and representative
registration, respectively. Thus, these
provisions currently cover members that
trade on PSX, and are substantially
similar to the rules of The NASDAQ
Stock Market LLC (‘‘NASDAQ’’),
Financial Industry Regulatory Authority
(‘‘FINRA’’) and NASDAQ OMX BX, Inc.
(‘‘BX’’) requiring PSX users to register
and qualify representatives and
principals with the Exchange in
accordance with such rules.
Proposal
The Exchange is proposing to extend
the current principal requirement
beyond PSX users to include all member
organizations, including those who
trade options. This more extensive
principal requirement will be embodied
in new Rules 611 and 612, which are
substantially similar to current Rule
604(g) and Supplementary Material .01–
.03.
In connection with strengthening its
registration rules, the Exchange is
proposing to reorganize and renumber
its registration rules to better align with
those of NASDAQ and FINRA, albeit
within its own rule numbering
structure. The following summarizes the
new rule numbering structure:
New phlx rule
#
Topic
604(g) ...............................................
604.01–.03 .......................................
604(h) ...............................................
604.04 ..............................................
604(i) ................................................
604(j) ................................................
None ................................................
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Current phlx rule #
Principal Registration ................................................................................
Categories of Principal Registration ..........................................................
Representative Registration ......................................................................
Categories of Representative Registration ...............................................
Persons Exempt from Registration ...........................................................
Waiver .......................................................................................................
Electronic Filing .........................................................................................
3 The term ‘‘associated person’’ or ‘‘person
associated with’’ a member organization means any
partner, officer, director, or branch manager of an
Exchange member organization or applicant (or
person occupying a similar status or performing
similar functions), any person directly or indirectly
controlling, controlled by, or under common
control with such member organization or
applicant, or any employee of such member or
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applicant, except that any person associated with a
member organization or applicant whose functions
are solely clerical or ministerial shall not be
included in the meaning of such term for purposes
of the Exchange Rules. See Rule 1(b).
4 See Securities Exchange Act Release No. 62776
(August 26, 2010), 75 FR 53727 (September 1, 2010)
(SR–Phlx–2010–91).
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611
612
613
613
614
615
616
NASDAQ
1021
1022
1031
1032
1060
1070(d)
1140
5 See Securities Exchange Act Release No. 62877
(September 9, 2010), 75 FR 56633 (September 16,
2010) (SR–Phlx–2010–79).
6 See Rule 604(a).
7 See Rule 604(e).
8 See Rule 604(d).
9 See Rule 1(t).
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Federal Register / Vol. 77, No. 45 / Wednesday, March 7, 2012 / Notices
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Representative Registration
Rule 604(h) currently governs the
registration of representatives 10 with
the Exchange; specifically, Rule
604(h)(1) requires that all persons
engaged or to be engaged in the
investment banking or securities
business 11 of a member organization
who are to function as representatives
shall be registered as such with the
Exchange through WebCRD 12 in the
category of registration appropriate to
the function to be performed as
specified in Supplementary Material .04
of Rule 604. Before their registration can
become effective, they shall pass the
Series 7 examination. Rule 604(h) is
applicable today only to PSX users
pursuant to Rule 604(f).
The provisions currently contained in
Rule 604(h) are proposed to be moved
to new Rule 613, Representative
Registration, in substantially the same
form, except with respect to trading
floor personnel subject to Rule 620.
Specifically, new Rule 613(a) will
expressly state that, except members
whose activities are limited to the
Exchange’s options trading floor and
who are registered pursuant to Rule
620(a) as well as associated persons
whose activities are limited to the
Exchange’s options trading floor and are
registered pursuant to Rule 620(b), all
persons engaged or to be engaged in the
investment banking or securities
business of a member organization who
are to function as representatives shall
be registered as such with the Exchange
through WebCRD in the category of
registration appropriate to the function
to be performed as specified in Rule
613(e). This is the only change to the
language currently in Rule 604(h) that is
being moved to new Rule 613.
10 The term ‘‘representative’’ is defined in Rule 1
as a member or an associated person of a registered
broker or dealer, including assistant officers other
than principals, who is engaged in the investment
banking or securities business for the member
organization including the functions of supervision,
solicitation or conduct of business in securities or
who is engaged in the training of persons associated
with a broker or dealer for any of these functions.
To the extent provided in Rule 604, all
representatives are required to be registered with
the Exchange, and representatives that are so
registered are referred to herein as ‘‘Registered
Representatives.’’ See Rule 1(cc).
11 The term ‘‘investment banking or securities
business’’ means the business, carried on by a
broker or dealer, of underwriting or distributing
issues of securities, or of purchasing securities and
offering the same for sale as a dealer, or of
purchasing and selling securities upon the order
and for the account of others. See Rule 1(m). Of
course, the federal securities laws may require
broker-dealers to become members of the FINRA in
order to perform some of these functions. See e.g.,
15 U.S.C. 78o(b)(8).
12 WebCRD is FINRA’s automated Central
Registration Depository.
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Accordingly, trading floor personnel
will continue to be required to register
pursuant to Rule 620, in lieu of new
Rule 613,13 such that trading floor
personnel will not be required to
successfully complete the Series 7
examination, as long as their activities
are limited to the trading floor. The
Exchange believes that it is appropriate
to permit trading floor members and
associated persons to operate pursuant
to a registration and qualification
framework tailored to their specific
functions. These functions include
handling and executing electronic and
phoned-in orders on the trading floor, as
well as providing markets, both verbally
and electronically. Members on the
trading floor will continue to be subject
to the Exchange’s Trading Floor
Qualification Examination in lieu of the
Series 7, which the Exchange believes is
appropriate because the examination
focuses on the rules and procedures
most applicable to floor members.14 For
example, there are questions regarding
the quoting obligations of Rule 1014(b),
crossing orders pursuant to Rule 1064,
and Floor Broker obligations in Rule
1063.
Respecting trading floor members,
Rule 620 requires registration on Form
U4 through WebCRD. Rule 620 will now
require all trading floor personnel,
including clerks, interns and any other
associated persons, of a member
organization not required to register
pursuant to Rule 620(a) to register on
Form U4 through WebCRD.
Accordingly, the same registration
information will be available
electronically within WebCRD for
trading floor members and associated
persons as is available for persons
registered as General Securities
Representatives.
In terms of the actual category of
registration that applies, currently,
Supplementary Material .04 to Rule 604,
titled Categories of Representative
Registration—General Securities
Representative, contains the basic
requirement 15 that each member and
each person associated with a member
organization who is included within the
definition of a representative in Rule
1(cc) is required to register with the
Exchange as a General Securities
Representative and shall pass the Series
7 examination before such registration
may become effective. The appropriate
13 However, trading floor personnel and members
on the trading floor will be subject to new principal
registration requirements, as described below.
14 The Exchange recently revised this
examination. See Securities Exchange Act Release
No. 63603 (December 22, 2010), 75 FR 82419
(December 30, 2010) (SR–Phlx–2010–180).
15 This provision is the same as BX Rule 1032.
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registration category on WebCRD is
‘‘GS.’’ This provision is not changing,
and was intended to capture traditional
securities personnel in a rule similar to
that of several other SROs.16 The
Exchange continues to believe that this
provision is broad and should not
generate gaps that permit a member
organization to operate differently than
under the registration rules of BX,
NASDAQ or FINRA. The Exchange
proposes to move the provisions of Rule
604(h) into Rule 613 and
Supplementary Material .04 of Rule 604
into Rule 613(e). The Exchange believes
that it is clearer to place the ‘‘registered
representative’’ requirement and
category of registration all in one rule,
even though that differs from the FINRA
and NASDAQ rules slightly.
The Exchange also proposes to adopt
a new limited category of representative
registration as Rule 613(f). The
Exchange has been working with other
exchanges and FINRA to develop a
registration category and qualification
examination for proprietary traders in
lieu of the Series 7, which is now
available through WebCRD.
Accordingly, the Exchange proposes to
recognize the new registration category,
Proprietary Trader, and related
examination, the Series 56,17 and to
incorporate it into Rule 613(f), subject to
filing the Series 56 content outline with
the Commission.18 The Exchange
intends to file the Series 56 content
outline with the Commission shortly.19
Proposed Rule 613(f) would provide
that members and associated persons
engaged solely in proprietary trading,
market making or effecting transactions
on behalf of a broker-dealer account
may register instead as a Proprietary
Trader and pass the Series 56
examination.20 The term ‘‘persons
engaged in effecting transactions on
behalf of a broker-dealer account’’ is
equivalent to persons engaged in
proprietary trading or market making,
because it covers persons who do not
deal with the public. For example, this
would include both Floor Brokers on
the Exchange’s trading floor as well as
persons performing brokerage functions
16 See e.g., BX Rules 1031 and 1032, NASDAQ
rules 1031 and 1032, and NASD Rules 1031 AND
1031.
17 This new examination, the Series 56, would
also serve as a prerequisite for a new principal
registration category, which the Exchange would
recognize; the Series 24 would be the appropriate
examination for the new principal registration
category, as described below.
18 See e.g., Securities Exchange Act Release No.
64699 (June 17, 2011) (SR–CBOE–2011–056).
19 The Exchange is also proposing that the Series
56 serve as a prerequisite to the Series 24, as
described further below.
20 See supra note 17.
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off the trading floor (‘‘upstairs’’).21 The
Exchange believes that the Series 56
helps ensure that such persons are
qualified, because it addresses industry
topics that establish the foundation for
the regulatory and procedural
knowledge necessary for individuals
required to register as a Proprietary
Trader.
The Exchange is proposing to delete
Rule 604 in its entirety.22 With respect
to paragraphs (a), (d) and (e), the
Exchange believes that the requirements
of new Rule 613 cover every person
subject to registration as a representative
and the Series 7 examination. The
Exchange believes that Rule 613 is
broader, because it is not limited to
member organizations for which the
Exchange is the designated examining
authority (‘‘DEA’’) nor is it limited to
specific categories of persons, such as
Rule 604(e). In addition, the language of
Rule 613 more closely aligns with the
rules of FINRA and NASDAQ, which
should facilitate compliance by brokerdealers. Thus, although Rule 604 is
being deleted, the same persons will
continue to be required to successfully
complete the Series 7 examination and
be registered as a ‘‘Registered
Representative’’ on Form U4 through
WebCRD. This proposal will extend the
requirements of Rule 604(h) to all
member organizations, whereas today
Rule 604(h) only applies to member
organizations registered to use PSX.23
Principal Registration
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With respect to principal registration
on the Exchange, Rule 604(g) 24
currently provides that certain member
organizations must register at least two
principals with the Exchange,25 unless
an exception applies. The Exchange is
proposing to adopt new Rule 611,
Principal Registration, and to move the
provisions of existing Rule 604(g) over
into this new rule. Accordingly, the
principal registration rules will now
21 This provision is the same as the provision in
Chicago Board Options Exchange Incorporated
(‘‘CBOE’’) rules which requires that an individual
Permit Holder or associated person who effects
transactions on behalf of a broker-dealer account
register and pass the Series 56 examination. See
CBOE Rule 3.6A, Interpretation and Policy .06.
22 The Exchange proposes to amend the following
additional rules to replace references to Rule 604
with the new applicable rule number: Rule 1(cc),
Rule 1090, Rule 3202, Equity Floor Procedure
Advice (‘‘EFPA’’) A–7 and Options Floor Procedure
Advice (‘‘OFPA’’) F–34. Rule 3202 will now refer
to the applicability of Rules 611–616 to PSX users.
23 See Rule 604(f).
24 This rule is similar to NASDAQ Rule 1021, BX
Rule 1021 and NASD Rule 1021.
25 All persons who engage in specified
supervisory functions will be registered as
principals. All principals are first required to
register as and qualify as Representatives.
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apply beyond PSX users to all Phlx
member organizations, with the
addition of two new registration
categories to satisfy the principal
requirement: Registered Options
Principal and Proprietary Trader
Principal.
Phlx rules will require that each
principal must successfully complete
the General Securities Principal
Examination (‘‘Series 24’’) and submit a
Form U4 via WebCRD reflecting
registration as such, using the category
‘‘GP,’’ unless a different category of
principal registration applies to such
person. Specifically, new Rule 611 will
provide that all persons engaged or to be
engaged in the investment banking or
securities business of a member
organization who are to function as
principals shall be registered as such
with the Exchange through WebCRD in
the category of registration appropriate
to the function to be performed as
specified in Rule 612, Categories of
Principal Registration, which replaces
existing Supplementary Material .01–.03
of Rule 604. Before their registration can
become effective, they shall pass a
qualification examination for principals
appropriate to the category of
registration. Persons associated with a
member organization who are actively
engaged in the management of the
member organization’s investment
banking or securities business,
including supervision, solicitation,
conduct of business or the training of
persons associated with a member
organization for any of these functions
are principals. Such persons shall
include: sole proprietors, officers,
partners, managers of offices of
supervisory jurisdiction,26 and directors
of corporations. This requirement will
now appear in Rule 611(b) and apply to
all member organizations.
Rule 604(g)(5) currently requires at
least two registered principals, which
will now be contained in new Rule
611(e).27 Specifically, an Exchange
member organization, 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 organization’s investment
banking and securities business
pursuant to the applicable provisions of
Rule 611; provided, however, that a
proprietary trading firm 28 with 25 or
fewer registered representatives shall
only be required to have one officer or
partner who is registered as a principal.
This exception to the two principal
requirement is similar to that of several
other exchanges and reflects that such
firms do not necessitate the same level
of supervisory structure as firms who
have customers or larger firms. This
exception is not changing and will now
be in Rule 611(e)(i), applicable to all
member organizations.29
Rule 611(e)(ii) will provide, like Rule
604(g) currently does, that the Exchange
may waive the two principal
requirement in situations that indicate
conclusively that only one person
should be required to register as a
principal. This provision is identical to
that of several other exchanges, and the
Exchange believes that such waiver is
appropriate in certain situations, but
should be carefully applied; for
example, the Exchange may determine
to apply this provision to a very small
firm, with only a few employees in one
location.
To help determine how a person
should register as a principal,
Supplementary Material .01–.03 to Rule
604 currently enumerates the three
categories of principal registration.
These categories will now be in new
Rule 612. First, Rule 604.01, titled
General Securities Principal, provides
that each member or person associated
with a member organization who is
included within the definition of
26 The Exchange defined the term ‘‘office of
supervisory jurisdiction’’ to mean any office of a
member organization at which any one or more of
the following functions take place: order execution
and/or market making; structuring of public
offerings or private placements; maintaining
custody of customers’ funds and/or securities; final
acceptance (approval) of new accounts on behalf of
the member organization; review and endorsement
of customer orders; final approval of advertising or
sales literature for use by persons associated with
the member organization, pursuant to Rule 605,
except for an office that solely conducts final
approval of research reports; or responsibility for
supervising the activities of persons associated with
the member organization at one or more other
branch offices of the member organization. This
definition is drawn from NASD Rule 3010. The
Exchange is adopting the reference to this term in
order to cover these managers in the new principal
registration requirement. The Exchange is not, at
this time, adopting a comprehensive program with
regard to such offices, such as that found in NASD
Rule 3010. See proposed Rule 611(b).
27 All persons who engage in specified
supervisory functions must be registered as
Principals.
28 The term ‘‘proprietary trading firm’’ means a
member organization or applicant with the
following characteristics: (A) 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; (B) 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; (C) the applicant does
not, and will not have customers; and (D) 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. See proposed Rule 611(e)(i).
29 Member organizations operating on the trading
floor will be subject to the minimum ‘‘two
principal’’ requirement, except to the extent that the
‘‘proprietary trading firm’’ exception permits
certain firms to have one principal.
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Federal Register / Vol. 77, No. 45 / Wednesday, March 7, 2012 / Notices
principal, and each person designated
as a Chief Compliance Officer on
Schedule A of Form BD shall be
required to register with the Exchange
as a General Securities Principal and
shall pass the Series 24 examination
before such registration may become
effective, unless such person’s activities
are so limited as to qualify such person
for one or more of the limited categories
of principal registration specified in
Rule 612.30 The Exchange proposes to
move these provisions of Rule 604.01 to
new Rule 612(a), also titled General
Securities Principal.
The Exchange also proposes to
recognize two new principal registration
categories. First, the Exchange proposes
to adopt Rule 612(d) in order to permit
Registered Options Principals to satisfy
the principal registration requirements
of Rule 611. Specifically, each member
or person associated with a member
organization who is included within the
definition of principal, and each person
designated as a Chief Compliance
Officer on Schedule A of Form BD of a
member organization may register as a
Registered Options Principal and
successfully complete the Series 4
examination, instead of registering as a
General Securities Principal and
successfully completing the Series 24
examination, if such person’s activities
are limited solely to options.
Specifically, Rule 612(d) will provide
that such person’s supervisory
responsibilities in the investment
banking and securities business must be
limited to the options activities of a
member organization, that he or she
must be registered pursuant to Exchange
Rules as a General Securities
Representative, that he or she is
qualified to be so registered by passing
the Series 4 examination, and that he or
she shall not be qualified to function in
a principal capacity with responsibility
over any area of business activity other
than the supervision of persons
involved exclusively in options activity.
The Exchange believes that the
Registered Options Principal category is
appropriate for a principal whose
activities are limited solely to options.31
The Series 4 examination covers
options-related topics, which should
help ensure that principals whose
activities are limited to options are
properly qualified. Furthermore, Rule
1024 currently requires persons who
30 However, pursuant to Rule 604.01(c), a person
registered solely as a General Securities Principal
shall not be qualified to function as a FINOP or a
Limited Principal—General Securities Sales
Supervisor unless that person is also qualified and
registered as such.
31 This is similar to BATS Exchange, Inc.
(‘‘BATS’’) Rule 17.1(g).
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supervise options sales practice
activities to register as a Registered
Options Principal; thus, the Exchange
believes that some member
organizations have already registered
certain associated persons in this
category, such that these persons could
satisfy the new principal registration
requirement for applicable firms.
Second, the Exchange proposes to
recognize the new Proprietary Trader
Principal category as a limited principal
category in Rule 612(e). It would apply
to persons whose supervisory
responsibilities in the investment
banking and securities business are
limited to the activities of a member
organization that involve proprietary
trading, market making and effecting
transactions on behalf of broker-dealers.
It would require that he or she be
registered pursuant to Exchange Rules
as a Proprietary Trader, be qualified to
be so registered by passing the Series 24
examination, and not function in a
principal capacity with responsibility
over any area of business activity other
than proprietary trading, market making
and effecting transactions on behalf of
broker-dealer accounts.
The Exchange has been working with
other exchanges and FINRA to develop
this registration category, which is
limited to persons who supervise
persons engaged in proprietary trading,
market making or effecting transactions
on behalf of broker-dealer accounts.32
This category is in lieu of registration as
a General Securities Principal, for which
the prerequisite qualification
examination is the Series 7. The
appropriate qualification examination
for the proposed new registration
category of Proprietary Trader Principal
is the Series 24, which is the same
qualification required for registration as
a General Securities Principal; no new
examination has been developed.
However, the prerequisite examination
for the new Proprietary Trader Principal
category is the new Series 56, which is
described above. Accordingly, a person
who has passed the Series 56 can
register as a Proprietary Trader Principal
and take the Series 24 examination,
under this proposal, but cannot register
as a General Securities Principal
without first qualifying as a General
Securities Representative and passing
the Series 7. Thus, although the Series
24 will now be the appropriate
qualification examination for both
categories (General Securities Principal
and Proprietary Trader Principal),
32 In effect, supervisors who supervise persons
engaged only in activities covered by the proposed
new Proprietary Trader registration category can
meet the principal registration requirement by
registering as a Proprietary Trader Principal.
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different prerequisites apply and
different registration categories result.
The new Proprietary Trader Principal
category is expected to become available
to Phlx member organizations in
WebCRD soon and the Exchange will
communicate the implementation date
to the membership. The Exchange
believes that the new principal
registration category is an appropriate
corollary to the new representative
registration category discussed above
and reflects a substantial joint-exchange
effort to develop a registration
framework specific to principals
supervising persons engaged in
proprietary trading, market making and
effecting transactions on behalf of
broker-dealer accounts. Furthermore,
the Exchange believes that the Series 24
is the appropriate examination for
Proprietary Trader Principals, because it
tests knowledge and understanding of
supervision-related rules.
Both the Registered Options Principal
and the Proprietary Trader Principal
registrations count towards the
minimum two principal requirement in
Rule 611. The Exchange believes that
this is appropriate because both of these
principals are subject to a
comprehensive qualification
examination that covers their area of
supervision. Of course, if the member
organization is involved in activity
other than what a Proprietary Trader
Principal and a Registered Options
Principal are permitted under these
rules to supervise, an additional
principal would be required.
Two other provisions of the current
principal registration framework are
also becoming applicable to all member
organizations, in addition to the basic
principal requirement. Rule 604.02,
titled Limited Principal—Financial and
Operations, currently requires that each
member organization of the Exchange
that is subject to Rule 604(g) and that is
operating pursuant to the provisions of
SEC Rule 15c3–1(a)(1)(ii), (a)(2)(i) or
(a)(8), designate as Limited Principal—
Financial and Operations (‘‘FINOP’’)
those persons associated with it, at least
one of whom shall be its chief financial
officer, who perform the following
duties: final approval and responsibility
for the accuracy of financial reports
submitted to any duly established
securities industry regulatory body;
final preparation of such reports;
supervision of individuals who assist in
the preparation of such reports;
supervision of and responsibility for
individuals who are involved in the
actual maintenance of the member
organization’s books and records from
which such reports are derived;
supervision and/or performance of the
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member organization’s responsibilities
under all financial responsibility rules
promulgated pursuant to the provisions
of the Act; overall supervision of and
responsibility for the individuals who
are involved in the administration and
maintenance of the member
organization’s back office operations; or
any other matter involving the financial
and operational management of the
member organization. Each FINOP must
register with the Exchange and pass the
Series 27 examination. The Exchange
proposes to move this provision to Rule
612(b) and extend it beyond PSX users,
including trading floor members. This
provision is intended to ensure that
persons handling the financial affairs of
a firm are properly registered and
qualified. This requirement also
harmonizes the Exchange’s rules with
those of other exchanges 33 and
recognizes the importance and
complexity of the rules governing
financial responsibility for brokerdealers.34 Although the FINOP is a type
of principal registration, because its
scope is limited to financial matters, the
FINOP does not count toward the two
principal requirement of Rule 611.
Rule 604.03, Limited Principal—
General Securities Sales Supervisor, is
also being extended to all member
organizations as new Rule 612(c). It
currently provides that each person
associated with a member organization
who is included in the definition of
principal in Rule 604(g) (changing to
Rule 611) may register with the
Exchange as a Limited Principal—
General Securities Sales Supervisor, or
‘‘SU,’’ if applicable. This provision is
being moved, unchanged, in its entirety
to new Rule 612(c). Like the FINOP, the
General Securities Sales Supervisor
does not count toward satisfying the two
principal requirement of Rule 611.
In total, although various other
supervisory rules currently operate,
such as Phlx Rule 748,35 extending
these principal registration
requirements beyond Exchange member
organizations doing business on PSX
should strengthen the framework of
supervisory rules. The Exchange
believes that the broader application of
the principal registration requirement is
an important change. The Exchange also
believes that offering categories of
limited principal registration should
help ensure that principals are properly
qualified for their specific functions,
33 See
e.g., CBOE Rule 3.6A(b).
e.g., Phlx Rule 703.
35 Currently, Rule 748, Supervision, establishes
the supervisory requirement for member
organizations, including that all locations and
activities of a member organization be supervised
by a qualified supervisor.
34 See
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such as supervising persons involved in
options and proprietary trading.
Other Rules
The Exchange proposes to renumber
Rule 604(i), Persons Exempt from
Registration, as new Rule 614. No
changes are proposed thereto. These
registration exemptions will now apply
to all member organizations and are
intended to make clear that registration
of certain, specific persons is not
necessary, because of their functions.
This provision is based on exemptions
contained in, for example, NASDAQ
Rule 1060 and BX Rule 1060.
Rule 604(i)(2) provides that member
organizations, and persons associated
with a member organization, may pay
nonregistered foreign persons
transaction-related compensation based
upon the business of customers they
direct to member organizations under
certain conditions detailed in the rule.
This provision is intended to cover the
payment of fees to finders,36 and is
being moved to Rule 614(b), without
change.
The Exchange proposes to renumber
Rule 604(j) as Rule 615, Waiver of
Requirements. Currently, Rule 604(j)
provides that the Exchange may, in
exceptional cases and where good cause
is shown, waive the applicable
Qualification Examination and accept
other standards as evidence of an
applicant’s qualifications for
registration. Advanced age or physical
infirmity will not individually of
themselves constitute sufficient grounds
to waive a Qualification Examination.
Experience in fields ancillary to the
investment banking or securities
business may constitute sufficient
grounds to waive a Qualification
Examination. The rule is not changing
and is based on corresponding rules of
FINRA, NASDAQ and BX.
The Exchange proposes to adopt Rule
616, Electronic Filing Requirements for
Uniform Forms. Rule 616(a), WebCRD
Filing, will provide that forms required
to be filed under the Rule 600 Series
shall be filed electronically through
WebCRD.37 Currently, some of the rules
in the 600 series state this and others do
not, such that adopting a separate, new
rule should be clearer. Similarly, new
Rule 616(b), Form U4 and U5 Filing
Requirements, will require that initial
filings and amendments of Forms U4
and U5 be submitted electronically.
Furthermore, as part of the member
organization’s recordkeeping
36 This provision is identical to NASDAQ Rule
1060(b) and BX Rule 1060(b).
37 This is similar to International Securities
Exchange, LLC (‘‘ISE’’) Rules 313.01 and .02.
PO 00000
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13673
requirements, it shall retain such
records for a period of not less than
three years, the first two years in an
easily accessible place, in accordance
with Exchange Act Rule 17a–4, and
make such records available promptly
upon regulatory request. In addition,
every application for registration filed
with the Exchange shall be kept current
at all times by supplementary
amendments via electronic filing or
such other process as the Exchange may
prescribe. Such amendments shall be
filed not later than 30 days after the
applicant learns of the facts or
circumstances giving rise to the need for
the amendment. These requirements
also currently may appear in various
rules but not each applicable rule, such
that adopting a separate, new rule
should be clearer.38
The Exchange also proposes to amend
OFPA F–34 and EFPA A–7, both titled
Failure to Timely Submit Amendments
to Form U4, Form U5 and Form BD;
these are the corollary minor rule plan
provisions for Rule 623, which are being
amended only to add new rule numbers
611–613 and 616 and to delete reference
to Rule 604.
The Exchange proposes to amend
Rule 620, Trading Floor Registration, to
specifically state the registration
categories governed by the rule, to
require all trading floor associated
persons of member organizations to
register via Form U4, to delete
unnecessary language and to strengthen
a time requirement. Specifically, the
Exchange proposes to add to Rule
620(a), which requires the registration of
Floor Brokers, Specialists and
Registered Options Traders on an
Exchange trading floor via Form U4,
that the appropriate registration
category on such form is ‘‘Member
Exchange (‘‘ME’’)’’ under ‘‘PHLX.’’ This
is intended to specify registration
categories in the Exchange’s rules
whenever possible, for clarity. The
Exchange notes that this provision
covers members operating on the
trading floor and that such members are
required to successfully complete the
Exchange’s Trading Floor Qualification
Examination. The Exchange also
proposes to delete a reference in Rule
620(a) to updating Form U4 within a
certain time period, because this
requirement will now appear in new
Rule 616, as explained above.
Currently, Rule 620(b) covers all
trading floor personnel, such as clerks,
interns, and other associated persons of
member organizations, not required to
register under Rule 620(a) and requires
38 This rule is similar to NASDAQ Rule
1031(d)(3).
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them to register with the Exchange on
a form supplied by the Exchange. The
Exchange proposes to significantly
strengthen this requirement by requiring
these individuals to be registered on
Form U4 on WebCRD, not just with the
Exchange. Accordingly, these associated
persons will be subject to the
comprehensive disclosure obligations of
Form U4, which the Exchange believes
is an important enhancement. For
example, once a Form U4 submission is
required, the background information of
these individuals will be available
electronically within WebCRD for
access by the appropriate regulators.
The specific registration category will be
‘‘Floor Employee (‘‘FE’’)’’ under
‘‘PHLX,’’ which will be stated expressly
in the rule. The Exchange does not
intend to require a qualification
examination for non-member trading
floor personnel at this time. The
Exchange does not believe that the
Series 7, Series 56 or the Exchange’s
own Trading Floor Qualification
Examination are appropriate for the
limited functions of a trading floor
clerk, because these persons are not
members trading on the floor and they
are supervised by members. These
persons do not execute transactions on
the Exchange, but rather enter orders
and report trades, for example, and
related clerical functions.39 Specifically,
the types of questions covered by the
Exchange’s Trading Floor Qualification
Examination include announcing trades,
trade allocation and floor broker
responsibilities, all of which are rules
that apply to trading floor members, but
not clerks or off-floor persons.
The Exchange also proposes to amend
Rule 620(b) to provide that following
the termination of, or the initiation of a
change in the status of any such
personnel of a member organization
who has been issued an Exchange
access card and a trading floor badge,
the appropriate Exchange form must be
completed, approved and dated by a
member organization principal, officer,
or member of the member organization
with authority to do so, and submitted
to the appropriate Exchange department
no later than 9:30 a.m. the next business
day by the member organization
employer. The Exchange proposes to
strengthen this requirement by adding
that such submission should occur,
rather than no later than 9:30 a.m. the
next business day, as soon as possible
but no later than 9:30 a.m. the next
business day.
Lastly, the Exchange proposes to
amend Rule 623, Fingerprinting, to
adopt a new paragraph (b), which is
39 See
Rule 1090.
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18:40 Mar 06, 2012
Jkt 226001
similar to NASDAQ Rule 1140(d). Upon
filing an electronic Form U4 pursuant to
Rule 616 on behalf of a person applying
for registration, a member shall
promptly submit fingerprint information
for that person. The Exchange may make
a registration effective pending receipt
of the fingerprint information. The
fingerprinting requirement is not new,
but rather is being codified into the
appropriate rule.40
Conclusion
The Exchange believes that these
proposed new rules should form a solid
framework for the registration and
qualification of all member
organizations and their personnel. As a
result of the new registration
requirements, additional persons will
become subject to the Exchange’s
continuing education requirement in
Rule 640. The Exchange will announce
to the membership when these new
requirements will be implemented and
available for member organizations to
access.
The Exchange proposes to require that
member organizations comply with the
new registration and qualification
requirements within 90 days of the
Exchange’s issuance of an alert to its
membership, announcing Commission
approval; respecting any registration
category and related examination that
has a prerequisite, the Exchange
proposes to require its member
organizations to comply therewith 90
days after successful completion of the
prerequisite exam.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 41 in general, and furthers the
objectives of: (1) Section 6(c)(3)(B) of the
Act,42 pursuant to which a national
securities exchange prescribes standards
of training, experience and competence
for members and their associated
persons; and (2) Section 6(b)(5) of the
Act,43 in that it is designed, among other
things, 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, by
extending its registration and
qualification requirements beyond PSX
users. Overall, as discussed in more
40 OFPA F–25 and EFPA A–4 are the corollary
minor rule plan provisions for Rule 623; these are
not changing.
41 15 U.S.C. 78f(b).
42 15 U.S.C. 78(c)(3)(B).
43 15 U.S.C. 78f(b)(5).
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detail above, the Exchange believes that
these new 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.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition 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
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 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 Exchange consents,
the Commission shall: (a) By order
approve or disapprove such proposed
rule change, or (b) institute proceedings
to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–Phlx–2012–23 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–Phlx–2012–23. This file
number should be included on the
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subject line if email 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 (https://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 Web site viewing and
printing 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 the filing also
will be available for inspection and
copying at the principal office of the
Exchange. All comments received will
be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–Phlx–
2012–23 and should be submitted on or
before March 28, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.44
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–5555 Filed 3–6–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66503; File No. SR–CHX–
2012–02]
Self-Regulatory Organizations;
Chicago Stock Exchange, Inc.; Order
Approving a Proposed Rule Change To
Add to and Amend Its Rules Regarding
the Obligations of Institutional Brokers
Registered With the Exchange
srobinson on DSK4SPTVN1PROD with NOTICES
On January 6, 2012, the Chicago Stock
Exchange, Inc. (‘‘CHX’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
CFR 200.30–3(a)(12).
18:40 Mar 06, 2012
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Securities Exchange Act Release No. 66177
(January 18, 2012), 77 FR 3527 (‘‘Notice’’).
4 See CHX Rules, Article 17, Rule 1, Interpretation
and Policy .02.
5 See Securities Exchange Act Release No. 54550
(September 29, 2006), 71 FR 59563 (October 10,
2006) (SR–CHX–2006–05).
6 See id.
7 See Securities Exchange Act Release No. 65633
(October 26, 2011), 76 FR 67509 (November 1, 2011)
(SR–CHX–2011–29).
2 17
I. Introduction
VerDate Mar<15>2010
II. Description of the Proposal
Institutional Brokers are an elective
sub-category of Exchange Participants
who are subject to the obligations of
Article 17 of the CHX rules. Registration
as an Institutional Broker is limited to
Participant Firms, and is not available to
individual persons.4 Under current CHX
rules, each individual person authorized
to enter bids and offers and execute
transactions on behalf of an Institutional
Broker is considered an Institutional
Broker Representative (‘‘IBR’’) and must
be registered with the Exchange as
provided in Article 6.
Institutional Brokers are the
successors to the floor brokers that
operated within the Exchange’s
previous floor-based, auction trading
model. The Exchange replaced its floorbased, auction trading model with its
New Trading Model, which features an
electronic limit order matching system
as its core trading facility (‘‘Matching
System’’), beginning in late 2006.5
Under CHX’s New Trading Model,
Institutional Brokers were regarded as
operating on the Exchange.6 Recently,
the Exchange amended its rules to
provide that Institutional Brokers are no
longer considered to be operating on the
Exchange.7 Given this change in the
status of Institutional Brokers, the
Exchange stated that the instant
proposal is designed to enable
Institutional Brokers to engage in
business activities beyond those
handled by IBRs, such as over-thecounter (‘‘OTC’’) market making, while
ensuring that their activities as an
Institutional Broker are appropriately
governed by CHX rules.
The Exchange proposed to permit
Institutional Brokers to operate a non1 15
March 1, 2012.
44 17
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
permit broker-dealers registered as
Institutional Brokers with CHX to
operate a non-Institutional Broker unit
within the same Participant Firm. The
proposed rule change was published for
comment in the Federal Register on
January 24, 2012.3 The Commission
received no comment letters on the
proposal. This order approves the
proposed rule change.
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13675
Institutional Broker unit within the
same Participant Firm. A firm registered
with the Exchange as Institutional
Broker could maintain other lines of
business separate and distinct from its
Institutional Broker activities without
subjecting those other areas to the
requirements of Article 17, Rule 3
contingent upon the creation and
maintenance of effective information
barrier procedures as specified in
proposed Rule 6 of Article 17. The
Exchange stated that non-IBR activities
of a Participant Firm registered as an
Institutional Broker would remain
subject to all other applicable provisions
of the Exchange’s rules.8 The non-IBR
personnel at an Institutional Broker
could continue to send orders to the
Exchange, but those orders would be
regarded as standard order-sending
Participant orders, not as Institutional
Broker activity. The Exchange stated
that it can and will distinguish between
orders sent to the Matching System by
IBRs and other orders sent by
Institutional Brokers to the Matching
System for billing and other purposes.9
CHX proposed to modify its rules
correspondingly to redefine IBR 10 and
‘‘Participant Firm,’’ 11 and amend the
obligations of Institutional Brokers and
IBRs.12 Certain Institutional Broker
privileges and responsibilities would
apply only to the activities of those
individuals registered with the
Exchange as IBRs (and clerks thereto).13
Further, the Exchange proposed to
8 See
Notice, 77 FR at 3529.
id.
10 See Article 1, new Rule 1(gg) (defining IBR).
See also amended Interpretation and Policy .02 to
Article 17, Rule 1 (redefining IBR as an individual
person affiliated with an Institutional Broker who
is authorized to accept orders, enter bids and offers
and execute transactions on behalf of an
Institutional Broker and who has registered with the
Exchange as an IBR as provided in Article 6).
11 See Article 17, revised Rule 2 (clarifying that
only Participants Firms are eligible to register as
Institutional Brokers).
12 See Article 17, Rule 3(e) (the obligations owed
by Institutional Brokers under Article 11 include
the affirmative obligation to provide electronic
information to the Exchange in certain
circumstances); Interpretation and Policy .01(a) to
Article 6, Rule 3 (all applicants seeking to register
as IBRs must successfully complete an Institutional
Broker exam).
13 See amended Article 17, Rule 3 (enumerated
Institutional Broker responsibilities apply to
activities by or through an affiliated IRR); amended
Article 17, Rule 5(a) (the ability to make clearing
submissions is limited to IBRs); new Article 17,
Rule 6 (creating a duty of Institutional Brokers with
a non-Institutional Broker unit to establish and
maintain information barriers between the
Institutional Broker unit and non-Institutional
Broker unit); amended Article 17, Rule 1 (only
registered IBRs are permitted to use Exchange
systems provided for Institutional Brokers for
handling orders and reporting transactions, i.e.,
Brokerplex®). For a description of Brokerplex®, see
Notice, 77 FR at 3528, n.9.
9 See
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]]>Agencies
[Federal Register Volume 77, Number 45 (Wednesday, March 7, 2012)]
[Notices]
[Pages 13668-13675]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-5555]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66497; File No. SR-Phlx-2012-23]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change To Amend Registration and Qualification
Requirements
March 1, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given
that on February 16, 2012, NASDAQ OMX PHLX LLC (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Exchange. The
[[Page 13669]]
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to delete Rule 604 as well as amend and adopt
several new rules governing the registration and qualification of
members and persons associated with \3\ member organizations, as
described below. The text of the proposed rule change is available on
the Exchange's Web site at https://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, at the principal office of the Exchange,
and at the Commission's Public Reference Room.
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\3\ The term ``associated person'' or ``person associated with''
a member organization means any partner, officer, director, or
branch manager of an Exchange member organization or applicant (or
person occupying a similar status or performing similar functions),
any person directly or indirectly controlling, controlled by, or
under common control with such member organization or applicant, or
any employee of such member or applicant, except that any person
associated with a member organization or applicant whose functions
are solely clerical or ministerial shall not be included in the
meaning of such term for purposes of the Exchange Rules. See Rule
1(b).
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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.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to strengthen the
Exchange's current registration provisions in a number of ways. In
2010,\4\ in connection with the Exchange's proposal to launch the
Exchange's equity trading platform for NMS Stocks, NASDAQ OMX PSX
(``PSX''),\5\ the Exchange amended Rule 604 to adopt paragraph (h) to
govern the registration of representatives and Supplementary Material
.04 to Rule 604 regarding the specific category of such registration.
In addition, with respect to principal registration, the Exchange
adopted paragraph (g), Principal Registration, and Supplementary
Material .01-.03 governing the specific categories of principal
registration, to require that every member organization covered by
those rules have at least two registered principals as well as a
Financial/Operations Principal. The Exchange also adopted paragraph (i)
to establish which persons are exempt from registration. These
provisions became applicable only to PSX users pursuant to paragraph
(f). In that filing, the Exchange stated:
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\4\ See Securities Exchange Act Release No. 62776 (August 26,
2010), 75 FR 53727 (September 1, 2010) (SR-Phlx-2010-91).
\5\ See Securities Exchange Act Release No. 62877 (September 9,
2010), 75 FR 56633 (September 16, 2010) (SR-Phlx-2010-79).
``The Exchange intends to separately revise its registration and
qualification rules related to activity other than business
conducted on PSX, including its options business. The Exchange
understands that other self-regulatory organizations are expected to
adopt a framework that requires more fulsome registration and
qualification requirements clearly spelled out in rules. The
Exchange supports the Commission's commitment to ensure that such
rules are adopted by all self-regulatory organizations on a
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consistent basis.''
Accordingly, the Exchange is now proposing to extend the principal
and representative registration requirements of Rule 604(g) and (h) to
all members, member organizations and associated persons by adopting
Rules 611-616 to replace Rule 604. As a result of the new registration
requirements, additional persons will become subject to the Exchange's
continuing education requirement in Rule 640.
Background and Current Requirements
Currently, Rules 604(a)-(e) apply to all member organizations and
generally require the Series 7 examination for Registered
Representatives,\6\ off-floor traders \7\ and persons compensated
directly or indirectly for the solicitation or handling of business in
securities who are not otherwise required to register with the Exchange
by Rule 604(a).\8\ Furthermore, Rule 604(f) provides that members and
persons associated with member organizations that are registered with
the Exchange for the purpose of trading NMS Stocks \9\ through the
facilities of the Exchange, which is the PSX platform, are subject to
the provisions of Rule 604(g) and (h) governing principal and
representative registration, respectively. Thus, these provisions
currently cover members that trade on PSX, and are substantially
similar to the rules of The NASDAQ Stock Market LLC (``NASDAQ''),
Financial Industry Regulatory Authority (``FINRA'') and NASDAQ OMX BX,
Inc. (``BX'') requiring PSX users to register and qualify
representatives and principals with the Exchange in accordance with
such rules.
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\6\ See Rule 604(a).
\7\ See Rule 604(e).
\8\ See Rule 604(d).
\9\ See Rule 1(t).
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Proposal
The Exchange is proposing to extend the current principal
requirement beyond PSX users to include all member organizations,
including those who trade options. This more extensive principal
requirement will be embodied in new Rules 611 and 612, which are
substantially similar to current Rule 604(g) and Supplementary Material
.01-.03.
In connection with strengthening its registration rules, the
Exchange is proposing to reorganize and renumber its registration rules
to better align with those of NASDAQ and FINRA, albeit within its own
rule numbering structure. The following summarizes the new rule
numbering structure:
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New phlx rule
Current phlx rule Topic NASDAQ
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604(g)........................................ Principal Registration.......... 611 1021
604.01-.03.................................... Categories of Principal 612 1022
Registration.
604(h)........................................ Representative Registration..... 613 1031
604.04........................................ Categories of Representative 613 1032
Registration.
604(i)........................................ Persons Exempt from Registration 614 1060
604(j)........................................ Waiver.......................... 615 1070(d)
None.......................................... Electronic Filing............... 616 1140
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[[Page 13670]]
Representative Registration
Rule 604(h) currently governs the registration of representatives
\10\ with the Exchange; specifically, Rule 604(h)(1) requires that all
persons engaged or to be engaged in the investment banking or
securities business \11\ of a member organization who are to function
as representatives shall be registered as such with the Exchange
through WebCRD \12\ in the category of registration appropriate to the
function to be performed as specified in Supplementary Material .04 of
Rule 604. Before their registration can become effective, they shall
pass the Series 7 examination. Rule 604(h) is applicable today only to
PSX users pursuant to Rule 604(f).
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\10\ The term ``representative'' is defined in Rule 1 as a
member or an associated person of a registered broker or dealer,
including assistant officers other than principals, who is engaged
in the investment banking or securities business for the member
organization including the functions of supervision, solicitation or
conduct of business in securities or who is engaged in the training
of persons associated with a broker or dealer for any of these
functions. To the extent provided in Rule 604, all representatives
are required to be registered with the Exchange, and representatives
that are so registered are referred to herein as ``Registered
Representatives.'' See Rule 1(cc).
\11\ The term ``investment banking or securities business''
means the business, carried on by a broker or dealer, of
underwriting or distributing issues of securities, or of purchasing
securities and offering the same for sale as a dealer, or of
purchasing and selling securities upon the order and for the account
of others. See Rule 1(m). Of course, the federal securities laws may
require broker-dealers to become members of the FINRA in order to
perform some of these functions. See e.g., 15 U.S.C. 78o(b)(8).
\12\ WebCRD is FINRA's automated Central Registration
Depository.
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The provisions currently contained in Rule 604(h) are proposed to
be moved to new Rule 613, Representative Registration, in substantially
the same form, except with respect to trading floor personnel subject
to Rule 620. Specifically, new Rule 613(a) will expressly state that,
except members whose activities are limited to the Exchange's options
trading floor and who are registered pursuant to Rule 620(a) as well as
associated persons whose activities are limited to the Exchange's
options trading floor and are registered pursuant to Rule 620(b), all
persons engaged or to be engaged in the investment banking or
securities business of a member organization who are to function as
representatives shall be registered as such with the Exchange through
WebCRD in the category of registration appropriate to the function to
be performed as specified in Rule 613(e). This is the only change to
the language currently in Rule 604(h) that is being moved to new Rule
613.
Accordingly, trading floor personnel will continue to be required
to register pursuant to Rule 620, in lieu of new Rule 613,\13\ such
that trading floor personnel will not be required to successfully
complete the Series 7 examination, as long as their activities are
limited to the trading floor. The Exchange believes that it is
appropriate to permit trading floor members and associated persons to
operate pursuant to a registration and qualification framework tailored
to their specific functions. These functions include handling and
executing electronic and phoned-in orders on the trading floor, as well
as providing markets, both verbally and electronically. Members on the
trading floor will continue to be subject to the Exchange's Trading
Floor Qualification Examination in lieu of the Series 7, which the
Exchange believes is appropriate because the examination focuses on the
rules and procedures most applicable to floor members.\14\ For example,
there are questions regarding the quoting obligations of Rule 1014(b),
crossing orders pursuant to Rule 1064, and Floor Broker obligations in
Rule 1063.
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\13\ However, trading floor personnel and members on the trading
floor will be subject to new principal registration requirements, as
described below.
\14\ The Exchange recently revised this examination. See
Securities Exchange Act Release No. 63603 (December 22, 2010), 75 FR
82419 (December 30, 2010) (SR-Phlx-2010-180).
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Respecting trading floor members, Rule 620 requires registration on
Form U4 through WebCRD. Rule 620 will now require all trading floor
personnel, including clerks, interns and any other associated persons,
of a member organization not required to register pursuant to Rule
620(a) to register on Form U4 through WebCRD. Accordingly, the same
registration information will be available electronically within WebCRD
for trading floor members and associated persons as is available for
persons registered as General Securities Representatives.
In terms of the actual category of registration that applies,
currently, Supplementary Material .04 to Rule 604, titled Categories of
Representative Registration--General Securities Representative,
contains the basic requirement \15\ that each member and each person
associated with a member organization who is included within the
definition of a representative in Rule 1(cc) is required to register
with the Exchange as a General Securities Representative and shall pass
the Series 7 examination before such registration may become effective.
The appropriate registration category on WebCRD is ``GS.'' This
provision is not changing, and was intended to capture traditional
securities personnel in a rule similar to that of several other
SROs.\16\ The Exchange continues to believe that this provision is
broad and should not generate gaps that permit a member organization to
operate differently than under the registration rules of BX, NASDAQ or
FINRA. The Exchange proposes to move the provisions of Rule 604(h) into
Rule 613 and Supplementary Material .04 of Rule 604 into Rule 613(e).
The Exchange believes that it is clearer to place the ``registered
representative'' requirement and category of registration all in one
rule, even though that differs from the FINRA and NASDAQ rules
slightly.
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\15\ This provision is the same as BX Rule 1032.
\16\ See e.g., BX Rules 1031 and 1032, NASDAQ rules 1031 and
1032, and NASD Rules 1031 AND 1031.
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The Exchange also proposes to adopt a new limited category of
representative registration as Rule 613(f). The Exchange has been
working with other exchanges and FINRA to develop a registration
category and qualification examination for proprietary traders in lieu
of the Series 7, which is now available through WebCRD. Accordingly,
the Exchange proposes to recognize the new registration category,
Proprietary Trader, and related examination, the Series 56,\17\ and to
incorporate it into Rule 613(f), subject to filing the Series 56
content outline with the Commission.\18\ The Exchange intends to file
the Series 56 content outline with the Commission shortly.\19\ Proposed
Rule 613(f) would provide that members and associated persons engaged
solely in proprietary trading, market making or effecting transactions
on behalf of a broker-dealer account may register instead as a
Proprietary Trader and pass the Series 56 examination.\20\ The term
``persons engaged in effecting transactions on behalf of a broker-
dealer account'' is equivalent to persons engaged in proprietary
trading or market making, because it covers persons who do not deal
with the public. For example, this would include both Floor Brokers on
the Exchange's trading floor as well as persons performing brokerage
functions
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off the trading floor (``upstairs'').\21\ The Exchange believes that
the Series 56 helps ensure that such persons are qualified, because it
addresses industry topics that establish the foundation for the
regulatory and procedural knowledge necessary for individuals required
to register as a Proprietary Trader.
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\17\ This new examination, the Series 56, would also serve as a
prerequisite for a new principal registration category, which the
Exchange would recognize; the Series 24 would be the appropriate
examination for the new principal registration category, as
described below.
\18\ See e.g., Securities Exchange Act Release No. 64699 (June
17, 2011) (SR-CBOE-2011-056).
\19\ The Exchange is also proposing that the Series 56 serve as
a prerequisite to the Series 24, as described further below.
\20\ See supra note 17.
\21\ This provision is the same as the provision in Chicago
Board Options Exchange Incorporated (``CBOE'') rules which requires
that an individual Permit Holder or associated person who effects
transactions on behalf of a broker-dealer account register and pass
the Series 56 examination. See CBOE Rule 3.6A, Interpretation and
Policy .06.
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The Exchange is proposing to delete Rule 604 in its entirety.\22\
With respect to paragraphs (a), (d) and (e), the Exchange believes that
the requirements of new Rule 613 cover every person subject to
registration as a representative and the Series 7 examination. The
Exchange believes that Rule 613 is broader, because it is not limited
to member organizations for which the Exchange is the designated
examining authority (``DEA'') nor is it limited to specific categories
of persons, such as Rule 604(e). In addition, the language of Rule 613
more closely aligns with the rules of FINRA and NASDAQ, which should
facilitate compliance by broker-dealers. Thus, although Rule 604 is
being deleted, the same persons will continue to be required to
successfully complete the Series 7 examination and be registered as a
``Registered Representative'' on Form U4 through WebCRD. This proposal
will extend the requirements of Rule 604(h) to all member
organizations, whereas today Rule 604(h) only applies to member
organizations registered to use PSX.\23\
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\22\ The Exchange proposes to amend the following additional
rules to replace references to Rule 604 with the new applicable rule
number: Rule 1(cc), Rule 1090, Rule 3202, Equity Floor Procedure
Advice (``EFPA'') A-7 and Options Floor Procedure Advice (``OFPA'')
F-34. Rule 3202 will now refer to the applicability of Rules 611-616
to PSX users.
\23\ See Rule 604(f).
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Principal Registration
With respect to principal registration on the Exchange, Rule 604(g)
\24\ currently provides that certain member organizations must register
at least two principals with the Exchange,\25\ unless an exception
applies. The Exchange is proposing to adopt new Rule 611, Principal
Registration, and to move the provisions of existing Rule 604(g) over
into this new rule. Accordingly, the principal registration rules will
now apply beyond PSX users to all Phlx member organizations, with the
addition of two new registration categories to satisfy the principal
requirement: Registered Options Principal and Proprietary Trader
Principal.
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\24\ This rule is similar to NASDAQ Rule 1021, BX Rule 1021 and
NASD Rule 1021.
\25\ All persons who engage in specified supervisory functions
will be registered as principals. All principals are first required
to register as and qualify as Representatives.
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Phlx rules will require that each principal must successfully
complete the General Securities Principal Examination (``Series 24'')
and submit a Form U4 via WebCRD reflecting registration as such, using
the category ``GP,'' unless a different category of principal
registration applies to such person. Specifically, new Rule 611 will
provide that all persons engaged or to be engaged in the investment
banking or securities business of a member organization who are to
function as principals shall be registered as such with the Exchange
through WebCRD in the category of registration appropriate to the
function to be performed as specified in Rule 612, Categories of
Principal Registration, which replaces existing Supplementary Material
.01-.03 of Rule 604. Before their registration can become effective,
they shall pass a qualification examination for principals appropriate
to the category of registration. Persons associated with a member
organization who are actively engaged in the management of the member
organization's investment banking or securities business, including
supervision, solicitation, conduct of business or the training of
persons associated with a member organization for any of these
functions are principals. Such persons shall include: sole proprietors,
officers, partners, managers of offices of supervisory
jurisdiction,\26\ and directors of corporations. This requirement will
now appear in Rule 611(b) and apply to all member organizations.
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\26\ The Exchange defined the term ``office of supervisory
jurisdiction'' to mean any office of a member organization at which
any one or more of the following functions take place: order
execution and/or market making; structuring of public offerings or
private placements; maintaining custody of customers' funds and/or
securities; final acceptance (approval) of new accounts on behalf of
the member organization; review and endorsement of customer orders;
final approval of advertising or sales literature for use by persons
associated with the member organization, pursuant to Rule 605,
except for an office that solely conducts final approval of research
reports; or responsibility for supervising the activities of persons
associated with the member organization at one or more other branch
offices of the member organization. This definition is drawn from
NASD Rule 3010. The Exchange is adopting the reference to this term
in order to cover these managers in the new principal registration
requirement. The Exchange is not, at this time, adopting a
comprehensive program with regard to such offices, such as that
found in NASD Rule 3010. See proposed Rule 611(b).
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Rule 604(g)(5) currently requires at least two registered
principals, which will now be contained in new Rule 611(e).\27\
Specifically, an Exchange member organization, 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
organization's investment banking and securities business pursuant to
the applicable provisions of Rule 611; provided, however, that a
proprietary trading firm \28\ with 25 or fewer registered
representatives shall only be required to have one officer or partner
who is registered as a principal. This exception to the two principal
requirement is similar to that of several other exchanges and reflects
that such firms do not necessitate the same level of supervisory
structure as firms who have customers or larger firms. This exception
is not changing and will now be in Rule 611(e)(i), applicable to all
member organizations.\29\
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\27\ All persons who engage in specified supervisory functions
must be registered as Principals.
\28\ The term ``proprietary trading firm'' means a member
organization or applicant with the following characteristics: (A)
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; (B) 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; (C) the applicant does not, and will not
have customers; and (D) 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. See
proposed Rule 611(e)(i).
\29\ Member organizations operating on the trading floor will be
subject to the minimum ``two principal'' requirement, except to the
extent that the ``proprietary trading firm'' exception permits
certain firms to have one principal.
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Rule 611(e)(ii) will provide, like Rule 604(g) currently does, that
the Exchange may waive the two principal requirement in situations that
indicate conclusively that only one person should be required to
register as a principal. This provision is identical to that of several
other exchanges, and the Exchange believes that such waiver is
appropriate in certain situations, but should be carefully applied; for
example, the Exchange may determine to apply this provision to a very
small firm, with only a few employees in one location.
To help determine how a person should register as a principal,
Supplementary Material .01-.03 to Rule 604 currently enumerates the
three categories of principal registration. These categories will now
be in new Rule 612. First, Rule 604.01, titled General Securities
Principal, provides that each member or person associated with a member
organization who is included within the definition of
[[Page 13672]]
principal, and each person designated as a Chief Compliance Officer on
Schedule A of Form BD shall be required to register with the Exchange
as a General Securities Principal and shall pass the Series 24
examination before such registration may become effective, unless such
person's activities are so limited as to qualify such person for one or
more of the limited categories of principal registration specified in
Rule 612.\30\ The Exchange proposes to move these provisions of Rule
604.01 to new Rule 612(a), also titled General Securities Principal.
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\30\ However, pursuant to Rule 604.01(c), a person registered
solely as a General Securities Principal shall not be qualified to
function as a FINOP or a Limited Principal--General Securities Sales
Supervisor unless that person is also qualified and registered as
such.
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The Exchange also proposes to recognize two new principal
registration categories. First, the Exchange proposes to adopt Rule
612(d) in order to permit Registered Options Principals to satisfy the
principal registration requirements of Rule 611. Specifically, each
member or person associated with a member organization who is included
within the definition of principal, and each person designated as a
Chief Compliance Officer on Schedule A of Form BD of a member
organization may register as a Registered Options Principal and
successfully complete the Series 4 examination, instead of registering
as a General Securities Principal and successfully completing the
Series 24 examination, if such person's activities are limited solely
to options. Specifically, Rule 612(d) will provide that such person's
supervisory responsibilities in the investment banking and securities
business must be limited to the options activities of a member
organization, that he or she must be registered pursuant to Exchange
Rules as a General Securities Representative, that he or she is
qualified to be so registered by passing the Series 4 examination, and
that he or she shall not be qualified to function in a principal
capacity with responsibility over any area of business activity other
than the supervision of persons involved exclusively in options
activity. The Exchange believes that the Registered Options Principal
category is appropriate for a principal whose activities are limited
solely to options.\31\ The Series 4 examination covers options-related
topics, which should help ensure that principals whose activities are
limited to options are properly qualified. Furthermore, Rule 1024
currently requires persons who supervise options sales practice
activities to register as a Registered Options Principal; thus, the
Exchange believes that some member organizations have already
registered certain associated persons in this category, such that these
persons could satisfy the new principal registration requirement for
applicable firms.
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\31\ This is similar to BATS Exchange, Inc. (``BATS'') Rule
17.1(g).
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Second, the Exchange proposes to recognize the new Proprietary
Trader Principal category as a limited principal category in Rule
612(e). It would apply to persons whose supervisory responsibilities in
the investment banking and securities business are limited to the
activities of a member organization that involve proprietary trading,
market making and effecting transactions on behalf of broker-dealers.
It would require that he or she be registered pursuant to Exchange
Rules as a Proprietary Trader, be qualified to be so registered by
passing the Series 24 examination, and not function in a principal
capacity with responsibility over any area of business activity other
than proprietary trading, market making and effecting transactions on
behalf of broker-dealer accounts.
The Exchange has been working with other exchanges and FINRA to
develop this registration category, which is limited to persons who
supervise persons engaged in proprietary trading, market making or
effecting transactions on behalf of broker-dealer accounts.\32\ This
category is in lieu of registration as a General Securities Principal,
for which the prerequisite qualification examination is the Series 7.
The appropriate qualification examination for the proposed new
registration category of Proprietary Trader Principal is the Series 24,
which is the same qualification required for registration as a General
Securities Principal; no new examination has been developed. However,
the prerequisite examination for the new Proprietary Trader Principal
category is the new Series 56, which is described above. Accordingly, a
person who has passed the Series 56 can register as a Proprietary
Trader Principal and take the Series 24 examination, under this
proposal, but cannot register as a General Securities Principal without
first qualifying as a General Securities Representative and passing the
Series 7. Thus, although the Series 24 will now be the appropriate
qualification examination for both categories (General Securities
Principal and Proprietary Trader Principal), different prerequisites
apply and different registration categories result.
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\32\ In effect, supervisors who supervise persons engaged only
in activities covered by the proposed new Proprietary Trader
registration category can meet the principal registration
requirement by registering as a Proprietary Trader Principal.
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The new Proprietary Trader Principal category is expected to become
available to Phlx member organizations in WebCRD soon and the Exchange
will communicate the implementation date to the membership. The
Exchange believes that the new principal registration category is an
appropriate corollary to the new representative registration category
discussed above and reflects a substantial joint-exchange effort to
develop a registration framework specific to principals supervising
persons engaged in proprietary trading, market making and effecting
transactions on behalf of broker-dealer accounts. Furthermore, the
Exchange believes that the Series 24 is the appropriate examination for
Proprietary Trader Principals, because it tests knowledge and
understanding of supervision-related rules.
Both the Registered Options Principal and the Proprietary Trader
Principal registrations count towards the minimum two principal
requirement in Rule 611. The Exchange believes that this is appropriate
because both of these principals are subject to a comprehensive
qualification examination that covers their area of supervision. Of
course, if the member organization is involved in activity other than
what a Proprietary Trader Principal and a Registered Options Principal
are permitted under these rules to supervise, an additional principal
would be required.
Two other provisions of the current principal registration
framework are also becoming applicable to all member organizations, in
addition to the basic principal requirement. Rule 604.02, titled
Limited Principal--Financial and Operations, currently requires that
each member organization of the Exchange that is subject to Rule 604(g)
and that is operating pursuant to the provisions of SEC Rule 15c3-
1(a)(1)(ii), (a)(2)(i) or (a)(8), designate as Limited Principal--
Financial and Operations (``FINOP'') those persons associated with it,
at least one of whom shall be its chief financial officer, who perform
the following duties: final approval and responsibility for the
accuracy of financial reports submitted to any duly established
securities industry regulatory body; final preparation of such reports;
supervision of individuals who assist in the preparation of such
reports; supervision of and responsibility for individuals who are
involved in the actual maintenance of the member organization's books
and records from which such reports are derived; supervision and/or
performance of the
[[Page 13673]]
member organization's responsibilities under all financial
responsibility rules promulgated pursuant to the provisions of the Act;
overall supervision of and responsibility for the individuals who are
involved in the administration and maintenance of the member
organization's back office operations; or any other matter involving
the financial and operational management of the member organization.
Each FINOP must register with the Exchange and pass the Series 27
examination. The Exchange proposes to move this provision to Rule
612(b) and extend it beyond PSX users, including trading floor members.
This provision is intended to ensure that persons handling the
financial affairs of a firm are properly registered and qualified. This
requirement also harmonizes the Exchange's rules with those of other
exchanges \33\ and recognizes the importance and complexity of the
rules governing financial responsibility for broker-dealers.\34\
Although the FINOP is a type of principal registration, because its
scope is limited to financial matters, the FINOP does not count toward
the two principal requirement of Rule 611.
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\33\ See e.g., CBOE Rule 3.6A(b).
\34\ See e.g., Phlx Rule 703.
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Rule 604.03, Limited Principal--General Securities Sales
Supervisor, is also being extended to all member organizations as new
Rule 612(c). It currently provides that each person associated with a
member organization who is included in the definition of principal in
Rule 604(g) (changing to Rule 611) may register with the Exchange as a
Limited Principal--General Securities Sales Supervisor, or ``SU,'' if
applicable. This provision is being moved, unchanged, in its entirety
to new Rule 612(c). Like the FINOP, the General Securities Sales
Supervisor does not count toward satisfying the two principal
requirement of Rule 611.
In total, although various other supervisory rules currently
operate, such as Phlx Rule 748,\35\ extending these principal
registration requirements beyond Exchange member organizations doing
business on PSX should strengthen the framework of supervisory rules.
The Exchange believes that the broader application of the principal
registration requirement is an important change. The Exchange also
believes that offering categories of limited principal registration
should help ensure that principals are properly qualified for their
specific functions, such as supervising persons involved in options and
proprietary trading.
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\35\ Currently, Rule 748, Supervision, establishes the
supervisory requirement for member organizations, including that all
locations and activities of a member organization be supervised by a
qualified supervisor.
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Other Rules
The Exchange proposes to renumber Rule 604(i), Persons Exempt from
Registration, as new Rule 614. No changes are proposed thereto. These
registration exemptions will now apply to all member organizations and
are intended to make clear that registration of certain, specific
persons is not necessary, because of their functions. This provision is
based on exemptions contained in, for example, NASDAQ Rule 1060 and BX
Rule 1060.
Rule 604(i)(2) provides that member organizations, and persons
associated with a member organization, may pay nonregistered foreign
persons transaction-related compensation based upon the business of
customers they direct to member organizations under certain conditions
detailed in the rule. This provision is intended to cover the payment
of fees to finders,\36\ and is being moved to Rule 614(b), without
change.
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\36\ This provision is identical to NASDAQ Rule 1060(b) and BX
Rule 1060(b).
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The Exchange proposes to renumber Rule 604(j) as Rule 615, Waiver
of Requirements. Currently, Rule 604(j) provides that the Exchange may,
in exceptional cases and where good cause is shown, waive the
applicable Qualification Examination and accept other standards as
evidence of an applicant's qualifications for registration. Advanced
age or physical infirmity will not individually of themselves
constitute sufficient grounds to waive a Qualification Examination.
Experience in fields ancillary to the investment banking or securities
business may constitute sufficient grounds to waive a Qualification
Examination. The rule is not changing and is based on corresponding
rules of FINRA, NASDAQ and BX.
The Exchange proposes to adopt Rule 616, Electronic Filing
Requirements for Uniform Forms. Rule 616(a), WebCRD Filing, will
provide that forms required to be filed under the Rule 600 Series shall
be filed electronically through WebCRD.\37\ Currently, some of the
rules in the 600 series state this and others do not, such that
adopting a separate, new rule should be clearer. Similarly, new Rule
616(b), Form U4 and U5 Filing Requirements, will require that initial
filings and amendments of Forms U4 and U5 be submitted electronically.
Furthermore, as part of the member organization's recordkeeping
requirements, it shall retain such records for a period of not less
than three years, the first two years in an easily accessible place, in
accordance with Exchange Act Rule 17a-4, and make such records
available promptly upon regulatory request. In addition, every
application for registration filed with the Exchange shall be kept
current at all times by supplementary amendments via electronic filing
or such other process as the Exchange may prescribe. Such amendments
shall be filed not later than 30 days after the applicant learns of the
facts or circumstances giving rise to the need for the amendment. These
requirements also currently may appear in various rules but not each
applicable rule, such that adopting a separate, new rule should be
clearer.\38\
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\37\ This is similar to International Securities Exchange, LLC
(``ISE'') Rules 313.01 and .02.
\38\ This rule is similar to NASDAQ Rule 1031(d)(3).
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The Exchange also proposes to amend OFPA F-34 and EFPA A-7, both
titled Failure to Timely Submit Amendments to Form U4, Form U5 and Form
BD; these are the corollary minor rule plan provisions for Rule 623,
which are being amended only to add new rule numbers 611-613 and 616
and to delete reference to Rule 604.
The Exchange proposes to amend Rule 620, Trading Floor
Registration, to specifically state the registration categories
governed by the rule, to require all trading floor associated persons
of member organizations to register via Form U4, to delete unnecessary
language and to strengthen a time requirement. Specifically, the
Exchange proposes to add to Rule 620(a), which requires the
registration of Floor Brokers, Specialists and Registered Options
Traders on an Exchange trading floor via Form U4, that the appropriate
registration category on such form is ``Member Exchange (``ME'')''
under ``PHLX.'' This is intended to specify registration categories in
the Exchange's rules whenever possible, for clarity. The Exchange notes
that this provision covers members operating on the trading floor and
that such members are required to successfully complete the Exchange's
Trading Floor Qualification Examination. The Exchange also proposes to
delete a reference in Rule 620(a) to updating Form U4 within a certain
time period, because this requirement will now appear in new Rule 616,
as explained above.
Currently, Rule 620(b) covers all trading floor personnel, such as
clerks, interns, and other associated persons of member organizations,
not required to register under Rule 620(a) and requires
[[Page 13674]]
them to register with the Exchange on a form supplied by the Exchange.
The Exchange proposes to significantly strengthen this requirement by
requiring these individuals to be registered on Form U4 on WebCRD, not
just with the Exchange. Accordingly, these associated persons will be
subject to the comprehensive disclosure obligations of Form U4, which
the Exchange believes is an important enhancement. For example, once a
Form U4 submission is required, the background information of these
individuals will be available electronically within WebCRD for access
by the appropriate regulators. The specific registration category will
be ``Floor Employee (``FE'')'' under ``PHLX,'' which will be stated
expressly in the rule. The Exchange does not intend to require a
qualification examination for non-member trading floor personnel at
this time. The Exchange does not believe that the Series 7, Series 56
or the Exchange's own Trading Floor Qualification Examination are
appropriate for the limited functions of a trading floor clerk, because
these persons are not members trading on the floor and they are
supervised by members. These persons do not execute transactions on the
Exchange, but rather enter orders and report trades, for example, and
related clerical functions.\39\ Specifically, the types of questions
covered by the Exchange's Trading Floor Qualification Examination
include announcing trades, trade allocation and floor broker
responsibilities, all of which are rules that apply to trading floor
members, but not clerks or off-floor persons.
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\39\ See Rule 1090.
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The Exchange also proposes to amend Rule 620(b) to provide that
following the termination of, or the initiation of a change in the
status of any such personnel of a member organization who has been
issued an Exchange access card and a trading floor badge, the
appropriate Exchange form must be completed, approved and dated by a
member organization principal, officer, or member of the member
organization with authority to do so, and submitted to the appropriate
Exchange department no later than 9:30 a.m. the next business day by
the member organization employer. The Exchange proposes to strengthen
this requirement by adding that such submission should occur, rather
than no later than 9:30 a.m. the next business day, as soon as possible
but no later than 9:30 a.m. the next business day.
Lastly, the Exchange proposes to amend Rule 623, Fingerprinting, to
adopt a new paragraph (b), which is similar to NASDAQ Rule 1140(d).
Upon filing an electronic Form U4 pursuant to Rule 616 on behalf of a
person applying for registration, a member shall promptly submit
fingerprint information for that person. The Exchange may make a
registration effective pending receipt of the fingerprint information.
The fingerprinting requirement is not new, but rather is being codified
into the appropriate rule.\40\
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\40\ OFPA F-25 and EFPA A-4 are the corollary minor rule plan
provisions for Rule 623; these are not changing.
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Conclusion
The Exchange believes that these proposed new rules should form a
solid framework for the registration and qualification of all member
organizations and their personnel. As a result of the new registration
requirements, additional persons will become subject to the Exchange's
continuing education requirement in Rule 640. The Exchange will
announce to the membership when these new requirements will be
implemented and available for member organizations to access.
The Exchange proposes to require that member organizations comply
with the new registration and qualification requirements within 90 days
of the Exchange's issuance of an alert to its membership, announcing
Commission approval; respecting any registration category and related
examination that has a prerequisite, the Exchange proposes to require
its member organizations to comply therewith 90 days after successful
completion of the prerequisite exam.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \41\ in general, and furthers the objectives of: (1)
Section 6(c)(3)(B) of the Act,\42\ pursuant to which a national
securities exchange prescribes standards of training, experience and
competence for members and their associated persons; and (2) Section
6(b)(5) of the Act,\43\ in that it is designed, among other things, 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, by
extending its registration and qualification requirements beyond PSX
users. Overall, as discussed in more detail above, the Exchange
believes that these new 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.
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\41\ 15 U.S.C. 78f(b).
\42\ 15 U.S.C. 78(c)(3)(B).
\43\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition 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
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 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 Exchange consents, the Commission shall: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-Phlx-2012-23 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2012-23. This file
number should be included on the
[[Page 13675]]
subject line if email 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
(https://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 Web site viewing and printing 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 the
filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-Phlx-2012-23 and should be submitted on or before March
28, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\44\
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\44\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-5555 Filed 3-6-12; 8:45 am]
BILLING CODE 8011-01-P
