Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend, Reorganize and Enhance Membership, Registration and Qualification Rules and To Make Conforming Changes to Certain Other Rules, 50981-50999 [2018-21902]
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Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Notices
that the initial and continued listing
standards contained in those rules may
apply to the trading pursuant to UTP of
such ETPs, and make related changes;
and (5) amend NYSE Rule 5.1(a)(2)
relating to ETPs trading pursuant to
UTP to delete the requirement that the
Exchange file with the Commission a
Form 19b–4(e) with respect to each ETP
it trades by UTP, and to make clear that
the Exchange would halt trading in an
ETP trading pursuant to UTP as
provided for in NYSE Rule 7.18.
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such ETPs conforms NYSE’s rules to the
corresponding provisions of the rules of
NYSE National, Inc. (‘‘NYSE
National’’).14
Additionally, the Commission
believes that the deletion of listing rules
that would be superseded by the
proposed rule change, the proposed
amendments to NYSE Rules 5.1(a), and
technical conforming changes are
appropriate and consistent with Section
6(b)(5) of the Act. These changes would
eliminate language that is no longer
relevant and modify the Exchange rules
III. Discussion and Commission
to be more precise, thereby leading to
Findings
greater clarity for Exchange members,
After careful review, the Commission
regulators, investors, and the general
finds that the proposed rule change, as
public.
amended, is consistent with the
In approving the proposed rule
requirements of the Act and the rules
change, the Commission also relies
and regulations thereunder applicable to
upon the Exchange’s representation
a national securities exchange.10 In
that: (1) Listed ETPs would be subject to
particular, the Commission finds that
the existing trading surveillances
the proposed rule change is consistent
administered by the Exchange for ETPs
with Section 6(b) of the Act,11 in
trading UTP, as well as cross-market
general, and furthers the objectives of
surveillances administered by the
Section 6(b)(5) of the Act,12 in
Financial Industry Regulatory Authority
particular, in that it is designed to
(‘‘FINRA’’) on behalf of the Exchange,
prevent fraudulent and manipulative
and (2) the initial and continued listing
acts and practices, to promote just and
reviews of ETPs listed on the Exchange
equitable principles of trade, to remove
will be conducted in the same manner
impediments to and perfect the
as they are on NYSE’s affiliated
mechanism of a free and open market
exchange, NYSE Arca.15 Further, the
and a national market system, and, in
Exchange
or FINRA, on behalf of the
general, to protect investors and the
Exchange, or both, will communicate as
public interest.
needed regarding trading in ETPs, as
The Commission believes that the
well as certain other securities and
Exchange’s proposed listing standards
for ETPs 13 do not raise any novel issues, financial instruments underlying such
ETPs, with other markets and other
as they are consistent with the rules of
other national securities exchanges. The entities that are members of the
Intermarket Surveillance Group (‘‘ISG’’).
proposed rules for the qualification,
The Exchange or FINRA, on behalf of
listing, and trading of ETPs are
the Exchange, or both, may obtain
substantially identical (other than
trading information regarding trading in
certain non-substantive and technical
ETPs and financial instruments from
changes) to the rules of NYSE Arca and
such markets and other entities. In
NYSE American. Moreover, the
addition, the Exchange may obtain
Exchange’s proposal to make clear that
information regarding trading in ETPs,
the initial and continued listing
as well as certain other securities and
standards in Rules 5P and 8P do not
financial instruments underlying such
apply to the trading pursuant to UTP of
ETPs from markets and other entities
10 In approving this proposed rule change, the
that are members of ISG or with which
Commission has considered the proposed rule’s
the Exchange has in place a
impact on efficiency, competition, and capital
comprehensive surveillance sharing
formation. See 15 U.S.C. 78c(f).
agreement.16
11 15 U.S.C. 78f(b).
12 15 U.S.C. 78f(b)(5).
The Commission therefore finds that
13 The proposed listing standards of Rules 5P and
the proposed rule change, as modified
8P: (1) Provide for the listing of certain ETPs,
by Amendment No. 2, is consistent
provided that an ETP meets the applicable
with, and furthers the objectives of,
requirements of NYSE Rules 5P and 8P and does
Section 6(b)(5) of the Act.17
not have any component NMS Stock that is listed
on the Exchange or is based on, or represents an
interest in, an underlying index or reference asset
that includes an NMS Stock listed on the Exchange;
(2) delete a sentence in NYSE Rule 5.1(a)(1) that is
no longer relevant given the Exchange’s addition of
Section 303A to the Listed Company Manual; and
(3) delete all references in NYSE Rules 5P and 8P
that imply that the initial and continued listing
standards contained in those rules may apply to the
trading pursuant to UTP of such ETPs.
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14 In addition, the Commission believes that the
proposed changes to NYSE Rule 5.1(a)(2) would
further harmonize the Exchange’s rules applicable
to ETPs traded on a UTP basis with the rules of
NYSE National.
15 See Notice, supra note 4, at 31587–31588.
16 See id. at 31587.
17 15 U.S.C. 78f(b)(5).
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IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,18 that the
proposed rule change (SR–NYSE–2018–
30), as modified by Amendment No. 2,
be, and hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.19
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–21907 Filed 10–9–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–84352; File No. SR–Phlx–
2018–61]
Self-Regulatory Organizations; Nasdaq
PHLX LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend, Reorganize
and Enhance Membership,
Registration and Qualification Rules
and To Make Conforming Changes to
Certain Other Rules
October 3, 2018.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on
September 27, 2018, Nasdaq PHLX LLC
(‘‘Phlx’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I and
II, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend,
reorganize and enhance its membership,
registration and qualification rules and
to make conforming changes to certain
other rules.
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaqphlx.cchwallstreet.com/,
at the principal office of the Exchange,
and at the Commission’s Public
Reference Room.
18 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
19 17
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Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Notices
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
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The Exchange has adopted
registration requirements to ensure that
associated persons of member
organizations attain and maintain
specified levels of competence and
knowledge pertinent to their function.
In general, the current rules require that
persons engaged in a member
organization’s investment banking or
securities business who are to function
as representatives or principals register
with the Exchange in the category of
registration appropriate to their
functions by passing one or more
qualification examinations 3 and exempt
specified associated persons from the
registration requirements.4 They also
prescribe ongoing continuing education
requirements for registered persons.5
The Exchange now proposes to amend,
reorganize and enhance its rules
regarding registration, qualification
examinations and continuing education,
as described below.6
Recently, the Commission approved a
Financial Industry Regulatory Authority
(‘‘FINRA’’) proposed rule change
adopting rules relating to qualification
and registration requirements in the
Consolidated FINRA Rulebook,7
3 See Phlx Rules 611, Principal Registration
Requirements, and 613, Representative Registration.
4 See Phlx Rule 614, Persons Exempt from
Registration.
5 See Phlx Rule 640, Continuing Education for
Registered Persons.
6 The Exchange’s rules governing these matters
were extensively updated and amended in 2012.
See Securities Exchange Act Release No. 66840
(April 20, 2012), 77 FR 25003 (April 26, 2012) (SR–
Phlx–2012–23).
7 The current FINRA rulebook consists of: (1)
FINRA rules; (2) NASD rules; and (3) rules
incorporated from the New York Stock Exchange
(‘‘NYSE’’) (the ‘‘Incorporated NYSE rules’’). While
the NASD rules generally apply to all FINRA
members, the Incorporated NYSE rules apply only
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restructuring the FINRA representativelevel qualification examinations,
creating a general knowledge
examination and specialized knowledge
examinations, allowing permissive
registration, establishing an exam
waiver process for persons working for
a financial services affiliate of a
member, and amending certain
Continuing Education (‘‘CE’’)
requirements (collectively, the ‘‘FINRA
Rule Changes’’).8 The FINRA Rule
Changes will become effective on
October 1, 2018.
The Exchange now proposes to
amend, reorganize and enhance its own
membership, registration and
qualification rules in part in response to
the FINRA Rule Changes, and also in
order to conform the Exchange’s rules
more closely to those of its affiliated
exchanges in the interest of uniformity
and to facilitate compliance with
membership, registration and
qualification regulatory requirements by
members of multiple Nasdaq-affiliated
exchanges including Phlx. Last, the
Exchange proposes to enhance its
registration rules by adding a new
registration requirement applicable to
developers of algorithmic trading
systems similar to a requirement
adopted by FINRA pursuant to a 2016
FINRA proposed rule change.9
As part of this proposed rule change,
current Rules 53, Liability for Dues
to those members of FINRA that are also members
of the NYSE.
8 See Securities Exchange Act Release No. 81098
(July 7, 2017), 82 FR 32419 (July 13, 2017) (Order
Approving File No. SR–FINRA–2017–007). See also
FINRA Regulatory Notice 17–30 (SEC Approves
Consolidated FINRA Registration Rules,
Restructured Representative-Level Qualification
Examinations and Changes to Continuing Education
Requirements) (October 2017). FINRA articulated
its belief that the proposed rule change would
streamline, and bring consistency and uniformity
to, its registration rules, which would, in turn,
assist FINRA members and their associated persons
in complying with the rules and improve regulatory
efficiency. FINRA also determined to enhance the
overall efficiency of its representative-level
examinations program by eliminating redundancy
of subject matter content across examinations,
retiring several outdated representative-level
registrations, and introducing a general knowledge
examination that could be taken by all potential
representative-level registrants and the general
public. FINRA amended certain aspects of its
continuing education rule, including by codifying
existing guidance regarding the effect of failing to
complete the Regulatory Element on a registered
person’s activities and compensation.
9 See Securities Exchange Act Release No. 77551
(April 7, 2016), 81 FR 21914 (April 13, 2016) (Order
Approving File No. SR–FINRA–2016–007). In its
proposed rule change FINRA addressed the
increasing significance of algorithmic trading
strategies by amending its rules to require
registration, as Securities Traders, of associated
persons primarily responsible for the design,
development or significant modification of
algorithmic trading strategies, or who are
responsible for the day-to-day supervision or
direction of such activities.
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Until Transfer or Military Service; 611,
Principal Registration Requirements;
612, Categories of Principal Registration;
613, Representative Registration; 614,
Persons Exempt from Registration; 615,
Waiver of Requirements; 616, Electronic
Filing Requirements for Uniform Forms;
623, Fingerprinting; and 640,
Continuing Education for Registered
Persons, are proposed to be deleted.
Rule 620, Trading Floor Registration, is
proposed to be renumbered and
amended.10
In place of the deleted rules and rule
sections the Exchange proposes to adopt
a new 1200 Series of rules captioned
Registration, Qualification and
Continuing Education generally
conforming to and based upon FINRA’s
new 1200 Series of rules resulting from
the FINRA Rule Changes, but with a
number of Exchange-specific
variations.11 The proposed new 1200
Series is also being proposed for
adoption by Phlx’s affiliated exchanges
in order to facilitate compliance with
membership, registration and
qualification requirements by members
of two or more of those affiliated
exchanges.12 In the new 1200 Series of
10 The Exchange also proposes conforming
amendments to Rules 1, Definitions; 1024, Conduct
of Accounts for Options Trading; 1090, Clerks;
3202, Application of Other Rules of the Exchange;
9630, Appeal; Equity Floor Procedure Advice A–7,
Failure to Timely Submit Amendments to Form U4,
Form U5 and Form BD; Options Floor Procedure
Advice F–34, Failure to Timely Submit
Amendments to Form U4, Form U5 and Form BD;
and Section VII.C., FINRA Fees, of the Exchange’s
Pricing Schedule, and the addition of new Rule
2040, Nonregistered Foreign Finders. The Exchange
is also proposing to amend the two Floor Procedure
Advices to delete references to the ‘‘Department of
Market Regulation,’’ which refer to FINRA’s former
Department of Market Regulation. FINRA amended
its rules recently to reflect an internal
reorganization of its Enforcement Operations. See
Securities Exchange Act Release No. 83781 (August
6, 2018), 83 FR 39802 (August 10, 2018). In July
2017, FINRA announced its plan to consolidate its
existing enforcement functions into a unified
Department of Enforcement. FINRA’s recent rule
change makes technical and other non-substantive
changes to FINRA Rules 9000 Series Code of
Procedure to reflect the single Department of
Enforcement, which the Exchange is mirroring in
the two Floor Procedure Advices which will now
refer only to FINRA’s Department of Enforcement.
11 The proposed Phlx 1200 Series of Rules would
consist of Rule 1210, Registration Requirements;
Rule 1220, Registration Categories; Rule 1230,
Associated Persons Exempt from Registration; Rule
1240, Continuing Education Requirements; Rule
1250, Electronic Filing Requirements for Uniform
Forms; and Rule 1260, Trading Floor Registration.
12 The Exchange’s five affiliated exchanges, The
Nasdaq Stock Market LLC (‘‘Nasdaq’’), Nasdaq BX,
Inc. (‘‘BX’’); Nasdaq ISE, LLC (‘‘ISE’’); Nasdaq
GEMX, LLC (‘‘GEMX’’); and Nasdaq MRX, LLC
(‘‘MRX’’) (together with Phlx, the ‘‘Nasdaq
Affiliated Exchanges’’) are also submitting proposed
rule changes to adopt the 1200 Series of rules. See
SR–NASDAQ–2018–078, SR–BX–2018–047, SR–
ISE–2018–82, SR–GEMX–2018–33 and SR–MRX–
2018–31. The Exchange recently added a shell
structure to its rulebook with the purpose of
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rules the Exchange would, among other
things, recognize additional associated
person registration categories, recognize
a new general knowledge examination,
permit the maintenance of permissive
registrations, and require Securities
Trader registration of developers of
algorithmic trading strategies consistent
with a comparable, existing FINRA
registration requirement.13
The proposed rule change would
become operative October 1, 2018 with
the exception of the new registration
requirement for developers of
algorithmic trading strategies which
would become operative April 1, 2019.
Proposed Rules
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A. Registration Requirements (Proposed
Rule 1210)
Exchange Rules 613(a) and 611(a)
currently require that persons engaged,
or to be engaged, in the investment
banking or securities business of a
member who are to function as
representatives or principals register
with the Exchange in the category of
registration appropriate to their
functions as specified in Exchange
Rules 613 and 612.14 The Exchange is
proposing to consolidate and streamline
provisions of Exchange Rules 613(a) and
611(a) and to adopt them as Exchange
Rule 1210, subject to several changes.15
improving efficiency and readability and to align its
rules closer to those of the other Nasdaq Affiliated
Exchanges. See Securities Exchange Act Release No.
82169 (November 29, 2017), 82 FR 57508
(December 5, 2017) (SR–Phlx–2017–97). Ultimately,
the Exchange intends to submit another proposed
rule change to transfer the Exchange’s 1200 Series
of rules into the new shell structure. The Phlx 1200
Series of rules would differ slightly from the 1200
Series of the other Nasdaq Affiliated Exchanges
given Phlx’s trading floor and its unique
membership structure which features the concept of
a ‘‘member organization.’’ The Phlx 1200 Series
would therefore include a Rule 1260, Trading Floor
Registration. Additionally, each of the new Phlx
1200 Series of rules (except Rule 1260) would
contain a statement that references to a ‘‘member’’
in that rule shall be deemed to be references to a
‘‘member organization.’’
13 See Securities Exchange Act Release No. 77551
(April 7, 2016), 81 FR 21914 (April 13, 2016) (order
approving SR–FINRA–2016–007). In its proposed
rule change to adopt this registration requirement,
FINRA addressed the increasing significance of
algorithmic trading strategies by proposing to
require registration, as Securities Traders, of
associated persons primarily responsible for the
design, development or significant modification of
algorithmic trading strategies, or who are
responsible for the day-to-day supervision or
direction of such activities.
14 Section (a) of Rule 613 includes an exception
for members whose activities are limited to the
Exchange’s options trading floor and who are
registered pursuant to Rule 620(a), as well as for
associated persons whose activities are limited to
the Exchange’s options trading floor and are
registered pursuant to Rule 620(b). As discussed
below, the Exchange proposes to preserve this
exception as new section (c) of proposed Rule 1260.
15 In general the 1200 Series would conform the
Exchange’s rules to FINRA’s rules as revised in the
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Proposed Rule 1210 provides that
each person engaged in the securities
business of a member must register with
the Exchange as a representative or
principal in each category of registration
appropriate to his or her functions and
responsibilities as specified in proposed
Rule 1220, unless exempt from
registration pursuant to proposed Rule
1230. Unlike current Rules 613(a) and
611(a), proposed Rule 1210 would not
require persons engaged in the
investment banking business of a
member to register with the Exchange
since a member’s investment banking
business is not the primary concern of
the Exchange or the focus of its
operations.16 Proposed Rule 1210 also
provides that such person is not
qualified to function in any registered
capacity other than that for which the
person is registered, unless otherwise
stated in the rules.
B. Minimum Number of Registered
Principals (Proposed Rule 1210.01)
Existing Rule 611(e), Requirement of
Two Registered Principals, at section (i)
requires members other than sole
proprietorships to 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 with 25 or
fewer registered representatives is only
required to have one officer or partner
FINRA Rule Changes, with modifications tailored to
the business of the Exchange and of the other
Nasdaq Affiliated Exchanges. However, the
Exchange also proposes to adopt Rule 1210,
Supplementary Material .12, which is not based
upon a FINRA rule but instead on current Nasdaq
Rule 1031(c), (d) and (e), which Nasdaq is
proposing in SR-Nasdaq-2018–078 to relocate to
Rule 1210, Supplementary Material .12 in the
Nasdaq rulebook. These provisions govern the
process for applying for registration and amending
the registration application, as well as for notifying
the Exchange of termination of the member’s
association with a person registered with the
Exchange. The Exchange proposes to adopt Rule
1210, Supplemental Material .12, in order to have
uniform processes and requirements in this area
across the Nasdaq Affiliated Exchanges.
16 Miami International Securities Exchange LLC
(‘‘MIAX’’) Rule 203(a) and current ISE Rule
313(a)(1) likewise require registration of associated
persons of members engaged in the member’s
securities business, but do not require registration
with the exchanges of associated persons of
members who engage in the member’s investment
banking business. Because the Exchange’s proposed
registration rules focus solely on securities trading
activity, the proposed rules differ from the FINRA
Rule Changes by omitting references to investment
banking in proposed Rules 1210, 1210.03, 1210.10,
1220(a)(1), 1220(a)(2)(B), 1220(b), and 1240(b)(1),
and also by omitting as unnecessary from Rule
1220(a)(10) a limitation on the qualification of a
General Securities Sales Supervisor to supervise the
origination and structuring of an underwriting.
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50983
who is registered as a principal.17 Under
Rule 611(e)(ii) the Exchange may waive
the provisions of paragraph (e)(i) in
situations that indicate conclusively
that only one person should be required
to register as a principal. Additionally,
Rule 611(e)(iii) requires an applicant for
membership to have at least one person
qualified for registration as a Limited
Principal—Financial and Operations,
pursuant to Rule 612(b)(i).18
The Exchange is proposing to delete
these requirements and in their place to
adopt new Rule 1210.01. The new rule
would provide firms that limit the scope
of their business with flexibility in
satisfying the two-principal
requirement. In particular, proposed
Rule 1210.01 requires that a member
have a minimum of two General
Securities Principals, provided that a
member that is limited in the scope of
its activities may instead have two
officers or partners who are registered in
a principal category that corresponds to
the scope of the member’s activities.19
For instance, if a firm’s business is
limited to securities trading, the firm
may have two Securities Trader
Principals, instead of two General
Securities Principals. Additionally,
Exchange Rule 1210.01 provides that
any member with only one associated
person is excluded from the two
principal requirement. Proposed Rule
1210.01 would provide that existing
members as well as new applicants may
request a waiver of the two-principal
requirement, consistent with current
Exchange Rule 611(e)(ii). Finally, the
Exchange is proposing to retain the
existing rule’s provision permitting a
proprietary trading firm with 25 or
fewer registered representatives to have
just one registered principal. The FINRA
Rule Changes do not include this
provision.20 The Financial and
17 Rule 611(e)(i)(A)–(D) defines the term
‘‘proprietary trading firm’’. Because the Exchange is
proposing to delete Rule 611 in its entirety, Rule
611(e)(i) (A)–(D) would be reworded and relocated
to Rule 1, Definitions, Section (kk) as a defined
term.
18 The Exchange’s rules currently refer to various
categories of limited principal registration as
‘‘Limited Principal—’’ followed by the name of the
registration category. In this proposed rule change,
the Exchange will no longer employ the term
‘‘Limited Principal—’’ in discussing various
principal registration categories. No substantive
change is intended; shortening the names of the
various principals simply improves readability of
the rules.
19 The principal registration categories are
described in greater detail below.
20 The Exchange is not proposing provisions
conforming to the new FINRA Rule 1210.01
requirements that all FINRA members are required
to have a Principal Financial Officer and a Principal
Operations Officer, because it believes that its
proposed Rule 1220(a)(4), Financial and Operations
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Operations Principal requirement of
current Rules 611(e)(i) and 612(b)(i),
which it references, would be revised
and relocated to proposed Rule
1220(a)(4)(A).
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C. Permissive Registrations (Proposed
Rule 1210.02)
Current Rule 611(a) prohibits member
organizations from maintaining a
principal registration with the Exchange
for any person (A) who is no longer
active in the member organization’s
investment banking or securities
business, (B) who is no longer
functioning as a principal, or (C) where
the sole purpose is to avoid the
examination requirement of the rule. A
member organization may not make
application for the registration of any
person as principal where there is no
intent to employ such person in the
member organization’s investment
banking or securities business.
However, a member organization may
maintain or make application for the
registration as a principal of a person
who performs legal, compliance,
internal audit, back-office operations, or
similar duties for the member
organization or a person engaged in the
investment banking or securities
business of a foreign securities affiliate
or subsidiary of the member
organization. Exchange Rule 613(b) is a
parallel provision applicable to
representatives.
The Exchange is proposing to replace
these provisions with new Rule 1210.02.
The Exchange is also proposing to
expand the scope of permissive
registrations and to clarify a member’s
obligations regarding individuals who
are maintaining such registrations.
Specifically, proposed Rule 1210.02
allows any associated person to obtain
and maintain any registration permitted
by the member. For instance, an
associated person of a member working
solely in a clerical or ministerial
capacity, such as in an administrative
capacity, would be able to obtain and
maintain a General Securities
Representative registration with the
member. As another example, an
Principal, which requires member firms operating
pursuant to certain provisions of SEC rules to
designate at least one Financial and Operations
Principal, is sufficient. Further, the Exchange is not
adopting the FINRA Rule 1210.01 requirements that
(1) a member engaged in investment banking
activities have an Investment Banking Principal, (2)
a member engaged in research activities have a
Research Principal, or (3) a member engaged in
options activities with the public have a Registered
Options Principal. The Exchange does not recognize
the Investment Banking Principal or the Research
Principal registration categories, and the Registered
Options Principal registration requirement is set
forth in Rule 1210.08 and its inclusion is therefore
unnecessary in Rule 1210.01.
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associated person of a member who is
registered, and functioning solely, as a
General Securities Representative would
be able to obtain and maintain a General
Securities Principal registration with the
member. Further, proposed Rule
1210.02 allows an individual engaged in
the securities business of a foreign
securities affiliate or subsidiary of a
member to obtain and maintain any
registration permitted by the member.
The Exchange is proposing to permit
the registration of such individuals for
several reasons. First, a member may
foresee a need to move a former
representative or principal who has not
been registered for two or more years
back into a position that would require
such person to be registered. Currently,
such persons are required to requalify
(or obtain a waiver of the applicable
qualification examinations) and reapply
for registration. Second, the proposed
rule change would allow members to
develop a depth of associated persons
with registrations in the event of
unanticipated personnel changes. Third,
allowing registration in additional
categories encourages greater regulatory
understanding. Finally, the proposed
rule change would eliminate an
inconsistency in the current rules,
which permit some associated persons
of a member to obtain permissive
registrations, but not others who equally
are engaged in the member’s business.
Individuals maintaining a permissive
registration under the proposed rule
change would be considered registered
persons and subject to all Exchange
rules, to the extent relevant to their
activities. For instance, an individual
working solely in an administrative
capacity would be able to maintain a
General Securities Representative
registration and would be considered a
registered person for purposes of rules
relating to borrowing from or lending to
customers, but the rule would have no
practical application to his or her
conduct because he or she would not
have any customers.
Consistent with the Exchange’s
supervision rules, members would be
required to have adequate supervisory
systems and procedures reasonably
designed to ensure that individuals with
permissive registrations do not act
outside the scope of their assigned
functions.21 With respect to an
individual who solely maintains a
permissive registration, such as an
21 The FINRA Proposed Rules at Rule 1210.02 cite
FINRA’s own supervision rule, by number. Because
the 1200 Series of rules is intended to apply to the
Exchange as well as to its affiliates which have
different supervision rules, proposed Rule 1210.02
refers generally to the supervision rules rather than
identifying them by number.
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individual working exclusively in an
administrative capacity, the individual’s
day-to-day supervisor may be a
nonregistered person. Members would
be required to assign a registered
supervisor to this person who would be
responsible for periodically contacting
such individual’s day-to-day supervisor
to verify that the individual is not acting
outside the scope of his or her assigned
functions. If such individual is
permissively registered as a
representative, the registered supervisor
must be registered as a representative or
principal. If the individual is
permissively registered as a principal,
the registered supervisor must be
registered as a principal.22
D. Qualification Examinations and
Waivers of Examinations (Proposed
Rule 1210.03)
Current Rule 611(a) provides that
before a registration can become
effective, persons who are to function as
principals must pass a qualification
examination for principals appropriate
to the category of registration as
specified in the rule. Rule 613(d)
provides that no member organization
shall permit any member or person
associated with it to engage in the
investment banking or securities
business unless the member
organization determines that such
person satisfies the qualification
requirements established by the Board
and is not subject to statutory
disqualification as defined in Section
3(a)(39) 23 of the Act. The Exchange is
proposing to replace these provisions
with new Rule 1210.03.
In addition, as part of the FINRA Rule
Changes FINRA has adopted a
restructured representative-level
qualification examination program
whereby representative-level registrants
would be required to take a general
knowledge examination (the Securities
Industry Essentials Exam or ‘‘SIE’’) and
a specialized knowledge examination
appropriate to their job functions at the
firm with which they are associating.
Therefore, proposed Rule 1210.03
provides that before the registration of a
person as a representative can become
effective under proposed Rule 1210,
such person must pass the SIE and an
appropriate representative-level
qualification examination as specified
in proposed Rule 1220. Proposed Rule
1210.03 also provides that before the
registration of a person as a principal
22 In either case, the registered supervisor of an
individual who solely maintains a permissive
registration would not be required to be registered
in the same representative or principal registration
category as the permissively-registered individual.
23 15 U.S.C. 78c(a)(39).
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can become effective under proposed
Rule 1210, such person must pass an
appropriate principal-level qualification
examination as specified in proposed
Rule 1220.
Further, proposed 1210.03 provides
that if the job functions of a registered
representative other than an individual
registered as an Order Processing
Assistant Representative, change and he
or she needs to become registered in
another representative-level category, he
or she would not need to pass the SIE
again. Rather, the registered person
would need to pass only the appropriate
representative-level qualification
examination.24 Thus under the
proposed rule change, individuals
seeking registration in two or more
representative-level categories would
experience a net decrease in the total
number of exam questions they would
be required to answer because the SIE
content would be tested only once.
The proposed rule change solely
impacts the representative-level
qualification requirements. The
proposed rule change does not change
the scope of the activities permitted
under the existing representative
categories. For instance, after the
operative date of the proposed rule
change, a previously unregistered
individual registering as a Securities
Trader for the first time would be
required to pass the SIE and an
appropriate specialized knowledge
examination. However, such individual
may engage only in those activities in
24 The exception for Order Processing Assistant
Representatives and Foreign Associates was
adopted by FINRA in FINRA Rule 1210.03, and is
included in proposed Exchange Rule 1210.03
without the reference to Foreign Associates which
is a registration category the Nasdaq Affiliated
Exchanges do not recognize. FINRA has stated that
the SIE would assess basic product knowledge; the
structure and function of the securities industry
markets, regulatory agencies and their functions;
and regulated and prohibited practices. Proposed
Rule 1210.03 provides that all associated persons,
such as associated persons whose functions are
solely and exclusively clerical or ministerial, are
eligible to take the SIE. Proposed Rule 1210.03 also
provides that individuals who are not associated
persons of firms, such as members of the general
public, are eligible to take the SIE. FINRA has stated
its belief that expanding the pool of individuals
who are eligible to take the SIE would enable
prospective securities industry professionals to
demonstrate to prospective employers a basic level
of knowledge prior to submitting a job application.
Further, this approach would allow for more
flexibility and career mobility within the securities
industry. While all associated persons of firms as
well as individuals who are not associated persons
would be eligible to take the SIE pursuant to
proposed Rule 1210.03, passing the SIE alone
would not qualify them for registration with the
Exchange. Rather, to be eligible for registration with
the Exchange, an individual would be required to
pass an applicable representative or principal
qualification examination and complete the other
requirements of the registration process.
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which a current Securities Trader may
engage under current Exchange Rules.
Individuals who are registered on the
operative date of the proposed rule
change would be eligible to maintain
those registrations without being subject
to any additional requirements.
Individuals who had been registered
within the past two years prior to the
operative date of the proposed rule
change would also be eligible to
maintain those registrations without
being subject to any additional
requirements, provided that they
reregister with the Exchange within two
years from the date of their last
registration.
Further, registered representatives
other than an individual registered as an
Order Processing Assistant
Representative, would be considered to
have passed the SIE in the CRD system,
and thus if they wish to register in any
other representative category after the
operative date of the proposed rule
change, they could do so by taking only
the appropriate specialized knowledge
examination.25 However, with respect to
an individual who is not registered on
the operative date of the proposed rule
change but was registered within the
past two years prior to the operative
date of the proposed rule change, the
individual’s SIE status in the CRD
system would be administratively
terminated if such individual does not
register within four years from the date
of the individual’s last registration.26
In addition, individuals, with the
exception of Order Processing Assistant
Representatives, who had been
registered as representatives two or
more years, but less than four years,
prior to the operative date of the
proposed rule change would also be
considered to have passed the SIE and
designated as such in the CRD system.
Moreover, if such individuals re-register
with a firm after the operative date of
the proposed rule change and within
four years of having been previously
registered, they would only need to pass
the specialized knowledge examination
associated with that registration
25 Under the proposed rule change, only
individuals who have passed an appropriate
representative-level examination would be
considered to have passed the SIE. Registered
principals who do not hold an appropriate
representative-level registration would not be
considered to have passed the SIE. For example, an
individual who is registered solely as a Financial
and Operations Principal (Series 27) today would
have to take the Series 7 to become registered as a
General Securities Representative. Under the
proposed rule change, in the future, this individual
would have to pass the SIE and the specialized
Series 7 examination to obtain registration as a
General Securities Representative.
26 As discussed below, the Exchange is proposing
a four-year expiration period for the SIE.
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50985
position. However, if they do not
register within four years from the date
of their last registration, their SIE status
in the CRD system would be
administratively terminated. Similar to
the current process for registration,
firms would continue to use the CRD
system to request registrations for
representatives. An individual would be
able to schedule both the SIE and
specialized knowledge examinations for
the same day, provided the individual is
able to reserve space at one of FINRA’s
designated testing centers.
Finally, under current Rule 615, 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. The Exchange is proposing
to replace Rule 615 with proposed Rule
1210.03 with changes that track FINRA
Rule 1210.03. The proposed rule
provides that the Exchange will only
consider examination waiver requests
submitted by a firm for individuals
associated with the firm who are
seeking registration in a representativeor principal-level registration category.
Moreover, proposed Rule 1210.03 states
that the Exchange will consider waivers
of the SIE alone or the SIE and the
representative- and principal-level
examination(s) for such individuals.
E. Requirements for Registered Persons
Functioning as Principals for a Limited
Period (Proposed Rule 1210.04)
Current Rule 611(d) provides that any
person associated with a member
organization as a registered
representative whose duties are changed
by the member organization so as to
require registration in any principal
classification is allowed a period of 90
calendar days following the change in
his or her duties during which to pass
the appropriate qualification
examination for principals. It further
provides that any person not presently
associated with a member organization
as registered representative seeking
registration as a principal shall submit
the appropriate application for
registration and any required
registration and examination fees. Such
person shall be allowed a period of 90
days after all applicable prerequisites
are fulfilled to pass the appropriate
qualification examination for principals.
A person who has never been registered
does not qualify for this exception. This
provision specifically applies to a
person associated with a member
organization of another registered
national securities exchange or
association who is required to register in
a principal classification under
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Exchange rules but who is not required
to be so registered under the rules of the
other exchange or association, as well as
to a person associated with a member
organization who was not required to
register with the Exchange as a principal
prior to the adoption of Exchange Rule
611.
The Exchange is proposing to adopt
these requirements of Rule 611(d) as
new Rule 1210.04, subject to certain
changes. Proposed Rule 1210.04 states
that a member may designate any
person currently registered, or who
becomes registered, with the member as
a representative to function as a
principal for a limited period, provided
that such person has at least 18 months
of experience functioning as a registered
representative within the five-year
period immediately preceding the
designation and has fulfilled all
prerequisite registration, fee and
examination requirements prior to
designation as principal. These
requirements apply to any principal
category, including those categories that
are not subject to a prerequisite
representative-level registration
requirement, such as the Financial and
Operations Principal registration
category.27 This change is intended to
ensure that representatives designated
to function as principals for the limited
period under the proposed rule have an
appropriate level of registered
representative experience. The proposed
rule clarifies that the requirements of
the rule apply to any principal category,
including those categories that are not
subject to a prerequisite representativelevel registration requirement, such as
the Financial and Operations Principal
registration category. Similarly, the rule
would permit a member to designate
any person currently registered, or who
becomes registered, with the member as
a principal to function in another
principal category for a period of 120
calendar days prior to passing an
appropriate qualification examination as
specified under Rule 1220. Proposed
Rule 1210.04 would increase the
existing rule’s 90 day period to 120
days, to provide additional flexibility
for representatives functioning as
principals for a limited period of time.
The Exchange is not conserving in
new Rule 1210.04 the language in
existing Rule 611 that the provisions
apply to a person associated with a
member organization of another
registered national securities exchange
or association who is required to register
27 In
this regard, the Exchange notes that
qualifying as a registered representative is currently
a prerequisite to qualifying as a principal on the
Exchange except with respect to the Financial and
Operations Principal registration category.
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in a principal classification under
Exchange rules but who is not required
to be so registered under the rules of the
other exchange or association, as well as
to a person associated with a member
organization who was not required to
register with the Exchange as a Principal
prior to the adoption of Exchange Rule
611. The Exchange believes this
language to be superfluous as the
applicability to various individuals of
proposed Rule 1210.04 speaks for itself
and requires no elaboration.28
F. Rules of Conduct for Taking
Examinations and Confidentiality of
Examinations (Proposed Rule 1210.05)
Before taking an examination, FINRA
currently requires each candidate to
agree to the Rules of Conduct for taking
a qualification examination. Among
other things, the examination Rules of
Conduct require each candidate to attest
that he or she is in fact the person who
is taking the examination. These Rules
of Conduct also require that each
candidate agree that the examination
content is the intellectual property of
FINRA and that the content cannot be
copied or redistributed by any means. If
FINRA discovers that a candidate has
violated the Rules of Conduct for taking
a qualification examination, the
candidate may forfeit the results of the
examination and may be subject to
disciplinary action by FINRA. For
instance, for cheating on a qualification
examination, FINRA’s Sanction
Guidelines recommend a bar.29
Effective October 1, 2018, FINRA has
codified the requirements relating to the
Rules of Conduct for examinations
under FINRA Rule 1210.05. FINRA also
adopted Rules of Conduct for taking the
SIE for associated persons and nonassociated persons who take the SIE.
The Exchange proposes to adopt its
own version of Rule 1210.05, which
would provide that associated persons
taking the SIE are subject to the SIE
Rules of Conduct, and that associated
persons taking any representative or
principal examination are subject to the
Rules of Conduct for representative and
principal examinations. Under the
proposed rule, a violation of the SIE
Rules of Conduct or the Rules of
Conduct for representative and
principal examinations by an associated
person would be deemed to be a
violation of Exchange rules requiring
observance of high standards of
commercial honor or just and equitable
28 Proposed Rule 1210.04 omits FINRA Rule
1210.04’s reference to Foreign Associates, which is
a registration category not recognized by the Nasdaq
Affiliated Exchanges, but otherwise tracks the
language of FINRA Rule 1210.04.
29 See SR–FINRA–2017–007, pp. 26–27.
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principles of trade, such as Exchange
Rule 707.30 Further, if the Exchange
determines that an associated person
has violated the SIE Rules of Conduct or
the Rules of Conduct for representative
and principal examinations, the
associated person may forfeit the results
of the examination and may be subject
to disciplinary action by the Exchange.
Proposed Rule 1210.05 also states that
the Exchange considers all of the
qualification examinations’ content to
be highly confidential. The removal of
examination content from an
examination center, reproduction,
disclosure, receipt from or passing to
any person, or use for study purposes of
any portion of such qualification
examination or any other use that would
compromise the effectiveness of the
examinations and the use in any manner
and at any time of the questions or
answers to the examinations would be
prohibited and would be deemed to be
a violation of Exchange rules requiring
observance of high standards of
commercial honor or just and equitable
principles of trade. Finally, proposed
Rule 1210.05 would prohibit an
applicant from receiving assistance
while taking the examination, and
require the applicant to certify that no
assistance was given to or received by
him or her during the examination.31
G. Waiting Periods for Retaking a Failed
Examination (Proposed Rule 1210.06)
The Exchange proposes to adopt new
Rule 1210.06, which provides that a
person who fails an examination may
retake that examination after 30
calendar days from the date of the
person’s last attempt to pass that
examination.32 Proposed Rule 1210.06
further provides that if a person fails an
examination three or more times in
succession within a two-year period, the
person is prohibited from retaking that
examination until 180 calendar days
from the date of the person’s last
attempt to pass it. These waiting periods
would apply to the SIE and the
representative- and principal-level
examinations.33
30 Exchange Rule 707 prohibits members, member
organizations or persons associated with or
employed by a member or member organization
from engaging in acts or practices inconsistent with
just and equitable principles of trade. FINRA Rule
1210.05 cites FINRA Rule 2010, which is a
comparable rule.
31 The Exchange is not adopting portions of
FINRA’s Rule 1210.05 which apply to nonassociated persons, over whom the Exchange would
in any event have no jurisdiction.
32 Proposed Rule 1210.06 has no counterpart in
existing Exchange rules.
33 FINRA Rule 1210.06 requires individuals
taking the SIE who are not associated persons to
agree to be subject to the same waiting periods for
retaking the SIE. The Exchange is not including this
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H. CE Requirements (Proposed Rule
1210.07)
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Pursuant to current Exchange Rule
640, no member organization shall
permit any registered person to continue
to, and no registered person shall
continue to, perform duties as a
registered person, unless such person
has complied with the continuing
education requirements of paragraph (a)
of Rule 640. Under the rule the CE
requirements applicable to registered
persons consist of a Regulatory
Element 34 and a Firm Element.35 The
Regulatory Element applies to registered
persons and must be completed within
prescribed time frames.36 For purposes
of the Regulatory Element, a ‘‘registered
person’’ is defined in current Rule 640
as any member, registered
representative or other person registered
or required to be registered under
Exchange Rules, but does not include
such person whose activities are limited
solely to the transaction of business on
the Exchange’s trading floor, with
members or registered broker-dealers.37
The Firm Element consists of annual,
member-developed and administered
training programs designed to keep
covered registered persons current
regarding securities products, services
and strategies offered by the member.
For purposes of the Firm Element, the
term ‘‘covered registered persons’’ is
defined as any registered person who
has direct contact with customers in the
conduct of the member organization’s
securities sales, trading or investment
banking activities, and to the immediate
supervisors of such persons.38
The Exchange proposes to delete
current Rule 640. The CE requirements
set forth in Rule 640 are proposed to be
reorganized and renumbered, and to be
adopted as new Rule 1240. The
Exchange believes that all persons
registered pursuant to Rule 1210,
regardless of their activities, should be
subject to the Regulatory Element of the
CE requirements so that they can keep
their knowledge of the securities
language in proposed Rule 1210.06, as the Exchange
will not apply the 1200 Series of rules in any event
to individuals who are not associated persons of
members.
34 See Rule 640(a).
35 See Rule 640(b).
36 Pursuant to Rule 640(a), each registered person
is required to complete the Regulatory Element on
the occurrence of their second registration
anniversary date(s), and every three years thereafter
or as otherwise prescribed by the Exchange. On
each occasion, the Regulatory Element must be
completed within 120 days after the person’s
registration anniversary date.
37 See Rule 640, Commentary .01.
38 See Rule 640(b)(1).
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industry current.39 Therefore, the
Exchange is proposing Rule 1210.07, to
clarify that all ‘‘covered persons’’ as
defined in Rule 1240(a)(5), including
those who solely maintain a permissive
registration, are required to satisfy the
Regulatory Element, as specified in
proposed new Rule 1240, discussed
below.40 Individuals who have passed
the SIE but not a representative or
principal-level examination and do not
hold a registered position would not be
subject to any CE requirements.
Consistent with current practice,
proposed Rule 1210.07 would also
provide that a registered person of a
member who becomes CE inactive
would not be permitted to be registered
in another registration category with
that member or be registered in any
registration category with another
member, until the person has satisfied
the Regulatory Element.
Individuals whose activities are
limited solely to the transaction of
business on the Exchange’s trading
floor, with members or registered
broker-dealers, would continue to be
excluded from the CE requirement.41
Pursuant to proposed Rule 1260,
Section (c), members whose activities
are limited to the Exchange’s options
trading floor and who are registered
pursuant to proposed Rule 1260(a) as
well as associated persons whose
activities are limited to the Exchange’s
options trading floor and who are
registered pursuant to proposed Rule
1260(b) would be exempt from the
representative registration requirements
of proposed Rules 1210 and 1220. The
CE requirements of proposed Rule 1240
would apply only to ‘‘covered persons,’’
39 The Exchange notes that Rule 625 also may
require individuals who are not required to register
pursuant to Rule 1210 to complete mandatory
training. The rule provides that all members and
persons employed by or associated with such
member or a member organization shall
successfully complete mandatory training, as
required by the Exchange. Training topics include,
but are not limited to, training related to that
person’s function at the Exchange, changes in
existing automated systems or any new technology
that is utilized by the Exchange, compliance with
Exchange Rules and federal securities laws, and
issues related to conduct, health and safety on the
trading floor. In addition, floor members shall
complete mandatory training programs, on at least
a semi-annual basis, that address compliance with
the federal securities laws and the Exchange’s Rules
in place to prevent and deter unlawful trading by
floor members.
40 Current Rule 640 would be deleted, replaced by
proposed Rule 1240. Rule 1240(a)(5) would define
the term ‘‘covered person’’ as any person registered
with the Exchange pursuant to Rule 1210, including
any person who is permissively registered pursuant
to Rule 1210.02, and any person who is designated
as eligible for a waiver pursuant to Rule 1210.09.
41 See existing Rule 640, Commentary .01, which
excludes such individuals from the term ‘‘registered
person’’ as it is used in Rule 640.
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50987
defined in turn in proposed Rule 1240
as persons registered pursuant to Rule
1210.
I. Lapse of Registration and Expiration
of SIE (Proposed Rule 1210.08)
Existing Rule 611(c) states that any
person whose registration has been
revoked by the Exchange as a
disciplinary sanction or whose most
recent registration as principal has been
terminated for two or more years
immediately preceding the date of
receipt by the Exchange of a new
application is required to pass a
qualification examination for Principals
appropriate to the category of
registration as specified in Rule 611.
The two year period is calculated from
the termination date to the date the
Exchange receives a new application for
registration. A comparable provision
applicable to representatives is found in
Rule 613(c). The Exchange is proposing
to delete existing Rules 611(c) and
613(c), and to replace them with Rule
1210.08, Lapse of Registration and
Expiration of SIE.
Proposed Rule 1210.08 contains
language comparable to that of existing
Rules 611(c) and 613(c) but also clarifies
that, for purposes of the proposed rule,
an application would not be considered
to have been received by the Exchange
if that application does not result in a
registration. Proposed Rule 1210.08 also
sets forth the expiration period of the
SIE. Based on the content covered on
the SIE, the Exchange is proposing that
a passing result on the SIE be valid for
four years. Therefore, under the
proposed rule change, an individual
who passes the SIE and is an associated
person of a firm at the time would have
up to four years from the date he or she
passes the SIE to pass a representativelevel examination to register as a
representative with that firm, or a
subsequent firm, without having to
retake the SIE. In addition, an
individual who passes the SIE and is
not an associated person at the time
would have up to four years from the
date he or she passes the SIE to become
an associated person of a firm, pass a
representative-level examination and
register as a representative without
having to retake the SIE.
Moreover, an individual holding a
representative-level registration who
leaves the industry after the operative
date of the proposed rule change would
have up to four years to re-associate
with a firm and register as a
representative without having to retake
the SIE. However, the four-year
expiration period in the proposed rule
change extends only to the SIE, and not
the representative- and principal-level
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registrations. The representative- and
principal-level registrations would
continue to be subject to a two year
expiration period as is the case today.
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J. Waiver of Examinations for
Individuals Working for a Financial
Services Industry Affiliate of a Member
(Proposed Rule 1210.09)
The Exchange is proposing Rule
1210.09 to provide a new process
whereby individuals who would be
working for a financial services industry
affiliate of a member 42 would terminate
their registrations with the member and
would be granted a waiver of their
requalification requirements upon reregistering with a member, provided the
firm that is requesting the waiver and
the individual satisfy the criteria for a
Financial Services Affiliate (‘‘FSA’’)
waiver.43 The purpose of the FSA
waiver is to provide a firm greater
flexibility to move personnel, including
senior and middle management,
between the firm and its financial
services affiliate(s) so that they may gain
organizational skills and better
knowledge of products developed by the
affiliate(s) without the individuals
having to requalify by examination each
time they returned to the firm.
Under the proposed waiver process,
the first time a registered person is
designated as eligible for a waiver based
on the FSA criteria, the member with
which the individual is registered
would notify the Exchange of the FSA
designation. The member would
concurrently file a full Form U5
terminating the individual’s registration
with the firm, which would also
terminate the individual’s other SRO
and state registrations.
To be eligible for initial designation as
an FSA-eligible person by a member, an
individual must have been registered for
a total of five years within the most
recent 10-year period prior to the
designation, including for the most
recent year with that member.44 An
individual would have to satisfy these
preconditions only for purposes of his
42 Proposed Rule 1210.09 defines a ‘‘financial
services industry affiliate of a member’’ as a legal
entity that controls, is controlled by or is under
common control with a member and is regulated by
the SEC, Commodity Futures Trading Commission
(‘‘CFTC’’), state securities authorities, federal or
state banking authorities, state insurance
authorities, or substantially equivalent foreign
regulatory authorities.
43 There is no counterpart to proposed Rule
1210.09 in the Exchange’s existing rules. FINRA
Rule 1210.09 was recently adopted as a new waiver
process for FINRA registrants, as part of the FINRA
Rule Changes.
44 For purposes of this requirement, a five year
period of registration with the Exchange, with
FINRA or with another self-regulatory organization
would be sufficient.
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or her initial designation as an FSAeligible person, and not for any
subsequent FSA designation(s).
Thereafter, the individual would be
eligible for a waiver for up to seven
years from the date of initial
designation 45 provided that the other
conditions of the waiver, as described
below, have been satisfied.
Consequently, a member other than the
member that initially designated an
individual as an FSA-eligible person
may request a waiver for the individual
and more than one member may request
a waiver for the individual during the
seven-year period.46
An individual designated as an FSAeligible person would be subject to the
Regulatory Element of CE while working
for a financial services industry affiliate
of a member. The individual would be
subject to a Regulatory Element program
that correlates to his or her most recent
registration category, and CE would be
based on the same cycle had the
individual remained registered. If the
individual fails to complete the
prescribed Regulatory Element during
the 120-day window for taking the
session, he or she would lose FSA
eligibility (i.e., the individual would
have the standard two-year period after
termination to re-register without
having to retake an examination). The
Exchange is making corresponding
changes to Rule 640, Continuing
45 Individuals would be eligible for a single, fixed
seven-year period from the date of initial
designation, and the period would not be tolled or
renewed.
46 The following examples illustrate this point:
Example 1. Firm A designates an individual as an
FSA-eligible person by notifying the Exchange and
files a Form U5. The individual joins Firm A’s
financial services affiliate. Firm A does not submit
a waiver request for the individual. After working
for Firm A’s financial services affiliate for three
years, the individual directly joins Firm B’s
financial services affiliate for three years. Firm B
then submits a waiver request to register the
individual.
Example 2. Same as Example 1, but the
individual directly joins Firm B after working for
Firm A’s financial services affiliate, and Firm B
submits a waiver request to register the individual
at that point in time.
Example 3. Firm A designates an individual as an
FSA-eligible person by notifying the Exchange and
files a Form U5. The individual joins Firm A’s
financial services affiliate for three years. Firm A
then submits a waiver request to reregister the
individual. After working for Firm A in a registered
capacity for six months, Firm A re-designates the
individual as an FSA-eligible person by notifying
FINRA and files a Form U5. The individual rejoins
Firm A’s financial services affiliate for two years,
after which the individual directly joins Firm B’s
financial services affiliate for one year. Firm B then
submits a waiver request to register the individual.
Example 4. Same as Example 3, but the
individual directly joins Firm B after the second
period of working for Firm A’s financial services
affiliate, and Firm B submits a waiver request to
register the individual at that point in time.
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Education (proposed to be renumbered
as Rule 1240).
Upon registering an FSA-eligible
person, a firm would file a Form U4 and
request the appropriate registration(s)
for the individual. The firm would also
submit an examination waiver request
to the Exchange,47 similar to the process
used today for waiver requests, and it
would represent that the individual is
eligible for an FSA waiver based on the
conditions set forth below. The
Exchange would review the waiver
request and make a determination of
whether to grant the request within 30
calendar days of receiving the request.
The Exchange would summarily grant
the request if the following conditions
are met:
(1) Prior to the individual’s initial
designation as an FSA-eligible person,
the individual was registered for a total
of five years within the most recent 10year period, including for the most
recent year with the member that
initially designated the individual as an
FSA-eligible person;
(2) The waiver request is made within
seven years of the individual’s initial
designation as an FSA-eligible person
by a member;
(3) The initial designation and any
subsequent designation(s) were made
concurrently with the filing of the
individual’s related Form U5;
(4) The individual continuously
worked for the financial services
affiliate(s) of a member since the last
Form U5 filing;
(5) The individual has complied with
the Regulatory Element of CE; and
(6) The individual does not have any
pending or adverse regulatory matters,
or terminations, that are reportable on
the Form U4, and has not otherwise
been subject to a statutory
disqualification while the individual
was designated as an FSA-eligible
person with a member.
Following the Form U5 filing, an
individual could move between the
financial services affiliates of a member
so long as the individual is
continuously working for an affiliate.
Further, a member could submit
multiple waiver requests for the
individual, provided that the waiver
requests are made during the course of
the seven-year period.48 An individual
47 The Exchange would consider a waiver of the
representative-level qualification examination(s),
the principal-level qualification examination(s) and
the SIE, as applicable.
48 For example, if a member submits a waiver
request for an FSA-eligible person who has been
working for a financial services affiliate of the
member for three years and re-registers the
individual, the member could subsequently file a
Form U5 and re-designate the individual as an FSA-
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who has been designated as an FSAeligible person by a member would not
be able to take additional examinations
to gain additional registrations while
working for a financial services affiliate
of a member.
K. Status of Persons Serving in the
Armed Forces of the United States
(Proposed Rule 1210.10)
Current Rule 53, Inactive Status of
Currently Registered Persons, provides
specific relief to registered persons
serving in the Armed Forces of the
United States. Among other things, the
rule permits a registered person of a
member or member organization who
volunteers for or is called into active
duty in the Armed Forces of the United
States to be placed, after proper
notification to the Exchange, upon
inactive status and remain eligible to
receive ongoing transaction-related
compensation. The rule also includes
specific provisions regarding the
deferment of the lapse of registration
requirements in Rules 611, 613 and
3228 for formerly registered person
serving in the Armed Forces of the
United States.
The Exchange is proposing to adopt
Rule 53 as Rule 1210.10 with certain
changes. To enhance the efficiency of
the current notification process for
registered persons serving in the Armed
Forces, proposed Rule 1210.10 requires
that the member with which such
person is registered promptly notify the
Exchange of such person’s return to
employment with the member. A sole
proprietor must similarly notify the
Exchange of his or her return to
participation in the securities business.
Further, proposed Rule 1210.10
provides that the Exchange would also
defer the lapse of the SIE for formerly
registered persons serving in the Armed
Forces of the United States.49
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L. Impermissible Registrations
(Proposed Rule 1210.11)
Existing Rule 611(a) and 613(a)
prohibit a member organization from
maintaining a principal or
representative registration with the
eligible person. Moreover, if the individual works
with a financial services affiliate of the member for
another three years, the member could submit a
second waiver request and re-register the individual
upon returning to the member.
49 Proposed Rule 1210.10 tracks FINRA Rule
1210.10 except for the statement that inactive
registered persons are not to be included within the
definition of ‘‘Personnel’’ for purposes of dues or
assessments as provided in Article VI of the FINRA
By-Laws. Instead, proposed Rule 1210.10
incorporates language from existing Nasdaq and BX
IM–1002–2, stating that inactive persons under the
rule are not included within the scope of fees, if
any, charged by the Exchange with respect to
registered persons.
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Exchange for any person who is no
longer active in the member
organization’s investment banking or
securities business, who is no longer
functioning in the registered capacity, or
where the sole purpose is to avoid an
examination requirement. The rules also
prohibit a member organization from
applying for the registration of a person
as representative or principal where the
member organization does not intend to
employ the person in its investment
banking or securities business. These
prohibitions do not apply to the current
permissive registration categories
identified in Rules 611(a) and 613(a).50
In light of proposed Rule 1210.02,
Permissive Registrations, discussed
above the Exchange is proposing to
delete these provisions of Rule 611(a)
and 613(a) and instead adopt Rule
1210.11 prohibiting a member from
registering or maintaining the
registration of a person unless the
registration is consistent with the
requirements of proposed Rule 1210.51
M. Registration Categories (Proposed
Rule 1220)
The Exchange is proposing to adopt
new and revised registration category
rules and related definitions in
proposed Rule 1220, Registration
Categories.52
1. Definition of Principal (Proposed
Rule 1220(a)(1))
Current Rule 611(b) defines
‘‘principal’’ to include sole proprietors,
officers, partners, managers of offices of
supervisory jurisdiction and directors
who are actively engaged in the
management of the member
organization’s investment banking or
50 Rules 611(a) allows for permissive principal
registration of individuals who perform legal,
compliance, internal audit, back-office operations,
or similar duties for the member organization or a
person engaged in the investment banking or
securities business of a foreign securities affiliate or
subsidiary of the member organization. Rule 613(a)
permits permissive registration as a representative
of an individual who performs legal, compliance,
internal audit, back-office operations, or similar
responsibilities for the member organization, or a
person who performs administrative support
functions for registered personnel, or a person
engaged in the investment banking or securities
business of a foreign securities affiliate or
subsidiary of the member organization.
51 As discussed above, the Exchange is also
proposing Rule 1210, Supplementary Material .12,
Application for Registration and Jurisdiction, which
is not included in FINRA Rule 1210. Proposed
Exchange Rule 1210, Supplementary Material .12,
is based upon portions of existing Nasdaq Rule
1031.
52 For ease of reference, the Exchange proposes to
adopt as Rule 1220, Supplementary Material .07, in
chart form, a Summary of Qualification
Requirements in chart form for each of the
Exchange’s permitted registration categories
discussed below.
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50989
securities business, such as supervision,
solicitation, conduct of business or the
training of persons associated with a
member organization for any of these
functions. The Exchange is proposing to
streamline and adopt Rule 611(b) as
Rule 1220(a)(1).
For the reason discussed above in
connection with proposed Rule 1210,
proposed Rule 1220(a)(1) would not
apply to individuals who are not
engaged in the management of the
member’s securities business even if
they are engaged in the management of
the member’s investment banking
business. Proposed Rule 1220(a)(1)
clarifies that a member’s chief executive
officer (‘‘CEO’’) and chief financial
officer (‘‘CFO’’) (or equivalent officers)
are considered principals based solely
on their status. The proposed rule
further clarifies that the term
‘‘principal’’ includes any other
associated person who is performing
functions or carrying out
responsibilities that are required to be
performed or carried out by a principal
under Exchange rules. In addition, the
proposed rule provides that the phrase
‘‘actively engaged in the management of
the member’s securities business’’
includes the management of, and the
implementation of corporate policies
related to, such business as well as
managerial decision-making authority
with respect to the member’s securities
business and management-level
responsibilities for supervising any
aspect of such business, such as serving
as a voting member of the member’s
executive, management or operations
committees.
2. General Securities Principal
(Proposed Rule 1220(a)(2))
Current Rule 612(a) currently requires
that an associated person who meets the
definition of ‘‘principal’’ under Rule 611
and each person designated as Chief
Compliance Officer (‘‘CCO’’) on
Schedule A of the member’s Form BD
(Uniform Application for Broker-Dealer
Registration) register as a General
Securities Principal. A person
registering as a General Securities
Principal must pass the General
Securities Principal examination. The
rule, however, provides that such
person is not required to register as a
General Securities Principal if the
person’s activities are so limited as to
qualify such person for one or more of
the limited principal categories
specified in Rules 611(b)–(e). Further,
the rule does not preclude individuals
registered in a limited principal
category from registering as General
Securities Principals. Rule 612(a) also
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includes transitioning and
grandfathering provisions for CCO’s.
Rule 612(a) requires individuals
seeking to register and qualify as a
General Securities Principal, prior to or
concurrent with such registration, to
become registered as a General
Securities Representative. It also
includes a grandfathering provision for
persons who were registered as
principals before the adoption of the
General Securities Principal registration
category. Finally, it provides that an
associated person registered solely as a
General Securities Principal is not
qualified to function as a Limited
Principal—Financial and Operations,
Limited Principal—General Securities
Sales Supervisor or Securities Trader
Principal.
The Exchange is proposing to more
clearly set forth the obligation to register
as a General Securities Principal.
Specifically, proposed Rule
1220(a)(2)(A) states that each principal
as defined in proposed Rule 1220(a)(1)
is required to register with the Exchange
as a General Securities Principal, except
that if a principal’s activities are limited
to the functions of a Compliance
Official, a Financial and Operations
Principal, a Securities Trader Principal,
a Securities Trader Compliance Officer,
or a Registered Options Principal, then
the principal shall appropriately register
in one or more of these categories.53
Proposed Rule 1220(a)(2)(A) further
provides that if a principal’s activities
are limited solely to the functions of a
General Securities Sales Supervisor,
then the principal may appropriately
register in that category in lieu of
registering as a General Securities
Principal, provided that if the principal
is engaged in options sales activities he
or she would be required to register as
a General Securities Sales Supervisor or
as a Registered Options Principal.54
Proposed Rule 1220(a)(2)(B) requires
that an individual registering as a
General Securities Principal satisfy the
General Securities Representative
prerequisite registration and pass the
General Securities Principal
qualification examination.
In conjunction with the elimination of
the Corporate Securities Representative
registration category by FINRA, the
Exchange is proposing that Rule
53 The Exchange is proposing to recognize the
Compliance Official and Securities Trader
Compliance Officer registration categories for the
first time as a result of this proposed rule change.
54 The Exchange’s proposed Rule 1220(a)(2)(A)
deviates somewhat from the counterpart FINRA
rule in that it does not offer various limited
registration categories provided for in FINRA’s new
Rule 1220(a)(2)(A). It therefore proposes to reserve
Rules 1220(a)(2)(A)(ii) and (iv).
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1220(a)(2)(B) provide that, subject to the
lapse of registration provisions in
proposed Rule 1210.08, General
Securities Principals who obtained the
Corporate Securities Representative
prerequisite registration on the
Exchange in lieu of the General
Securities Representative prerequisite
registration and individuals who had
been registered as such within the past
two years prior to the operative date of
the proposed rule change, may continue
to supervise corporate securities
activities as currently permitted.55
Proposed Rule 1220(a)(2)(B) requires all
other individuals registering as General
Securities Principals after October 1,
2018, to first become registered as a
General Securities Representative
pursuant to Rule 1220(b)(2).56
The Exchange is also proposing to
eliminate the grandfathering provision
for individuals who were registered as
principals prior to the adoption of the
General Securities Principal registration
category because it no longer has any
practical application. Finally, the
Exchange is proposing to delete the
provision that persons eligible for
registration in other principal categories
are not precluded from registering as
General Securities Principals because it
is superfluous.57
55 The Exchange itself does not recognize the
Corporate Securities Representative registration
category, but understands that FINRA and Nasdaq
currently accept Corporate Securities
Representative registration as a prerequisite to
General Securities Principal registration.
56 The Exchange is not adopting the FINRA Rule
1220(a)(2)(B) language permitting an individual
registering as a General Securities Principal after
October 1, 2018 to register as a General Securities
Sales Supervisor and to pass the General Securities
Principal Sales Supervisor Module qualification
examination. The Exchange believes that
individuals registering as General Securities
Principals should be required to demonstrate their
competence for that role by passing the General
Securities Principal qualification examination.
57 Proposed Rule 1220(a)(2) generally tracks
FINRA Rule 1220(a)(2), except that it omits
references to a number of registration categories
which FINRA recognizes but that the Exchange
does not, and it includes a reference to the
Securities Trader Compliance Officer category
which the Exchange proposes to recognize, but
which FINRA does not. Additionally, proposed
Rule 1220(a)(2)(A)(i) extends that provision’s
exception to the General Securities Principal
registration requirement to certain principals whose
activities are ‘‘limited to’’ (rather than ‘‘include’’)
the functions of a more limited principal. The
Exchange believes that activities ‘‘limited to’’
expresses the intent of that exception more
accurately than activities that ‘‘include.’’ Finally,
proposed Rule 1220(a)(2)(B) specifies that
registration as a Corporate Securities Representative
must be with the Exchange in order to fulfill the
Corporate Securities Representative registration
prerequisite for General Securities Principal
registration pursuant to that rule.
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3. Compliance Official (Proposed Rule
1220(a)(3))
Current Rule 612(a) provides that
each person designated as a Chief
Compliance Officer on Schedule A of
Form BD of a member organization to
which Rule 611 applies, 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 Rule
612(b)–(e).58 The Exchange proposes to
delete this provision.
In its place, the Exchange proposes to
adopt Rule 1220(a)(3) providing that
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, provided that such
person may instead register as a
Compliance Official if his or her duties
do not include supervision of trading.
All individuals registering as
Compliance Official would be required,
prior to or concurrent with such
registration, to pass the Compliance
Official qualification examination. An
individual designated as a Chief
Compliance Officer on Schedule A of
Form BD of a member that is engaged
in limited securities business could also
be registered in a principal category
under Rule 1220(a) that corresponds to
the limited scope of the member’s
business.
Additionally, Rule 1220(a)(3) would
provide that an individual designated as
a Chief Compliance Officer on Schedule
A of Form BD may register and qualify
as a Securities Trader Compliance
Officer if, with respect to transactions in
equity, preferred or convertible debt
securities, or options such person is
engaged in proprietary trading, the
execution of transactions on an agency
basis, or the direct supervision of such
activities other than a person associated
with a member whose trading activities
are conducted principally on behalf of
an investment company that is
registered with the SEC pursuant to the
Investment Company Act and that
controls, is controlled by, or is under
common control with a member. All
individuals registering as Securities
Trader Compliance Officers would be
required to first become registered
58 The limited registration categories identified in
Rule 612(b)–(e) are Limited Principal—Financial
and Operations, Limited Principal—General
Securities Sales Supervisor, Limited Principal—
Registered Options Principal, and Securities Trader
Principal.
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pursuant to paragraph (b)(4) as a
Securities Trader, and to pass the
Compliance Official qualification
exam.59
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4. Financial and Operations Principal
(Proposed Rule 1220(a)(4))
Existing Rule 612(b) provides that
every member organization to which
Rule 611 applies and that is operating
pursuant to the provisions of SEC Rule
15c3–1(a)(1)(ii), (a)(2)(i) or (a)(8) shall
designate as Limited Principal—
Financial and Operations those persons
associated with it, at least one of whom
shall be its chief financial officer, who
perform the duties described in Rule
612(b)(ii).60 It requires each person
associated with a member organization
who performs such duties to be
registered as a Limited Principal—
Financial and Operations with the
Exchange and to pass the Series 27
examination before such registration
may become effective.
The Exchange is proposing to delete
Rule 612(b) and to adopt in its place
Rule 1220(a)(4), substituting the word
‘‘and’’ for the current word ‘‘or’’ found
in Rule 612(b)(ii)(F) in order to conform
to FINRA Rule 1220(a)(4)(A) in
describing the duties of a Financial and
Operations Principal.61
59 Proposed Rule 1220(a)(3) differs from FINRA
Rule 1220(a)(3), Compliance Officer. The Exchange
does not recognize the Compliance Officer
registration category. Similarly, FINRA does not
recognize the Compliance Official or the Securities
Trader Compliance Officer registration categories
which the Exchange proposes to recognize.
However, FINRA Rule 1220(a)(3), like proposed
Rule 1220(a)(3), offers an exception pursuant to
which a Chief Compliance Officer designated on
Schedule A of Form BD may register in a principal
category that corresponds to the limited scope of
the member’s business.
60 Those duties include (A) final approval and
responsibility for the accuracy of financial reports
submitted to any duly established securities
industry regulatory body; (B) final preparation of
such reports; (C) supervision of individuals who
assist in the preparation of such reports; (D)
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; (E) supervision
and/or performance of the member organization’s
responsibilities under all financial responsibility
rules promulgated pursuant to the provisions of the
Act; (F) 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 (G) any
other matter involving the financial and operational
management of the member organization. A person
registered solely as a Limited Principal—Financial
and Operations shall not be qualified to function in
a Principal capacity with responsibility over any
other area of business activity.
61 FINRA Rule 1220(a)(4) differs from proposed
Rule 1220(a)(4) in that it includes an Introducing
Broker-Dealer Financial and Operations Principal
registration requirement. Additionally, proposed
Rule 1220(a)(4) contains a requirement, which the
FINRA rule does not, that each person associated
with a member who performs the duties of a
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5. Investment Banking Principal
(Proposed Rule 1220(a)(5))
The Exchange does not recognize the
Investment Banking Principal
registration category and is reserving
Rule 1220(a)(5), retaining the caption
solely to facilitate comparison with
FINRA’s rules.
activities specified in proposed Rule
1220(b)(4) 62 register as a Securities
Trader Principal. The proposed rule
requires individuals registering as
Securities Trader Principals to be
registered as Securities Traders and to
pass the General Securities Principal
qualification examination.
6. Research Principal (Proposed Rule
1220(a)(6))
The Exchange does not recognize the
Research Principal registration category
and is reserving Rule 1220(a)(6),
retaining the caption solely to facilitate
comparison with FINRA’s rules.
8. Registered Options Principal
(Proposed Rules 1220(a)(8))
Rule 612(d) provides that each person
associated with a member organization
to which Rule 611 applies and who is
included in the definition of principal
in Rule 611 may register with the
Exchange as a Limited Principal—
Registered Options Principal if: (A) His
or her supervisory responsibilities in the
investment banking and securities
business are limited exclusively to the
options activities of a member
organization, (B) he or she is registered
pursuant to Exchange rules as a General
Securities Representative, and (C) he or
she is qualified to be so registered by
passing the Series 4 examination. It also
provides that a person registered in this
category solely on the basis of having
passed the Series 4 examination for
Limited Principal—Registered Options
Principal shall not be qualified to
function in a principal capacity with
responsibility over any area of business
activity not described in paragraph
(d)(i)(A).
The Exchange is proposing to delete
Rule 612(d) and to adopt Rule
1220(a)(8)(A), Registered Options
Principal, which would require under
its section (a)(8)(A) that each member
that is engaged in transactions in
options with the public to have at least
one Registered Options Principal.63
In addition, each principal as defined
in paragraph (a)(1) of the rule who is
responsible for supervising a member’s
options sales practices with the public
would be required to register with the
Exchange as a Registered Options
Principal, subject to the following
exception. If a principal’s options
activities are limited solely to those
activities that may be supervised by a
General Securities Sales Supervisor,
then such person may register as a
General Securities Sales Supervisor
pursuant to paragraph (a)(10) of the Rule
in lieu of registering as a Registered
Options Principal.64
7. Securities Trader Principal (Proposed
Rule 1220(a)(7))
Existing Rule 612(e) provides that
each person associated with a member
who is included within the definition of
principal in Rule 611(b) and who will
have supervisory responsibility over the
securities trading activities described in
Rule 613(f) shall become qualified and
registered as a Securities Trader
Principal. To qualify for registration as
a Securities Trader Principal, such
person must become qualified and
registered as a Securities Trader under
Rule 613(f) and pass the General
Securities Principal qualification
examination. A person who is qualified
and registered as a Securities Trader
Principal under this provision may only
have supervisory responsibility over the
Securities Trader activities specified in
Rule 613(f), unless such person is
separately qualified and registered in
another appropriate principal
registration category, such as the
General Securities Principal registration
category. Conversely, a person who is
registered as a General Securities
Principal is not qualified to supervise
the trading activities described in Rule
613(f), unless such person has also
become qualified and registered as a
Securities Trader under Rule 613(f) by
passing the Securities Trader
qualification examination and become
registered as a Securities Trader
Principal.
The Exchange is proposing to delete
Rule 612(e) and to adopt in its place
Rule 1220(a)(7), Securities Trader
Principal. Proposed Rule 1220(a)(7)
requires that a principal responsible for
supervising the securities trading
Financial and Operations Principal must register as
such with the Exchange. Further, as discussed
above, the Exchange is not adopting a Principal
Financial Officer or Principal Operations Officer
requirement like FINRA Rule 1220(a)(4)(B), as it
believes the Financial and Operations Principal
requirement is sufficient. Finally, proposed Rule
1220(a)(4)(B)(v) and (vi) contain minor wording
variations from the FINRA rule.
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62 Proposed Rule 1220(b)(4), discussed below,
provides for registration in the representative-level
‘‘Securities Trader’’ category.
63 Proposed Rule 1220(a)(8) differs from FINRA
Rule 1220(a)(8) in that it omits certain references to
other specific FINRA rules.
64 Current Exchange Rule 1024, Conduct of
Accounts for Options Trading, provides that
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Pursuant to proposed Rule
1220(a)(8)(B), subject to the lapse of
registration provisions in Rule 1210.08,
each person registered as a Registered
Options Principal on October 1, 2018
and each person who was registered as
a Registered Options Principal within
two years prior to October 1, 2018
would be qualified to register as a
Registered Options Principal without
passing any additional qualification
examinations. All other individuals
registering as Registered Options
Principals after October 1, 2018 would,
prior to or concurrent with such
registration, be required to become
registered pursuant to paragraph Rule
1220(b)(2) of the Rule as a General
Securities Representative and pass the
Registered Options Principal
qualification examination.65
members, member organizations and individuals
associated with member organizations shall not be
approved to transact options business with the
public until such persons, who are designated as
Options Principals, have been approved by and
registered with the Exchange. Further, persons
engaged in the supervision of options sales practice
or a person to whom the designated general partner
or executive officer (pursuant to Rule 1025) or
another Registered Options Principal delegates the
authority to supervise options sales practices shall
be designated as options principals. Rule 1024,
Commentary .06 provides that individuals engaged
in the supervision of options sales practices and
designated as Options Principals are required to
qualify as an Options Principal by passing the
Registered Options Principal Qualification
Examination (Series 4) or the Sales Supervisor
Qualification Examination (Series 9/10), and is
proposed to be deleted in view of new Rule
1220(a)(8)(a). Under Rule 1024.07, individuals who
are delegated responsibility pursuant to Rule 1025
for the acceptance of discretionary accounts, for
approving exceptions to a member’s criteria or
standards for uncovered options accounts, and for
approval of communications, shall be designated as
Options Principals and are required to qualify as an
Options Principal by passing the Registered Options
Principal Qualification Examination (Series 4).
Further, Exchange Rule 1024.08 states that a person
accepting orders from non-member customers
(unless such customer is a broker-dealer registered
with the Securities and Exchange Commission) is
required to register with the Exchange and to be
qualified by passing the General Securities
Registered Representative Examination (Series 7).
Except for Rule 1024, Commentary .06, the
foregoing provisions of Rule 1024 are specific to
conducting an options business with the public and
are not proposed to be amended in this proposed
rule change. However, Rule 1024(a) also contains
provisions regarding submission of Forms U4 and
U5 to WebCRD that are duplicative of the proposed
1200 Series of rules, in particular proposed Rules
1210.12, Application for Registration and
Jurisdiction, and 1250, Electronic Filing
Requirements for Electronic Forms, and are
therefore proposed to be deleted.
65 The Exchange is also proposing to adopt Rule
1220, Supplementary Material .02, which provides
that each person who is registered with the
Exchange as a Registered Options Principal (or as
a General Securities Representative, Options
Representative, or General Securities Sales
Supervisor) shall be eligible to engage in security
futures activities as a principal provided that such
individual completes a Firm Element program as set
forth in proposed Rule 1240 that addresses security
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9. Government Securities Principal. [sic]
(Rule 1220(a)(9))
The Exchange does not recognize the
Government Securities Principal
registration category and is reserving
Rule 1220(a)(9), retaining the caption
solely to facilitate comparison with
FINRA’s rules.
10. General Securities Sales Supervisor
(Proposed Rules 1220(a)(10) and
1220.04)
Current Rule 612(c) provides that
each person associated with a member
organization to which Rule 611 applies
and who is included in the definition of
Principal in Rule 611 may register with
the Exchange as a Limited Principal—
General Securities Sales Supervisor if:
(A) His or her supervisory
responsibilities in the investment
banking and securities business are
limited to the securities sales activities
of a member organization, including the
training of sales and sales supervisory
personnel and the maintenance of
records of original entry and/or ledger
accounts of the member organization
required to be maintained in branch
offices by SEC record keeping rules; (B)
he or she is registered pursuant to
Exchange Rules as a General Securities
Representative; and (C) he or she is
qualified to be so registered by passing
the Series 9 or Series 10 examination.
Under the rule a person registered in
this category solely on the basis of
having passed the Series 9 or Series 10
examination for Limited Principal—
General Securities Sales Supervisor is
not qualified to: (A) Function in a
Principal capacity with responsibility
over any area of business activity not
described in paragraph (c)(i)(A); (B) be
included for purposes of the Principal
numerical requirements of Rule 611(e);
or (C) perform for a member
organization any or all of the following
activities: (1) Supervision of the
origination and structuring of
underwritings; (2) supervision of market
making commitments; (3) final approval
of advertisements as these are defined in
Rule 605; (4) supervision of the custody
futures products before such person engages in
security futures activities. Unlike FINRA Rule
1220.02, proposed Exchange Rule 1220.02 omits
references to United Kingdom Securities
Representatives and Canada Securities
Representatives, which are registration categories
the Exchange does not recognize. In any event, the
Exchange does not currently offer security futures
products for trading. In addition, the Exchange is
also proposing to adopt Rule 1220, Supplementary
Material .03 which requires notification to the
Exchange in the event such person is terminated,
resigns, becomes incapacitated or is otherwise
unable to perform the duties of a Registered Options
Principal, and imposes certain restrictions on the
member’s options business in that event.
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of firm or customer funds and/or
securities for purposes of SEC Rule
15c3–3; or (5) supervision of overall
compliance with financial responsibility
rules for broker/dealers promulgated
pursuant to the provisions of the Act.
Rule 612(c)(iii) explains the purpose of
the General Securities Sales Supervisor
registration category.
The Exchange is proposing to adopt
Rule 612(c)(i) and (ii) and Rule
612(c)(iii), with changes, as Rules
1220(a)(10) and 1220.04, respectively.66
Rule 1220(a)(10), however, omits the
current Rule 1022(g) prohibition against
supervision of the origination and
structuring of underwritings, as that
activity does not fall within the new,
more limited scope of ‘‘securities
trading’’ covered by the new 1200 Series
of rules.
Each person seeking to register as a
General Securities Sales Supervisor
would be required, prior to or
concurrent with such registration, to
become registered pursuant to Rule
1220(b)(2) of the rule as a General
Securities Representative and pass the
General Securities Sales Supervisor
qualification examinations.
11. Investment Company and Variable
Contracts Products Principal and Direct
Participation Programs Principal (Rules
1220(a)(11) and (a)(12))
The Exchange does not recognize the
Investment Company and Variable
Contracts Products Principal and the
Direct Participation Programs Principal
registration categories and is reserving
Rule 1220(a)(11) and (a)(12), retaining
the captions solely to facilitate
comparison with FINRA’s rules.
12. Private Securities Offerings
Principal (Rule 1220(a)(13))
The Exchange does not recognize the
Private Securities Offerings Principal
registration category and is reserving
Rule 1220(a)(13), retaining the caption
solely to facilitate comparison with
FINRA’s rules.
66 The Exchange is not proposing to carry over
into proposed Rule 1220(a)(10) the current Rule
612(c)(ii)(C)(3) prohibition against final approval of
advertisements by General Securities Sales
Supervisors. The Exchange notes that FINRA
removed this prohibition several years ago from
NASD Rule 1022(g) (Limited Principal—General
Securities Sales Supervisor) and NASD IM–1022–2
(Limited Principal—General Securities Sales
Supervisor). See Securities Exchange Act Release
No. 68918 (February 13, 2013), 78 FR 11925
(February 20, 2013) (SR–FINRA–2013–014). Also,
unlike FINRA Rule 1220.04, proposed Exchange
Rule 1220.04 refers to ‘‘multiple exchanges’’ rather
than listing the various exchanges where a sales
principal might be required to qualify in the
absence of the General Securities Sales Supervisor
registration category. It also omits FINRA internal
cross-references.
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13. Supervisory Analyst (Rule
1220(a)(14))
The Exchange does not recognize the
Supervisory Analyst registration
category and is reserving Rule
1220(a)(14), retaining the caption solely
to facilitate comparison with FINRA’s
rules.
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14. Definition of Representative
(Proposed Rule 1220(b)(1))
Current Rule 1(a)(ee) defines
‘‘Representative’’ 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.
The Exchange now proposes to amend
Exchange Rule 1(a)(ee) to incorporate by
reference a new definition of
‘‘representative’’ in proposed Rule
1220(b)(1). Proposed 1220(b)(1) would
define the term representative as any
person associated with a member,
including assistant officers other than
principals, who is engaged in the
member’s securities business, such as
supervision, solicitation, conduct of
business in securities or the training of
persons associated with a member for
any of these functions.
15. General Securities Representative
(Proposed Rule 1220(b)(2))
Under Rule 613(a), except for
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
who 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 under PHLX in the category of
registration appropriate to the function
to be performed as specified in
paragraph (e),67 Categories of
Representative Registration—General
Securities Representative or (f),
Securities Trader.
The Exchange proposes to delete
those provisions of Rule 613(a) and to
67 Rule 613(e) provides that individuals required
to register with the Exchange as a General Securities
Representative under the rule must pass the Series
7 examination before such registration may become
effective.
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adopt new Rule 1220(b)(2), General
Securities Representative. Proposed
Rule 1220(b)(2)(A) states that each
representative as defined in proposed
Rule 1220(b)(1) is required to register
with the Exchange as a General
Securities Representative, subject to the
exception that if a representative’s
activities include the functions of a
Securities Trader, as specified in Rule
1220(b)(2), then such person shall
appropriately register as a Securities
Trader.
Further, consistent with the proposed
restructuring of the representative-level
examinations, proposed Rule
1220(b)(2)(B) would require that
individuals registering as General
Securities Representatives pass the SIE
and the General Securities
Representative examination except that
individuals registered as a General
Securities Representatives within two
years prior to October 1, 2018 would be
qualified to register as General
Securities Representatives without
passing any additional qualification
examinations.68
In addition, the Exchange is
proposing to adopt Rule 1220.01 to
provide individuals who are associated
persons of firms and who hold foreign
registrations an alternative, more
flexible, process to obtain an Exchange
representative-level registration. The
Exchange believes that there is
sufficient overlap between the SIE and
these foreign qualification requirements
to permit them to act as exemptions to
the SIE. Under proposed Rule 1220.01,
individuals who are in good standing as
representatives with the Financial
Conduct Authority in the United
Kingdom or with a Canadian stock
exchange or securities regulator would
be exempt from the requirement to pass
the SIE, and thus would be required
only to pass a specialized knowledge
examination to register with the
Exchange as a representative. The
proposed approach would provide
individuals with a United Kingdom or
Canadian qualification more flexibility
to obtain an Exchange representativelevel registration.
68 Proposed Rule 1220(b)(2)(B) differs from
FINRA Rule 1220(b)(2)(B) in that it omits references
to various registration categories which FINRA
recognizes but which the Exchange does not
propose to recognize.
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50993
16. Operations Professional, Securities
Trader, Investment Banking
Representative, Research Analyst,
Investment Company and Variable
Contracts Products Representative,
Direct Participation Programs
Representative and Private Securities
Offerings Representative (Rules
1220(b)(3), 1220(b)(4), 1220(b)(5),
1220(b)(6), 1220(b)(7), 1220(b)(8),
1220(b)(9) and 1220.05)
Operations Professional, Investment
Banking Representative, Research
Analyst, Investment Company and
Variable Products Representative, Direct
Participation Programs Representative
and Private Securities Offerings
Representative. The Exchange does not
recognize these registration categories
for its associated persons. The Exchange
is therefore reserving Rules 1220(b)(3)—
Operations Professional, and related
Rule 1220.05, Scope of Operations
Professional Requirement; 1220(b)(5)—
Investment Banking Representative;
1220(b)(6)—Research Analyst;
1220(b)(7)—Investment Company and
Variable Products Representative;
1220(b)(8)—Direct Participation
Programs Representative; and
1220(b)(9)—Private Securities Offerings
Representative, retaining the captions
for each of them solely to facilitate
comparison with FINRA’s rules.
Securities Trader—Proposed Rule
1220(b)(4). Pursuant to current
Exchange Rule 613(f)(1) and (2),
associated persons must pass the
qualification examination for Securities
Trader (the Series 57 examination) and
register with the Exchange as a
Securities Trader if, with respect to
transactions in equity, preferred or
convertible debt securities, or foreign
currency options on the Exchange, such
person is engaged in proprietary trading,
the execution of transactions on an
agency basis, or the direct supervision
of such activities, other than any person
associated with a member whose trading
activities are conducted principally on
behalf of an investment company that is
registered with the Commission
pursuant to the Investment Company
Act of 1940 and that controls, is
controlled by or is under common
control, with the member.69
The Exchange now proposes to delete
Exchange Rule 613(f) and to replace it
with proposed Rule 1220(b)(4).70 Rule
69 Rule 613(f)(3) provides that a person registered
as a Securities Trader is not qualified to function
in any other registration category, unless he or she
is also qualified and registered in such other
registration category.
70 Proposed Rule 1220(b)(4)(A) differs from
FINRA Rule 1220(b)(4)(A) in that it applies to
trading on the Exchange while the FINRA rule is
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1220(b)(4) would require each
representative as defined in Rule
1220(b)(1) of the rule to register with the
Exchange as a Securities Trader if, with
respect to transactions in equity,
preferred or convertible debt securities,
or options 71 such person is engaged in
proprietary trading, the execution of
transactions on an agency basis, or the
direct supervision of such activities
other than a person associated with a
member whose trading activities are
conducted principally on behalf of an
investment company that is registered
with the SEC pursuant to the Investment
Company Act and that controls, is
controlled by, or is under common
control with a member. Rule 1220(b)(4)
would require individuals registering as
Securities Traders to pass the SIE as
well as the Securities Trader
qualification exam.
Additionally, proposed Rule
1220(b)(4)(A) would require each person
associated with a member who is: (i)
Primarily responsible for the design,
development or significant modification
of an algorithmic trading strategy
relating to equity, preferred or
convertible debt securities or options; or
(ii) responsible for the day-to-day
supervision or direction of such
activities to register with the Exchange
as a Securities Trader.72
For purposes of this proposed new
registration requirement an ‘‘algorithmic
trading strategy’’ is an automated system
that generates or routes orders (or orderrelated messages) but does not include
an automated system that solely routes
orders received in their entirety to a
market center. The proposed registration
requirement applies to orders and order
related messages whether ultimately
routed or sent to be routed to an
exchange or over the counter. An order
router alone would not constitute an
algorithmic trading strategy. However,
an order router that performs any
additional functions would be
considered an algorithmic trading
limited to the specified trading which is ‘‘effected
otherwise than on a securities exchange.’’
Additionally, the FINRA rule does not specifically
extend to options trading.
71 Current Rule 613(f) refers to transactions in
foreign currency options. Proposed Rule 1220(b)(4)
would instead refer to ‘‘options’’ generally, to
clarify that equity options as well as foreign
currency options are products with respect to
which Securities Trader registration requirements
would apply.
72 As noted above, this new registration
requirement was recently added to the FINRA
rulebook. The Exchange has determined to add a
parallel requirement to its own rules, but also to
add options to the scope of products within the
proposed rule’s coverage. See Securities Exchange
Act Release No. 77551 (April 7, 2016), 81 FR 21914
(April 13, 2016) (Order Approving File No. SR–
FINRA–2016–007).
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strategy. An algorithm that solely
generates trading ideas or investment
allocations—including an automated
investment service that constructs
portfolio recommendations—but that is
not equipped to automatically generate
orders and order-related messages to
effectuate such trading ideas into the
market—whether independently or via a
linked router—would not constitute an
algorithmic trading strategy.73
The associated persons covered by the
expanded registration requirement
would be required to pass the requisite
qualification examination and be subject
to the same continuing education
requirements that are applicable to
individual Securities Traders. The
Exchange believes that potentially
problematic conduct stemming from
algorithmic trading strategies—such as
failure to check for order accuracy,
inappropriate levels of messaging traffic,
and inadequate risk management
controls—could be reduced or
prevented, in part, through improved
education regarding securities
regulations for the specified individuals
involved in the algorithm design and
development process.
The proposal is intended to ensure
the registration of one or more
associated persons that possesses
knowledge of, and responsibility for,
both the design of the intended trading
strategy and the technological
implementation of the strategy,
sufficient to evaluate whether the
resulting product is designed to achieve
regulatory compliance in addition to
business objectives. For example, a lead
developer who liaises with a head trader
regarding the head trader’s desired
algorithmic trading strategy and is
primarily responsible for the
supervision of the development of the
algorithm to meet such objectives must
be registered under the proposal as the
associated person primarily responsible
for the development of the algorithmic
trading strategy and supervising or
directing the team of developers.
Individuals under the lead developer’s
supervision would not be required to
register under the proposal if they are
not primarily responsible for the
development of the algorithmic trading
strategy or are not responsible for the
day-to-day supervision or direction of
others on the team. Under this scenario,
the person on the business side that is
primarily responsible for the design of
the algorithmic trading strategy, as
communicated to the lead developer,
also would be required to register. In the
73 See Securities Exchange Act Release No. 77551
(April 7, 2016), 81 FR 21914 (April 13, 2016) (Order
Approving File No. SR–FINRA–2016–007).
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event of a significant modification to the
algorithm, members, likewise, would be
required to ensure that the associated
person primarily responsible for the
significant modification (or the
associated person supervising or
directing such activity), is registered as
a Securities Trader.
A member employing an algorithm is
responsible for the algorithm’s activities
whether the algorithm is designed or
developed in house or by a third-party.
Thus, in all cases, robust supervisory
procedures, both before and after
deployment of an algorithmic trading
strategy, are a key component in
protecting against problematic behavior
stemming from algorithmic trading. In
addition, associated persons responsible
for monitoring or reviewing the
performance of an algorithmic trading
strategy must be registered, and a
member’s trading activity must always
be supervised by an appropriately
registered person. Therefore, even
where a firm purchases an algorithm offthe-shelf and does not significantly
modify the algorithm, the associated
person responsible for monitoring or
reviewing the performance of the
algorithm would be required to be
registered.
Pursuant to proposed Rule
1220(b)(4)(B) each person registered as a
Securities Trader on October 1, 2018
and each person who was registered as
a Securities Trader within two years
prior to October 1, 2018 would be
qualified to register as a Securities
Trader without passing any additional
qualification examinations. All other
individuals registering as Securities
Traders after October 1, 2018 would be
required, prior to or concurrent with
such registration, to pass the SIE and the
Securities Trader qualification
examination.
17. Eliminated Registration Categories
(Proposed Rule 1220.06)
Proposed Rule 1220.06 has no
practical relevance to the Exchange, but
is included because the Nasdaq
Affiliated Exchanges are also proposing
to adopt the new 1200 Series, on a
uniform basis. Proposed Rule 1220.06
will be relevant to Nasdaq and BX
which, unlike the Exchange, are
proposing to eliminate a number of
existing registration categories that are
not currently recognized by the
Exchange.74
Proposed Rule 1220.06 provides that,
subject to the lapse of registration
provisions in proposed Rule 1210.08,
individuals who are registered with the
Exchange in any capacity recognized by
74 See
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the Exchange immediately prior to
October 1, 2018, and each person who
was registered with the Exchange in
such categories within two years prior
to October 1, 2018, shall be eligible to
maintain such registrations with the
Exchange. However, if individuals
registered in such categories terminate
their registration with the Exchange and
the registration remains terminated for
two or more years, they would not be
able to re-register in that category. In
addition, proposed Rule 1220.06 would
include the current restrictions to which
Order Processing Assistant
Representatives are subject under
Nasdaq rules.75 As stated above, Rule
1220.06 would have no application to
the Exchange as a practical matter.76
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18. Grandfathering Provisions
In addition to the grandfathering
provisions in proposed Rule 1220(a)(2)
(relating to General Securities
Principals) and proposed Rule 1220.06
(relating to the eliminated registration
categories), the Exchange is proposing to
include grandfathering provisions in
proposed Rule 1220(a)(8) (Registered
Options Principal), 1220(b)(2) (General
Securities Representative), and
1220(b)(4) (Securities Trader).
Specifically, the proposed
grandfathering provisions provide that,
subject to the lapse of registration
provisions in proposed Rule 1210.08,
individuals who are registered in
specified registration categories on the
operative date of the proposed rule
change and individuals who had been
registered in such categories within the
past two years prior to the operative
date of the proposed rule change would
be qualified to register in the proposed
corresponding registration categories
without having to take any additional
examinations.
N. Associated Persons Exempt From
Registration (Proposed Rules 1230 and
1230.01)
Existing Rule 614 currently provides
that the following persons associated
with a member organization are not
required to register:
(i) Persons associated with a member
organization whose functions are solely
and exclusively clerical or ministerial;
(ii) persons associated with a member
organization who are not actively
engaged in the investment banking or
securities business;
(iii) persons associated with a member
organization whose functions are related
75 See
Nasdaq Rule 1042.
76 Proposed Exchange Rule 1220.06 omits
references to a number of registration categories it
does not propose to recognize, but which FINRA
refers to in its own Rule 1220.06.
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solely and exclusively to the member
organization’s need for nominal
corporate officers or for capital
participation; and
(iv) persons associated with a member
organization whose functions are related
solely and exclusively to effecting
transactions on the floor of another
national securities exchange and who
are registered as floor members with
such exchange; transactions in
municipal securities; transactions in
commodities; transactions in security
futures, provided that any such person
is registered with FINRA or a registered
futures association; transactions in
variable contracts and insurance
premium funding programs and other
contracts issued by an insurance
company; transactions in direct
participation programs; transactions in
government securities; or effecting sales
as part of a primary offering of securities
not involving a public offering pursuant
to Section 3(b), 4(2), or 4(6) of the
Securities Act of 1933 and the rules and
regulations thereunder.
The Exchange is proposing to adopt
Rule 614 as Rule 1230 subject to certain
changes. Rule 614 exempts from
registration those associated persons
who are not actively engaged in the
securities business. It also exempts from
registration those associated persons
whose functions are related solely and
exclusively to a member’s need for
nominal corporate officers or for capital
participation.77 The Exchange believes
that the determination of whether an
associated person is required to register
must be based on an analysis of the
person’s activities and functions in the
context of the various registration
categories. The Exchange does not
believe that categorical exemptions for
associated persons who are not
‘‘actively engaged’’ in a member’s
securities business, associated persons
whose functions are related only to a
member’s need for nominal corporate
officers or associated persons whose
functions are related only to a member’s
need for capital participation is
consistent with this analytical
framework. The Exchange therefore is
proposing to delete these exemptions.
Rule 614(a)(iv)(a) further exempts from
registration associated persons whose
functions are related solely and
exclusively to effecting transactions on
the floor of another national securities
exchange as long as they are registered
as floor members with such exchange.
77 These exemptions generally apply to associated
persons who are corporate officers of a member in
name only to meet specific corporate legal
obligations or who only provide capital for a
member, but have no other role in a member’s
business.
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50995
Because exchanges have registration
categories other than the floor member
category, proposed Rule 1230 clarifies
that the exemption applies to associated
persons solely and exclusively effecting
transactions on the floor of another
national securities exchange, provided
they are appropriately registered with
such exchange.78 Additionally, the
Exchange proposes to add Section 3 of
Rule 1230, pursuant to which persons
associated with a member that are not
citizens, nationals, or residents of the
United States or any of its territories or
possessions, that will conduct all of
their securities activities in areas
outside the jurisdiction of the United
States, and that will not engage in any
securities activities with or for any
citizen, national or resident of the
United States need not register with the
Exchange.79
The Exchange proposes to adopt Rule
1230.01 to clarify that the function of
accepting customer orders is not
considered a clerical or ministerial
function and that associated persons
who accept customer orders under any
circumstances are required to be
appropriately registered. However, the
proposed rule provides that an
associated person is not accepting a
customer order where occasionally,
when an appropriately registered person
is unavailable, the associated person
transcribes the order details and the
registered person contacts the customer
to confirm the order details before
entering the order.
O. Changes to Continuing Education
Requirements (Proposed Rule 1240)
As described above, existing Rule 640,
Continuing Education for Registered
Persons, includes a Regulatory Element
and a Firm Element. The Regulatory
Element applies to registered persons
and consists of periodic computer-based
training on regulatory, compliance,
ethical, supervisory subjects and sales
practice standards. The Firm Element
consists of at least annual, memberdeveloped and administered training
programs designed to keep covered
registered persons current regarding
securities products, services and
strategies offered by the member. The
CE requirements set forth in Rule 640
have been reorganized and renumbered,
78 Proposed Rule 1230 differs from FINRA Rule
1230 in that it includes a number of exemptions
based upon current Nasdaq Rule 1060(a) which are
not found in FINRA Rule 1230.
79 Individuals described by Section 3 of Rule 1230
who are associated with FINRA members may be
registered with FINRA as Foreign Associates
pursuant to FINRA Rule 1220.06. FINRA is
eliminating this registration category effective
October 1, 2018, and the Exchange has never
recognized it.
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and are now proposed to be adopted
with amendments as new Rule 1240.80
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1. Regulatory Element
The Exchange is proposing to replace
the term ‘‘registered person’’ in current
Rule 640 with the term ‘‘covered
person’’ and make conforming changes
to proposed Rule 1240(a). For purposes
of the Regulatory Element, the Exchange
is proposing to define the term ‘‘covered
person’’ in Rule 1240(a)(5) as any
person registered pursuant to proposed
Rule 1210, including any person who is
permissively registered pursuant to
proposed Rule 1210.02, and any person
who is designated as eligible for an FSA
waiver pursuant to proposed Rule
1210.09. The purpose of this change is
to ensure that all registered persons,
including those with permissive
registrations, keep their knowledge of
the securities industry current. The
inclusion of persons designated as
eligible for an FSA waiver under the
term ‘‘covered persons’’ corresponds to
the requirements of proposed Rule
1210.09. In addition, consistent with
proposed Rule 1210.09, proposed Rule
1240(a) provides that an FSA-eligible
person would be subject to a Regulatory
Element program that correlates to his
or her most recent registration category,
and CE would be based on the same
cycle had the individual remained
registered. The proposed rule also
provides that if an FSA-eligible person
fails to complete the Regulatory Element
during the prescribed time frames, he or
she would lose FSA eligibility.
Further, the Exchange is proposing to
add a rule to address the impact of
failing to complete the Regulatory
Element on a registered person’s
activities and compensation.
Specifically, proposed Rule 1240(a)(2)
provides that any person whose
registration has been deemed inactive
under the rule may not accept or solicit
business or receive any compensation
for the purchase or sale of securities.
However, like the FINRA rule, the
proposed rule provides that such person
may receive trail or residual
commissions resulting from transactions
completed before the inactive status,
unless the member with which the
person is associated has a policy
prohibiting such trail or residual
commissions.
2. Firm Element
The Exchange believes that training in
ethics and professional responsibility
80 Proposed Rule 1240 also differs slightly from
FINRA Rule 1240 in that it omits references to
certain registration categories which the Exchange
does not recognize as well as an internal cross
reference to FINRA Rule 4517.
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should apply to all covered registered
persons. Therefore, proposed Rule
1240(b)(2)(B), which provides that the
Firm Element training programs must
cover applicable regulatory
requirements, would also require that a
firm’s training program cover training in
ethics and professional responsibility.
P. Electronic Filing Rules
Existing Rule 616 states that forms
required to be filed under the Rule 600
Series shall be filed electronically
through WebCRD, including initial
filings and amendments of Forms U4
and U5. It also provides for prompt
filing of amendments, and that records
of filed documents be retained 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. Electronic filing
requirements are also found in a number
of other rules.
The Exchange is proposing to delete
existing Rule 616 and to replace it with
new Rule 1250, Electronic Filing
Requirements for Uniform Forms, which
will consolidate Form U4 and U5
electronic filing requirements in a single
location.81 The new rule provides that
all forms required to be filed under the
Exchange’s registration rules including
the Rule 1200 series shall be filed
through an electronic process or such
other process as the Exchange may
prescribe to the Central Registration
Depository. It also would impose certain
new requirements.
Under Rule 1250(b) members would
be required to designate registered
principal(s) or corporate officer(s) who
are responsible for supervising a firm’s
electronic filings. The registered
principal(s) or corporate officer(s) who
has or have the responsibility to review
and approve the forms filed pursuant to
the rule would be required to
acknowledge, electronically, that he is
filing this information on behalf of the
member and the member’s associated
persons. Under Rule 1250,
Supplementary Material .01, the
registered principal(s) or corporate
officer(s) could delegate filing
responsibilities to an associated person
(who need not be registered) but could
not delegate any of the supervision,
review, and approval responsibilities
mandated in Rule 1250(b). The
registered principal(s) or corporate
officer(s) would be required to take
reasonable and appropriate action to
ensure that all delegated electronic
filing functions were properly executed
and supervised.
81 Proposed Rule 1250 is based upon current
Nasdaq Rule 1140.
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Under Rule 1250(c)(1), initial and
transfer electronic Form U4 filings and
any amendments to the disclosure
information on Form U4 must be based
on a manually signed Form U4 provided
to the member or applicant for
membership by the person on whose
behalf the Form U4 is being filed. As
part of the member’s recordkeeping
requirements, it would be required to
retain the person’s manually signed
Form U4 or amendments to the
disclosure information on Form U4 in
accordance with Rule 17a–4(e)(1) under
the Act and make them available
promptly upon regulatory request. An
applicant for membership must also
retain every manually signed Form U4
it receives during the application
process and make them available
promptly upon regulatory request. Rule
1250(c)(2) and Supplementary Material
.03 and 04 provide for the electronic
filing of Form U4 amendments without
the individual’s manual signature,
subject to certain safeguards and
procedures.
Rule 1250(d) provides that upon filing
an electronic Form U4 on behalf of a
person applying for registration, a
member must promptly submit
fingerprint information for that person
and that the Exchange may make a
registration effective pending receipt of
the fingerprint information.82 It further
provides that if a member fails to submit
the fingerprint information within 30
days after filing of an electronic Form
U4, the person’s registration will be
deemed inactive, requiring the person to
immediately cease all activities
requiring registration or performing any
duties and functioning in any capacity
requiring registration. Under the rule
the Exchange must administratively
terminate a registration that is inactive
for a period of two years. A person
whose registration is administratively
terminated could reactivate the
registration only by reapplying for
registration and meeting the
qualification requirements of the
applicable provisions of proposed
Exchange Rule 1220. Upon application
and a showing of good cause, the
Exchange could extend the 30-day
period.
Rule 1250(e) would require initial
filings and amendments of Form U5 to
be submitted electronically. As part of
the member’s recordkeeping
requirements, it would be required to
retain such records for a period of not
less than three years, the first two years
82 Proposed Rule 1250(d) covers the same subject
matter as current Rules 616, Electronic Filing
Requirements for Uniform Forms, and 623,
Fingerprinting, which would be deleted.
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in an easily accessible place, in
accordance with Rule 17a–4 under the
Act, and to make such records available
promptly upon regulatory request.
Finally, under proposed Rule 1250,
Supplementary Material .02, a member
could enter into an agreement with a
third party pursuant to which the third
party agrees to file the required forms
electronically on behalf of the member
and the member’s associated persons.
Notwithstanding the existence of such
an agreement, the member would
remain responsible for complying with
the requirements of the Rule.
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Q. Trading Floor Registration (Rule
1260)
Currently, Rules 620(a) and (b) govern
trading floor member registration and
non-member clerk registration. Rule
620(a) requires each Floor Broker,
Specialist and Registered Options
Trader on the Exchange trading floor to
be registered as ‘‘Member Exchange’’
(‘‘ME’’) under ‘‘PHLX’’ on Form U4, and
to successfully complete the appropriate
floor trading examination(s), if
prescribed by the Exchange, in addition
to requirements imposed by other
Exchange rules. Under the rule the
Exchange may also require periodic
examinations due to changes in trading
rules, products or automated systems.
Rule 620(b) requires all trading floor
personnel, including clerks, interns,
stock execution clerks and any other
associated persons, of a member
organization not required to register
pursuant to Rule 620(a) to be registered
as ‘‘Floor Employee’’ (‘‘FE’’) under
‘‘PHLX’’ on Form U4. Under the rule the
Exchange may require these individuals
to also successfully complete an
examination, and may require periodic
examinations due to changes in trading
rules, products or automated systems.
To consolidate these registration rules
into the new Rule 1200 series, Rule 620
is being renumbered as Rule 1260.83
The Exchange proposes to adjust
internal cross references as required by
this proposed rule change, but not to
make substantive changes to Rule 620(a)
and (b). However, the Exchange
proposes to adopt new section (c) to
exempt certain individuals on the
Exchange’s trading floor from the
representative registration requirements
of proposed rules 1210 and 1220. Rule
83 Exhibit 5 simply reflects the proposed new rule
number of current Rule 620 rather than the deletion
of the entire rule and the subsequent reinsertion of
the entire rule following Rule 1250. In the rulebook,
Rule 1260 will appear immediately following Rule
1250.
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1260(c) would provide that members 84
whose activities are limited to the
Exchange’s options trading floor and
who are registered pursuant to Rule
1260(a), as well as associated persons
whose activities are limited to the
Exchange’s options trading floor and are
registered pursuant to Rule 1260(b) are
exempt from the representative
registration requirements (but not the
principal registration requirements,
including any prerequisite
representative registration requirement)
of Rules 1210 and 1220. Rule 1260(c) is
intended to preserve the current
exclusion of these individuals from the
representative registration requirements
of Rule 613.85
R. Other Rules
The Exchange is deleting Rule 614,
Persons Exempt from Registration, as
explained above. Rule 614(b), however,
contains provisions dealing with
Nonregistered Foreign ‘‘Finders’’ and is
simply being relocated with
nonsubstantive changes to new Rule
2040.86 The remaining rules identified
above under ‘‘Overview’’ which are to
be amended in this proposed rule
change simply update citations and/or
make technical or nonsubstantive
changes to the proposed new rules.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,87 in general, and furthers the
objectives of Section 6(b)(5) of the Act,88
in particular, in that it is designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general to protect
investors and the public interest.
The Exchange believes that the
proposed rule change will streamline,
and bring consistency and uniformity
to, the registration rules, which will, in
turn, assist members and their
associated persons in complying with
84 In Rule 1260, unlike the other 1200 Series of
proposed rules, the word ‘‘member’’ is not used to
mean ‘‘member organization.’’
85 Current Rule 613(a) imposes representative
registration requirements upon persons engaged or
to be engaged in the investment banking or
securities business of a member organization 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).
86 The FINRA counterpart to Rule 614(b) occupies
a similar location in the FINRA rulebook. See
FINRA Rule 2040(c), Nonregistered Foreign
Finders.
87 15 U.S.C. 78f(b).
88 15 U.S.C. 78f(b)(5).
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50997
these rules and improve regulatory
efficiency. The proposed rule change
will also improve the efficiency of the
examination program, without
compromising the qualification
standards, by eliminating duplicative
testing of general securities knowledge
on examinations and by removing
examinations that currently have
limited utility. In addition, the proposed
rule change will expand the scope of
permissive registrations, which, among
other things, will allow members to
develop a depth of associated persons
with registrations to respond to
unanticipated personnel changes and
will encourage greater regulatory
understanding. Further, the proposed
rule change will provide a more
streamlined and effective waiver
process for individuals working for a
financial services industry affiliate of a
member, and it will require such
individuals to maintain specified levels
of competence and knowledge while
working in areas ancillary to the
securities business. The proposed rule
change will improve the supervisory
structure of firms by imposing an
experience requirement for
representatives that are designated by
firms to function as principals for a 120day period before having to pass an
appropriate principal qualification
examination. The proposed rule change
will also prohibit unregistered persons
from accepting customer orders under
any circumstances, which will enhance
investor protection.
The Exchange believes that, with the
introduction of the SIE and expansion of
the pool of individuals who are eligible
to take the SIE, the proposed rule
change has the potential of enhancing
the pool of prospective securities
industry professionals by introducing
them to securities laws, rules and
regulations and appropriate conduct
before they join the industry in a
registered capacity.
The extension of the Securities Trader
registration requirement to developers
of algorithmic trading strategies requires
associated persons primarily
responsible for the design, development
or significant modification of an
algorithmic trading strategy or
responsible for the day-to-day
supervision or direction of such
activities to register and meet a
minimum standard of knowledge
regarding the securities rules and
regulations applicable to the member
employing the algorithmic trading
strategy. This minimum standard of
knowledge is identical to the standard
of knowledge currently applicable to
traditional securities traders. The
Exchange believes that improved
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education of firm personnel may reduce
the potential for problematic market
conduct and manipulative trading
activity.
Finally, the proposed rule change
makes organizational changes to the
Exchange’s registration and
qualification rules to align them with
registration and qualification rules of
the Nasdaq Affiliated Exchanges, in
order to prevent unnecessary regulatory
burdens and to promote efficient
administration of the rules. The change
also makes minor updates and
corrections to the Exchange’s rules
which improve readability.
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. The
proposed rule change is designed to
ensure that all associated persons of
members engaged in a securities
business are, and will continue to be,
properly trained and qualified to
perform their functions, will be
supervised, and can be identified by
regulators. The proposed new 1200
Series of rules, which are similar in
many respects to the registration-related
requirements adopted by FINRA
effective October 1, 2018, should
enhance the ability of member firms to
comply with the Exchange’s rules as
well as with the Federal securities laws.
Additionally, as described above, the
Exchange intends the amendments
described herein to eliminate
inconsistent registration-related
requirements across the Nasdaq
Affiliated Exchanges, thereby promoting
uniformity of regulation across markets.
The new 1200 Series should in fact
remove administrative burdens that
currently exist for members seeking to
register associated persons on multiple
Nasdaq Affiliated Exchanges featuring
varying registration-related
requirements. Additionally, all
similarly-situated associated persons of
members will be treated similarly under
the new 1200 Series in terms of
standards of training, experience and
competence for persons associated with
Exchange members.
With respect in particular to
registration of developers of algorithmic
trading strategies, the Exchange
recognizes that the proposal would
impose costs on member firms
employing associated persons engaged
in the activity subject to the registration
requirement. Specifically, among other
things, additional associated persons
would be required to become registered
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under the proposal, and the firm would
need to establish policies and
procedures to monitor compliance with
the proposed requirement on an ongoing
basis. However, given the prevalence
and importance of algorithmic trading
strategies in today’s markets, the
Exchange believes that associated
persons engaged in the activities
covered by this proposal must meet a
minimum standard of knowledge
regarding the applicable securities rules
and regulations. To mitigate the costs
imposed on member firms, the proposed
rule change limits the scope of
registration requirement by excluding
technological or development support
personnel who are not primarily
responsible for the covered activities. It
also excludes supervisors who are not
responsible for the ‘‘day-to-day’’
supervision or direction of the covered
activities.
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
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 89 and Rule 19b–
4(f)(6) thereunder.
A proposed rule change filed under
Rule 19b–4(f)(6) normally does not
become operative for 30 days from the
date of filing. However, Rule 19b–
4(f)(6)(iii) 90 permits the Commission to
designate a shorter time if such action
is consistent with the protection of
investors and the public interest. The
Exchange has asked the Commission to
waive the 30-day operative delay so that
the proposal may become operative on
October 1, 2018 to coincide with the
effective date of FINRA’s proposed rule
change on which the proposal is
based.91 The waiver of the operative
delay would make the Exchange’s
qualification requirements consistent
with those of FINRA, as of October 1,
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6)(iii).
91 See supra note 7. As discussed above, the
Exchange has stated that the new registration
requirements for developers of algorithmic trading
strategies would become operative on April 1, 2019.
2018. Therefore, the Commission
believes that the waiver of the 30-day
operative delay is consistent with the
protection of investors and the public
interest and hereby waives the 30-day
operative delay and designates the
proposal operative on October 1, 2018.92
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
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–2018–61 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–Phlx–2018–61. This file
number should be included on the
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 website (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 website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
89 15
90 17
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92 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
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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. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR-Phlx2018–61 and should be submitted on or
before October 31, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.93
Eduardo A. Aleman,
Assistant Secretary.
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.
BILLING CODE 8011–01–P
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
1. Purpose
[FR Doc. 2018–21902 Filed 10–9–18; 8:45 am]
[Release No. 34–84353; File No. SR–BX–
2018–047]
Self-Regulatory Organizations; Nasdaq
BX, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend, Reorganize
and Enhance Membership,
Registration and Qualification Rules,
and To Make Conforming Changes to
Certain Other Rules
October 3, 2018.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on
September 27, 2018, Nasdaq BX, Inc.
(‘‘BX’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I and
II, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
amozie on DSK3GDR082PROD with NOTICES1
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend,
reorganize and enhance its membership,
registration and qualification rules, and
to make conforming changes to certain
other rules.
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaqbx.cchwallstreet.com/, at
93 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Overview
The Exchange has adopted
registration requirements to ensure that
associated persons attain and maintain
specified levels of competence and
knowledge pertinent to their function.
In general, the current rules require that
persons engaged in a member’s
investment banking or securities
business who are to function as
representatives or principals register
with the Exchange in each category of
registration appropriate to their
functions by passing one or more
qualification examinations,3 and exempt
specified associated persons from the
registration requirements.4 They also
prescribe ongoing continuing education
requirements for registered persons.5
The Exchange now proposes to amend,
reorganize and enhance its rules
regarding registration, qualification
examinations and continuing education,
as described below.
Recently, the Commission approved a
FINRA proposed rule change
consolidating and adopting NASD and
Incorporated NYSE rules relating to
qualification and registration
requirements into the Consolidated
FINRA Rulebook,6 restructuring the
3 See, e.g., Exchange Rules 1021, Registration
Requirements, 1022, Categories of Principal
Registration, 1031, Registration Requirements, 1032,
Categories of Representative Registration, and 1041,
Registration Requirements for Assistant
Representatives.
4 See Rule 1060, Persons Exempt from
Registration.
5 See Rule 1120, Continuing Education
Requirements.
6 The current FINRA rulebook consists of: (1)
FINRA rules; (2) NASD rules; and (3) rules
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50999
FINRA representative-level qualification
examinations, creating a general
knowledge examination and specialized
knowledge examinations, allowing
permissive registration, establishing an
examination waiver process for persons
working for a financial services affiliate
of a member, and amending certain
continuing education (‘‘CE’’)
requirements (collectively, the ‘‘FINRA
Rule Changes’’).7 The FINRA Rule
Changes will become effective on
October 1, 2018.
The Exchange now proposes to
amend, reorganize and enhance certain
of its corresponding membership,
registration and qualification
requirement rules in part in response to
the FINRA Rule Changes, and also in
order to conform the Exchange’s rules
more closely to those of its affiliated
exchanges in the interest of uniformity
and to facilitate compliance with
membership, registration and
qualification regulatory requirements by
members of multiple Nasdaq-affiliated
exchanges including BX. Last, the
Exchange proposes to enhance its
registration rules by adding a new
registration requirement applicable to
developers of algorithmic trading
systems similar to a requirement
adopted by FINRA pursuant to a 2016
FINRA proposed rule change.8
incorporated from the New York Stock Exchange
(‘‘NYSE’’) (the ‘‘Incorporated NYSE rules’’). While
the NASD rules generally apply to all FINRA
members, the Incorporated NYSE rules apply only
to those members of FINRA that are also members
of the NYSE.
7 See Securities Exchange Act Release No. 81098
(July 7, 2017), 82 FR 32419 (July 13, 2017) (Order
Approving File No. SR–FINRA–2017–007). See also
FINRA Regulatory Notice 17–30 (SEC Approves
Consolidated FINRA Registration Rules,
Restructured Representative-Level Qualification
Examinations and Changes to Continuing Education
Requirements) (October 2017). FINRA articulated
its belief that the proposed rule change would
streamline, and bring consistency and uniformity
to, its registration rules, which would, in turn,
assist FINRA members and their associated persons
in complying with the rules and improve regulatory
efficiency. FINRA also determined to enhance the
overall efficiency of its representative-level
examinations program by eliminating redundancy
of subject matter content across examinations,
retiring several outdated representative-level
registrations, and introducing a general knowledge
examination that could be taken by all potential
representative-level registrants and the general
public. FINRA amended certain aspects of its
continuing education rule, including by codifying
existing guidance regarding the effect of failing to
complete the Regulatory Element on a registered
person’s activities and compensation.
8 See Securities Exchange Act Release No. 77551
(April 7, 2016), 81 FR 21914 (April 13, 2016) (Order
Approving File No. SR–FINRA–2016–007). In its
proposed rule change FINRA addressed the
increasing significance of algorithmic trading
strategies by amending its rules to require
registration, as Securities Traders, of associated
persons primarily responsible for the design,
development or significant modification of
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Agencies
[Federal Register Volume 83, Number 196 (Wednesday, October 10, 2018)]
[Notices]
[Pages 50981-50999]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-21902]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84352; File No. SR-Phlx-2018-61]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend,
Reorganize and Enhance Membership, Registration and Qualification Rules
and To Make Conforming Changes to Certain Other Rules
October 3, 2018.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 27, 2018, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change as described in Items I and II, below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend, reorganize and enhance its
membership, registration and qualification rules and to make conforming
changes to certain other rules.
The text of the proposed rule change is available on the Exchange's
website at https://nasdaqphlx.cchwallstreet.com/, at the principal
office of the Exchange, and at the Commission's Public Reference Room.
[[Page 50982]]
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 Exchange has adopted registration requirements to ensure that
associated persons of member organizations attain and maintain
specified levels of competence and knowledge pertinent to their
function. In general, the current rules require that persons engaged in
a member organization's investment banking or securities business who
are to function as representatives or principals register with the
Exchange in the category of registration appropriate to their functions
by passing one or more qualification examinations \3\ and exempt
specified associated persons from the registration requirements.\4\
They also prescribe ongoing continuing education requirements for
registered persons.\5\ The Exchange now proposes to amend, reorganize
and enhance its rules regarding registration, qualification
examinations and continuing education, as described below.\6\
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\3\ See Phlx Rules 611, Principal Registration Requirements, and
613, Representative Registration.
\4\ See Phlx Rule 614, Persons Exempt from Registration.
\5\ See Phlx Rule 640, Continuing Education for Registered
Persons.
\6\ The Exchange's rules governing these matters were
extensively updated and amended in 2012. See Securities Exchange Act
Release No. 66840 (April 20, 2012), 77 FR 25003 (April 26, 2012)
(SR-Phlx-2012-23).
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Recently, the Commission approved a Financial Industry Regulatory
Authority (``FINRA'') proposed rule change adopting rules relating to
qualification and registration requirements in the Consolidated FINRA
Rulebook,\7\ restructuring the FINRA representative-level qualification
examinations, creating a general knowledge examination and specialized
knowledge examinations, allowing permissive registration, establishing
an exam waiver process for persons working for a financial services
affiliate of a member, and amending certain Continuing Education
(``CE'') requirements (collectively, the ``FINRA Rule Changes'').\8\
The FINRA Rule Changes will become effective on October 1, 2018.
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\7\ The current FINRA rulebook consists of: (1) FINRA rules; (2)
NASD rules; and (3) rules incorporated from the New York Stock
Exchange (``NYSE'') (the ``Incorporated NYSE rules''). While the
NASD rules generally apply to all FINRA members, the Incorporated
NYSE rules apply only to those members of FINRA that are also
members of the NYSE.
\8\ See Securities Exchange Act Release No. 81098 (July 7,
2017), 82 FR 32419 (July 13, 2017) (Order Approving File No. SR-
FINRA-2017-007). See also FINRA Regulatory Notice 17-30 (SEC
Approves Consolidated FINRA Registration Rules, Restructured
Representative-Level Qualification Examinations and Changes to
Continuing Education Requirements) (October 2017). FINRA articulated
its belief that the proposed rule change would streamline, and bring
consistency and uniformity to, its registration rules, which would,
in turn, assist FINRA members and their associated persons in
complying with the rules and improve regulatory efficiency. FINRA
also determined to enhance the overall efficiency of its
representative-level examinations program by eliminating redundancy
of subject matter content across examinations, retiring several
outdated representative-level registrations, and introducing a
general knowledge examination that could be taken by all potential
representative-level registrants and the general public. FINRA
amended certain aspects of its continuing education rule, including
by codifying existing guidance regarding the effect of failing to
complete the Regulatory Element on a registered person's activities
and compensation.
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The Exchange now proposes to amend, reorganize and enhance its own
membership, registration and qualification rules in part in response to
the FINRA Rule Changes, and also in order to conform the Exchange's
rules more closely to those of its affiliated exchanges in the interest
of uniformity and to facilitate compliance with membership,
registration and qualification regulatory requirements by members of
multiple Nasdaq-affiliated exchanges including Phlx. Last, the Exchange
proposes to enhance its registration rules by adding a new registration
requirement applicable to developers of algorithmic trading systems
similar to a requirement adopted by FINRA pursuant to a 2016 FINRA
proposed rule change.\9\
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\9\ See Securities Exchange Act Release No. 77551 (April 7,
2016), 81 FR 21914 (April 13, 2016) (Order Approving File No. SR-
FINRA-2016-007). In its proposed rule change FINRA addressed the
increasing significance of algorithmic trading strategies by
amending its rules to require registration, as Securities Traders,
of associated persons primarily responsible for the design,
development or significant modification of algorithmic trading
strategies, or who are responsible for the day-to-day supervision or
direction of such activities.
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As part of this proposed rule change, current Rules 53, Liability
for Dues Until Transfer or Military Service; 611, Principal
Registration Requirements; 612, Categories of Principal Registration;
613, Representative Registration; 614, Persons Exempt from
Registration; 615, Waiver of Requirements; 616, Electronic Filing
Requirements for Uniform Forms; 623, Fingerprinting; and 640,
Continuing Education for Registered Persons, are proposed to be
deleted. Rule 620, Trading Floor Registration, is proposed to be
renumbered and amended.\10\
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\10\ The Exchange also proposes conforming amendments to Rules
1, Definitions; 1024, Conduct of Accounts for Options Trading; 1090,
Clerks; 3202, Application of Other Rules of the Exchange; 9630,
Appeal; Equity Floor Procedure Advice A-7, Failure to Timely Submit
Amendments to Form U4, Form U5 and Form BD; Options Floor Procedure
Advice F-34, Failure to Timely Submit Amendments to Form U4, Form U5
and Form BD; and Section VII.C., FINRA Fees, of the Exchange's
Pricing Schedule, and the addition of new Rule 2040, Nonregistered
Foreign Finders. The Exchange is also proposing to amend the two
Floor Procedure Advices to delete references to the ``Department of
Market Regulation,'' which refer to FINRA's former Department of
Market Regulation. FINRA amended its rules recently to reflect an
internal reorganization of its Enforcement Operations. See
Securities Exchange Act Release No. 83781 (August 6, 2018), 83 FR
39802 (August 10, 2018). In July 2017, FINRA announced its plan to
consolidate its existing enforcement functions into a unified
Department of Enforcement. FINRA's recent rule change makes
technical and other non-substantive changes to FINRA Rules 9000
Series Code of Procedure to reflect the single Department of
Enforcement, which the Exchange is mirroring in the two Floor
Procedure Advices which will now refer only to FINRA's Department of
Enforcement.
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In place of the deleted rules and rule sections the Exchange
proposes to adopt a new 1200 Series of rules captioned Registration,
Qualification and Continuing Education generally conforming to and
based upon FINRA's new 1200 Series of rules resulting from the FINRA
Rule Changes, but with a number of Exchange-specific variations.\11\
The proposed new 1200 Series is also being proposed for adoption by
Phlx's affiliated exchanges in order to facilitate compliance with
membership, registration and qualification requirements by members of
two or more of those affiliated exchanges.\12\ In the new 1200 Series
of
[[Page 50983]]
rules the Exchange would, among other things, recognize additional
associated person registration categories, recognize a new general
knowledge examination, permit the maintenance of permissive
registrations, and require Securities Trader registration of developers
of algorithmic trading strategies consistent with a comparable,
existing FINRA registration requirement.\13\
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\11\ The proposed Phlx 1200 Series of Rules would consist of
Rule 1210, Registration Requirements; Rule 1220, Registration
Categories; Rule 1230, Associated Persons Exempt from Registration;
Rule 1240, Continuing Education Requirements; Rule 1250, Electronic
Filing Requirements for Uniform Forms; and Rule 1260, Trading Floor
Registration.
\12\ The Exchange's five affiliated exchanges, The Nasdaq Stock
Market LLC (``Nasdaq''), Nasdaq BX, Inc. (``BX''); Nasdaq ISE, LLC
(``ISE''); Nasdaq GEMX, LLC (``GEMX''); and Nasdaq MRX, LLC
(``MRX'') (together with Phlx, the ``Nasdaq Affiliated Exchanges'')
are also submitting proposed rule changes to adopt the 1200 Series
of rules. See SR-NASDAQ-2018-078, SR-BX-2018-047, SR-ISE-2018-82,
SR-GEMX-2018-33 and SR-MRX-2018-31. The Exchange recently added a
shell structure to its rulebook with the purpose of improving
efficiency and readability and to align its rules closer to those of
the other Nasdaq Affiliated Exchanges. See Securities Exchange Act
Release No. 82169 (November 29, 2017), 82 FR 57508 (December 5,
2017) (SR-Phlx-2017-97). Ultimately, the Exchange intends to submit
another proposed rule change to transfer the Exchange's 1200 Series
of rules into the new shell structure. The Phlx 1200 Series of rules
would differ slightly from the 1200 Series of the other Nasdaq
Affiliated Exchanges given Phlx's trading floor and its unique
membership structure which features the concept of a ``member
organization.'' The Phlx 1200 Series would therefore include a Rule
1260, Trading Floor Registration. Additionally, each of the new Phlx
1200 Series of rules (except Rule 1260) would contain a statement
that references to a ``member'' in that rule shall be deemed to be
references to a ``member organization.''
\13\ See Securities Exchange Act Release No. 77551 (April 7,
2016), 81 FR 21914 (April 13, 2016) (order approving SR-FINRA-2016-
007). In its proposed rule change to adopt this registration
requirement, FINRA addressed the increasing significance of
algorithmic trading strategies by proposing to require registration,
as Securities Traders, of associated persons primarily responsible
for the design, development or significant modification of
algorithmic trading strategies, or who are responsible for the day-
to-day supervision or direction of such activities.
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The proposed rule change would become operative October 1, 2018
with the exception of the new registration requirement for developers
of algorithmic trading strategies which would become operative April 1,
2019.
Proposed Rules
A. Registration Requirements (Proposed Rule 1210)
Exchange Rules 613(a) and 611(a) currently require that persons
engaged, or to be engaged, in the investment banking or securities
business of a member who are to function as representatives or
principals register with the Exchange in the category of registration
appropriate to their functions as specified in Exchange Rules 613 and
612.\14\ The Exchange is proposing to consolidate and streamline
provisions of Exchange Rules 613(a) and 611(a) and to adopt them as
Exchange Rule 1210, subject to several changes.\15\
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\14\ Section (a) of Rule 613 includes an exception for members
whose activities are limited to the Exchange's options trading floor
and who are registered pursuant to Rule 620(a), as well as for
associated persons whose activities are limited to the Exchange's
options trading floor and are registered pursuant to Rule 620(b). As
discussed below, the Exchange proposes to preserve this exception as
new section (c) of proposed Rule 1260.
\15\ In general the 1200 Series would conform the Exchange's
rules to FINRA's rules as revised in the FINRA Rule Changes, with
modifications tailored to the business of the Exchange and of the
other Nasdaq Affiliated Exchanges. However, the Exchange also
proposes to adopt Rule 1210, Supplementary Material .12, which is
not based upon a FINRA rule but instead on current Nasdaq Rule
1031(c), (d) and (e), which Nasdaq is proposing in SR-Nasdaq-2018-
078 to relocate to Rule 1210, Supplementary Material .12 in the
Nasdaq rulebook. These provisions govern the process for applying
for registration and amending the registration application, as well
as for notifying the Exchange of termination of the member's
association with a person registered with the Exchange. The Exchange
proposes to adopt Rule 1210, Supplemental Material .12, in order to
have uniform processes and requirements in this area across the
Nasdaq Affiliated Exchanges.
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Proposed Rule 1210 provides that each person engaged in the
securities business of a member must register with the Exchange as a
representative or principal in each category of registration
appropriate to his or her functions and responsibilities as specified
in proposed Rule 1220, unless exempt from registration pursuant to
proposed Rule 1230. Unlike current Rules 613(a) and 611(a), proposed
Rule 1210 would not require persons engaged in the investment banking
business of a member to register with the Exchange since a member's
investment banking business is not the primary concern of the Exchange
or the focus of its operations.\16\ Proposed Rule 1210 also provides
that such person is not qualified to function in any registered
capacity other than that for which the person is registered, unless
otherwise stated in the rules.
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\16\ Miami International Securities Exchange LLC (``MIAX'') Rule
203(a) and current ISE Rule 313(a)(1) likewise require registration
of associated persons of members engaged in the member's securities
business, but do not require registration with the exchanges of
associated persons of members who engage in the member's investment
banking business. Because the Exchange's proposed registration rules
focus solely on securities trading activity, the proposed rules
differ from the FINRA Rule Changes by omitting references to
investment banking in proposed Rules 1210, 1210.03, 1210.10,
1220(a)(1), 1220(a)(2)(B), 1220(b), and 1240(b)(1), and also by
omitting as unnecessary from Rule 1220(a)(10) a limitation on the
qualification of a General Securities Sales Supervisor to supervise
the origination and structuring of an underwriting.
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B. Minimum Number of Registered Principals (Proposed Rule 1210.01)
Existing Rule 611(e), Requirement of Two Registered Principals, at
section (i) requires members other than sole proprietorships to 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 with 25 or
fewer registered representatives is only required to have one officer
or partner who is registered as a principal.\17\ Under Rule 611(e)(ii)
the Exchange may waive the provisions of paragraph (e)(i) in situations
that indicate conclusively that only one person should be required to
register as a principal. Additionally, Rule 611(e)(iii) requires an
applicant for membership to have at least one person qualified for
registration as a Limited Principal--Financial and Operations, pursuant
to Rule 612(b)(i).\18\
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\17\ Rule 611(e)(i)(A)-(D) defines the term ``proprietary
trading firm''. Because the Exchange is proposing to delete Rule 611
in its entirety, Rule 611(e)(i) (A)-(D) would be reworded and
relocated to Rule 1, Definitions, Section (kk) as a defined term.
\18\ The Exchange's rules currently refer to various categories
of limited principal registration as ``Limited Principal--''
followed by the name of the registration category. In this proposed
rule change, the Exchange will no longer employ the term ``Limited
Principal--'' in discussing various principal registration
categories. No substantive change is intended; shortening the names
of the various principals simply improves readability of the rules.
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The Exchange is proposing to delete these requirements and in their
place to adopt new Rule 1210.01. The new rule would provide firms that
limit the scope of their business with flexibility in satisfying the
two-principal requirement. In particular, proposed Rule 1210.01
requires that a member have a minimum of two General Securities
Principals, provided that a member that is limited in the scope of its
activities may instead have two officers or partners who are registered
in a principal category that corresponds to the scope of the member's
activities.\19\ For instance, if a firm's business is limited to
securities trading, the firm may have two Securities Trader Principals,
instead of two General Securities Principals. Additionally, Exchange
Rule 1210.01 provides that any member with only one associated person
is excluded from the two principal requirement. Proposed Rule 1210.01
would provide that existing members as well as new applicants may
request a waiver of the two-principal requirement, consistent with
current Exchange Rule 611(e)(ii). Finally, the Exchange is proposing to
retain the existing rule's provision permitting a proprietary trading
firm with 25 or fewer registered representatives to have just one
registered principal. The FINRA Rule Changes do not include this
provision.\20\ The Financial and
[[Page 50984]]
Operations Principal requirement of current Rules 611(e)(i) and
612(b)(i), which it references, would be revised and relocated to
proposed Rule 1220(a)(4)(A).
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\19\ The principal registration categories are described in
greater detail below.
\20\ The Exchange is not proposing provisions conforming to the
new FINRA Rule 1210.01 requirements that all FINRA members are
required to have a Principal Financial Officer and a Principal
Operations Officer, because it believes that its proposed Rule
1220(a)(4), Financial and Operations Principal, which requires
member firms operating pursuant to certain provisions of SEC rules
to designate at least one Financial and Operations Principal, is
sufficient. Further, the Exchange is not adopting the FINRA Rule
1210.01 requirements that (1) a member engaged in investment banking
activities have an Investment Banking Principal, (2) a member
engaged in research activities have a Research Principal, or (3) a
member engaged in options activities with the public have a
Registered Options Principal. The Exchange does not recognize the
Investment Banking Principal or the Research Principal registration
categories, and the Registered Options Principal registration
requirement is set forth in Rule 1210.08 and its inclusion is
therefore unnecessary in Rule 1210.01.
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C. Permissive Registrations (Proposed Rule 1210.02)
Current Rule 611(a) prohibits member organizations from maintaining
a principal registration with the Exchange for any person (A) who is no
longer active in the member organization's investment banking or
securities business, (B) who is no longer functioning as a principal,
or (C) where the sole purpose is to avoid the examination requirement
of the rule. A member organization may not make application for the
registration of any person as principal where there is no intent to
employ such person in the member organization's investment banking or
securities business. However, a member organization may maintain or
make application for the registration as a principal of a person who
performs legal, compliance, internal audit, back-office operations, or
similar duties for the member organization or a person engaged in the
investment banking or securities business of a foreign securities
affiliate or subsidiary of the member organization. Exchange Rule
613(b) is a parallel provision applicable to representatives.
The Exchange is proposing to replace these provisions with new Rule
1210.02. The Exchange is also proposing to expand the scope of
permissive registrations and to clarify a member's obligations
regarding individuals who are maintaining such registrations.
Specifically, proposed Rule 1210.02 allows any associated person to
obtain and maintain any registration permitted by the member. For
instance, an associated person of a member working solely in a clerical
or ministerial capacity, such as in an administrative capacity, would
be able to obtain and maintain a General Securities Representative
registration with the member. As another example, an associated person
of a member who is registered, and functioning solely, as a General
Securities Representative would be able to obtain and maintain a
General Securities Principal registration with the member. Further,
proposed Rule 1210.02 allows an individual engaged in the securities
business of a foreign securities affiliate or subsidiary of a member to
obtain and maintain any registration permitted by the member.
The Exchange is proposing to permit the registration of such
individuals for several reasons. First, a member may foresee a need to
move a former representative or principal who has not been registered
for two or more years back into a position that would require such
person to be registered. Currently, such persons are required to
requalify (or obtain a waiver of the applicable qualification
examinations) and reapply for registration. Second, the proposed rule
change would allow members to develop a depth of associated persons
with registrations in the event of unanticipated personnel changes.
Third, allowing registration in additional categories encourages
greater regulatory understanding. Finally, the proposed rule change
would eliminate an inconsistency in the current rules, which permit
some associated persons of a member to obtain permissive registrations,
but not others who equally are engaged in the member's business.
Individuals maintaining a permissive registration under the
proposed rule change would be considered registered persons and subject
to all Exchange rules, to the extent relevant to their activities. For
instance, an individual working solely in an administrative capacity
would be able to maintain a General Securities Representative
registration and would be considered a registered person for purposes
of rules relating to borrowing from or lending to customers, but the
rule would have no practical application to his or her conduct because
he or she would not have any customers.
Consistent with the Exchange's supervision rules, members would be
required to have adequate supervisory systems and procedures reasonably
designed to ensure that individuals with permissive registrations do
not act outside the scope of their assigned functions.\21\ With respect
to an individual who solely maintains a permissive registration, such
as an individual working exclusively in an administrative capacity, the
individual's day-to-day supervisor may be a nonregistered person.
Members would be required to assign a registered supervisor to this
person who would be responsible for periodically contacting such
individual's day-to-day supervisor to verify that the individual is not
acting outside the scope of his or her assigned functions. If such
individual is permissively registered as a representative, the
registered supervisor must be registered as a representative or
principal. If the individual is permissively registered as a principal,
the registered supervisor must be registered as a principal.\22\
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\21\ The FINRA Proposed Rules at Rule 1210.02 cite FINRA's own
supervision rule, by number. Because the 1200 Series of rules is
intended to apply to the Exchange as well as to its affiliates which
have different supervision rules, proposed Rule 1210.02 refers
generally to the supervision rules rather than identifying them by
number.
\22\ In either case, the registered supervisor of an individual
who solely maintains a permissive registration would not be required
to be registered in the same representative or principal
registration category as the permissively-registered individual.
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D. Qualification Examinations and Waivers of Examinations (Proposed
Rule 1210.03)
Current Rule 611(a) provides that before a registration can become
effective, persons who are to function as principals must pass a
qualification examination for principals appropriate to the category of
registration as specified in the rule. Rule 613(d) provides that no
member organization shall permit any member or person associated with
it to engage in the investment banking or securities business unless
the member organization determines that such person satisfies the
qualification requirements established by the Board and is not subject
to statutory disqualification as defined in Section 3(a)(39) \23\ of
the Act. The Exchange is proposing to replace these provisions with new
Rule 1210.03.
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\23\ 15 U.S.C. 78c(a)(39).
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In addition, as part of the FINRA Rule Changes FINRA has adopted a
restructured representative-level qualification examination program
whereby representative-level registrants would be required to take a
general knowledge examination (the Securities Industry Essentials Exam
or ``SIE'') and a specialized knowledge examination appropriate to
their job functions at the firm with which they are associating.
Therefore, proposed Rule 1210.03 provides that before the registration
of a person as a representative can become effective under proposed
Rule 1210, such person must pass the SIE and an appropriate
representative-level qualification examination as specified in proposed
Rule 1220. Proposed Rule 1210.03 also provides that before the
registration of a person as a principal
[[Page 50985]]
can become effective under proposed Rule 1210, such person must pass an
appropriate principal-level qualification examination as specified in
proposed Rule 1220.
Further, proposed 1210.03 provides that if the job functions of a
registered representative other than an individual registered as an
Order Processing Assistant Representative, change and he or she needs
to become registered in another representative-level category, he or
she would not need to pass the SIE again. Rather, the registered person
would need to pass only the appropriate representative-level
qualification examination.\24\ Thus under the proposed rule change,
individuals seeking registration in two or more representative-level
categories would experience a net decrease in the total number of exam
questions they would be required to answer because the SIE content
would be tested only once.
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\24\ The exception for Order Processing Assistant
Representatives and Foreign Associates was adopted by FINRA in FINRA
Rule 1210.03, and is included in proposed Exchange Rule 1210.03
without the reference to Foreign Associates which is a registration
category the Nasdaq Affiliated Exchanges do not recognize. FINRA has
stated that the SIE would assess basic product knowledge; the
structure and function of the securities industry markets,
regulatory agencies and their functions; and regulated and
prohibited practices. Proposed Rule 1210.03 provides that all
associated persons, such as associated persons whose functions are
solely and exclusively clerical or ministerial, are eligible to take
the SIE. Proposed Rule 1210.03 also provides that individuals who
are not associated persons of firms, such as members of the general
public, are eligible to take the SIE. FINRA has stated its belief
that expanding the pool of individuals who are eligible to take the
SIE would enable prospective securities industry professionals to
demonstrate to prospective employers a basic level of knowledge
prior to submitting a job application. Further, this approach would
allow for more flexibility and career mobility within the securities
industry. While all associated persons of firms as well as
individuals who are not associated persons would be eligible to take
the SIE pursuant to proposed Rule 1210.03, passing the SIE alone
would not qualify them for registration with the Exchange. Rather,
to be eligible for registration with the Exchange, an individual
would be required to pass an applicable representative or principal
qualification examination and complete the other requirements of the
registration process.
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The proposed rule change solely impacts the representative-level
qualification requirements. The proposed rule change does not change
the scope of the activities permitted under the existing representative
categories. For instance, after the operative date of the proposed rule
change, a previously unregistered individual registering as a
Securities Trader for the first time would be required to pass the SIE
and an appropriate specialized knowledge examination. However, such
individual may engage only in those activities in which a current
Securities Trader may engage under current Exchange Rules.
Individuals who are registered on the operative date of the
proposed rule change would be eligible to maintain those registrations
without being subject to any additional requirements. Individuals who
had been registered within the past two years prior to the operative
date of the proposed rule change would also be eligible to maintain
those registrations without being subject to any additional
requirements, provided that they reregister with the Exchange within
two years from the date of their last registration.
Further, registered representatives other than an individual
registered as an Order Processing Assistant Representative, would be
considered to have passed the SIE in the CRD system, and thus if they
wish to register in any other representative category after the
operative date of the proposed rule change, they could do so by taking
only the appropriate specialized knowledge examination.\25\ However,
with respect to an individual who is not registered on the operative
date of the proposed rule change but was registered within the past two
years prior to the operative date of the proposed rule change, the
individual's SIE status in the CRD system would be administratively
terminated if such individual does not register within four years from
the date of the individual's last registration.\26\
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\25\ Under the proposed rule change, only individuals who have
passed an appropriate representative-level examination would be
considered to have passed the SIE. Registered principals who do not
hold an appropriate representative-level registration would not be
considered to have passed the SIE. For example, an individual who is
registered solely as a Financial and Operations Principal (Series
27) today would have to take the Series 7 to become registered as a
General Securities Representative. Under the proposed rule change,
in the future, this individual would have to pass the SIE and the
specialized Series 7 examination to obtain registration as a General
Securities Representative.
\26\ As discussed below, the Exchange is proposing a four-year
expiration period for the SIE.
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In addition, individuals, with the exception of Order Processing
Assistant Representatives, who had been registered as representatives
two or more years, but less than four years, prior to the operative
date of the proposed rule change would also be considered to have
passed the SIE and designated as such in the CRD system. Moreover, if
such individuals re-register with a firm after the operative date of
the proposed rule change and within four years of having been
previously registered, they would only need to pass the specialized
knowledge examination associated with that registration position.
However, if they do not register within four years from the date of
their last registration, their SIE status in the CRD system would be
administratively terminated. Similar to the current process for
registration, firms would continue to use the CRD system to request
registrations for representatives. An individual would be able to
schedule both the SIE and specialized knowledge examinations for the
same day, provided the individual is able to reserve space at one of
FINRA's designated testing centers.
Finally, under current Rule 615, 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. The Exchange is proposing to replace
Rule 615 with proposed Rule 1210.03 with changes that track FINRA Rule
1210.03. The proposed rule provides that the Exchange will only
consider examination waiver requests submitted by a firm for
individuals associated with the firm who are seeking registration in a
representative- or principal-level registration category. Moreover,
proposed Rule 1210.03 states that the Exchange will consider waivers of
the SIE alone or the SIE and the representative- and principal-level
examination(s) for such individuals.
E. Requirements for Registered Persons Functioning as Principals for a
Limited Period (Proposed Rule 1210.04)
Current Rule 611(d) provides that any person associated with a
member organization as a registered representative whose duties are
changed by the member organization so as to require registration in any
principal classification is allowed a period of 90 calendar days
following the change in his or her duties during which to pass the
appropriate qualification examination for principals. It further
provides that any person not presently associated with a member
organization as registered representative seeking registration as a
principal shall submit the appropriate application for registration and
any required registration and examination fees. Such person shall be
allowed a period of 90 days after all applicable prerequisites are
fulfilled to pass the appropriate qualification examination for
principals. A person who has never been registered does not qualify for
this exception. This provision specifically applies to a person
associated with a member organization of another registered national
securities exchange or association who is required to register in a
principal classification under
[[Page 50986]]
Exchange rules but who is not required to be so registered under the
rules of the other exchange or association, as well as to a person
associated with a member organization who was not required to register
with the Exchange as a principal prior to the adoption of Exchange Rule
611.
The Exchange is proposing to adopt these requirements of Rule
611(d) as new Rule 1210.04, subject to certain changes. Proposed Rule
1210.04 states that a member may designate any person currently
registered, or who becomes registered, with the member as a
representative to function as a principal for a limited period,
provided that such person has at least 18 months of experience
functioning as a registered representative within the five-year period
immediately preceding the designation and has fulfilled all
prerequisite registration, fee and examination requirements prior to
designation as principal. These requirements apply to any principal
category, including those categories that are not subject to a
prerequisite representative-level registration requirement, such as the
Financial and Operations Principal registration category.\27\ This
change is intended to ensure that representatives designated to
function as principals for the limited period under the proposed rule
have an appropriate level of registered representative experience. The
proposed rule clarifies that the requirements of the rule apply to any
principal category, including those categories that are not subject to
a prerequisite representative-level registration requirement, such as
the Financial and Operations Principal registration category.
Similarly, the rule would permit a member to designate any person
currently registered, or who becomes registered, with the member as a
principal to function in another principal category for a period of 120
calendar days prior to passing an appropriate qualification examination
as specified under Rule 1220. Proposed Rule 1210.04 would increase the
existing rule's 90 day period to 120 days, to provide additional
flexibility for representatives functioning as principals for a limited
period of time.
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\27\ In this regard, the Exchange notes that qualifying as a
registered representative is currently a prerequisite to qualifying
as a principal on the Exchange except with respect to the Financial
and Operations Principal registration category.
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The Exchange is not conserving in new Rule 1210.04 the language in
existing Rule 611 that the provisions apply to a person associated with
a member organization of another registered national securities
exchange or association who is required to register in a principal
classification under Exchange rules but who is not required to be so
registered under the rules of the other exchange or association, as
well as to a person associated with a member organization who was not
required to register with the Exchange as a Principal prior to the
adoption of Exchange Rule 611. The Exchange believes this language to
be superfluous as the applicability to various individuals of proposed
Rule 1210.04 speaks for itself and requires no elaboration.\28\
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\28\ Proposed Rule 1210.04 omits FINRA Rule 1210.04's reference
to Foreign Associates, which is a registration category not
recognized by the Nasdaq Affiliated Exchanges, but otherwise tracks
the language of FINRA Rule 1210.04.
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F. Rules of Conduct for Taking Examinations and Confidentiality of
Examinations (Proposed Rule 1210.05)
Before taking an examination, FINRA currently requires each
candidate to agree to the Rules of Conduct for taking a qualification
examination. Among other things, the examination Rules of Conduct
require each candidate to attest that he or she is in fact the person
who is taking the examination. These Rules of Conduct also require that
each candidate agree that the examination content is the intellectual
property of FINRA and that the content cannot be copied or
redistributed by any means. If FINRA discovers that a candidate has
violated the Rules of Conduct for taking a qualification examination,
the candidate may forfeit the results of the examination and may be
subject to disciplinary action by FINRA. For instance, for cheating on
a qualification examination, FINRA's Sanction Guidelines recommend a
bar.\29\
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\29\ See SR-FINRA-2017-007, pp. 26-27.
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Effective October 1, 2018, FINRA has codified the requirements
relating to the Rules of Conduct for examinations under FINRA Rule
1210.05. FINRA also adopted Rules of Conduct for taking the SIE for
associated persons and non-associated persons who take the SIE.
The Exchange proposes to adopt its own version of Rule 1210.05,
which would provide that associated persons taking the SIE are subject
to the SIE Rules of Conduct, and that associated persons taking any
representative or principal examination are subject to the Rules of
Conduct for representative and principal examinations. Under the
proposed rule, a violation of the SIE Rules of Conduct or the Rules of
Conduct for representative and principal examinations by an associated
person would be deemed to be a violation of Exchange rules requiring
observance of high standards of commercial honor or just and equitable
principles of trade, such as Exchange Rule 707.\30\ Further, if the
Exchange determines that an associated person has violated the SIE
Rules of Conduct or the Rules of Conduct for representative and
principal examinations, the associated person may forfeit the results
of the examination and may be subject to disciplinary action by the
Exchange.
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\30\ Exchange Rule 707 prohibits members, member organizations
or persons associated with or employed by a member or member
organization from engaging in acts or practices inconsistent with
just and equitable principles of trade. FINRA Rule 1210.05 cites
FINRA Rule 2010, which is a comparable rule.
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Proposed Rule 1210.05 also states that the Exchange considers all
of the qualification examinations' content to be highly confidential.
The removal of examination content from an examination center,
reproduction, disclosure, receipt from or passing to any person, or use
for study purposes of any portion of such qualification examination or
any other use that would compromise the effectiveness of the
examinations and the use in any manner and at any time of the questions
or answers to the examinations would be prohibited and would be deemed
to be a violation of Exchange rules requiring observance of high
standards of commercial honor or just and equitable principles of
trade. Finally, proposed Rule 1210.05 would prohibit an applicant from
receiving assistance while taking the examination, and require the
applicant to certify that no assistance was given to or received by him
or her during the examination.\31\
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\31\ The Exchange is not adopting portions of FINRA's Rule
1210.05 which apply to non-associated persons, over whom the
Exchange would in any event have no jurisdiction.
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G. Waiting Periods for Retaking a Failed Examination (Proposed Rule
1210.06)
The Exchange proposes to adopt new Rule 1210.06, which provides
that a person who fails an examination may retake that examination
after 30 calendar days from the date of the person's last attempt to
pass that examination.\32\ Proposed Rule 1210.06 further provides that
if a person fails an examination three or more times in succession
within a two-year period, the person is prohibited from retaking that
examination until 180 calendar days from the date of the person's last
attempt to pass it. These waiting periods would apply to the SIE and
the representative- and principal-level examinations.\33\
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\32\ Proposed Rule 1210.06 has no counterpart in existing
Exchange rules.
\33\ FINRA Rule 1210.06 requires individuals taking the SIE who
are not associated persons to agree to be subject to the same
waiting periods for retaking the SIE. The Exchange is not including
this language in proposed Rule 1210.06, as the Exchange will not
apply the 1200 Series of rules in any event to individuals who are
not associated persons of members.
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[[Page 50987]]
H. CE Requirements (Proposed Rule 1210.07)
Pursuant to current Exchange Rule 640, no member organization shall
permit any registered person to continue to, and no registered person
shall continue to, perform duties as a registered person, unless such
person has complied with the continuing education requirements of
paragraph (a) of Rule 640. Under the rule the CE requirements
applicable to registered persons consist of a Regulatory Element \34\
and a Firm Element.\35\ The Regulatory Element applies to registered
persons and must be completed within prescribed time frames.\36\ For
purposes of the Regulatory Element, a ``registered person'' is defined
in current Rule 640 as any member, registered representative or other
person registered or required to be registered under Exchange Rules,
but does not include such person whose activities are limited solely to
the transaction of business on the Exchange's trading floor, with
members or registered broker-dealers.\37\ The Firm Element consists of
annual, member-developed and administered training programs designed to
keep covered registered persons current regarding securities products,
services and strategies offered by the member. For purposes of the Firm
Element, the term ``covered registered persons'' is defined as any
registered person who has direct contact with customers in the conduct
of the member organization's securities sales, trading or investment
banking activities, and to the immediate supervisors of such
persons.\38\
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\34\ See Rule 640(a).
\35\ See Rule 640(b).
\36\ Pursuant to Rule 640(a), each registered person is required
to complete the Regulatory Element on the occurrence of their second
registration anniversary date(s), and every three years thereafter
or as otherwise prescribed by the Exchange. On each occasion, the
Regulatory Element must be completed within 120 days after the
person's registration anniversary date.
\37\ See Rule 640, Commentary .01.
\38\ See Rule 640(b)(1).
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The Exchange proposes to delete current Rule 640. The CE
requirements set forth in Rule 640 are proposed to be reorganized and
renumbered, and to be adopted as new Rule 1240. The Exchange believes
that all persons registered pursuant to Rule 1210, regardless of their
activities, should be subject to the Regulatory Element of the CE
requirements so that they can keep their knowledge of the securities
industry current.\39\ Therefore, the Exchange is proposing Rule
1210.07, to clarify that all ``covered persons'' as defined in Rule
1240(a)(5), including those who solely maintain a permissive
registration, are required to satisfy the Regulatory Element, as
specified in proposed new Rule 1240, discussed below.\40\ Individuals
who have passed the SIE but not a representative or principal-level
examination and do not hold a registered position would not be subject
to any CE requirements. Consistent with current practice, proposed Rule
1210.07 would also provide that a registered person of a member who
becomes CE inactive would not be permitted to be registered in another
registration category with that member or be registered in any
registration category with another member, until the person has
satisfied the Regulatory Element.
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\39\ The Exchange notes that Rule 625 also may require
individuals who are not required to register pursuant to Rule 1210
to complete mandatory training. The rule provides that all members
and persons employed by or associated with such member or a member
organization shall successfully complete mandatory training, as
required by the Exchange. Training topics include, but are not
limited to, training related to that person's function at the
Exchange, changes in existing automated systems or any new
technology that is utilized by the Exchange, compliance with
Exchange Rules and federal securities laws, and issues related to
conduct, health and safety on the trading floor. In addition, floor
members shall complete mandatory training programs, on at least a
semi-annual basis, that address compliance with the federal
securities laws and the Exchange's Rules in place to prevent and
deter unlawful trading by floor members.
\40\ Current Rule 640 would be deleted, replaced by proposed
Rule 1240. Rule 1240(a)(5) would define the term ``covered person''
as any person registered with the Exchange pursuant to Rule 1210,
including any person who is permissively registered pursuant to Rule
1210.02, and any person who is designated as eligible for a waiver
pursuant to Rule 1210.09.
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Individuals whose activities are limited solely to the transaction
of business on the Exchange's trading floor, with members or registered
broker-dealers, would continue to be excluded from the CE
requirement.\41\ Pursuant to proposed Rule 1260, Section (c), members
whose activities are limited to the Exchange's options trading floor
and who are registered pursuant to proposed Rule 1260(a) as well as
associated persons whose activities are limited to the Exchange's
options trading floor and who are registered pursuant to proposed Rule
1260(b) would be exempt from the representative registration
requirements of proposed Rules 1210 and 1220. The CE requirements of
proposed Rule 1240 would apply only to ``covered persons,'' defined in
turn in proposed Rule 1240 as persons registered pursuant to Rule 1210.
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\41\ See existing Rule 640, Commentary .01, which excludes such
individuals from the term ``registered person'' as it is used in
Rule 640.
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I. Lapse of Registration and Expiration of SIE (Proposed Rule 1210.08)
Existing Rule 611(c) states that any person whose registration has
been revoked by the Exchange as a disciplinary sanction or whose most
recent registration as principal has been terminated for two or more
years immediately preceding the date of receipt by the Exchange of a
new application is required to pass a qualification examination for
Principals appropriate to the category of registration as specified in
Rule 611. The two year period is calculated from the termination date
to the date the Exchange receives a new application for registration. A
comparable provision applicable to representatives is found in Rule
613(c). The Exchange is proposing to delete existing Rules 611(c) and
613(c), and to replace them with Rule 1210.08, Lapse of Registration
and Expiration of SIE.
Proposed Rule 1210.08 contains language comparable to that of
existing Rules 611(c) and 613(c) but also clarifies that, for purposes
of the proposed rule, an application would not be considered to have
been received by the Exchange if that application does not result in a
registration. Proposed Rule 1210.08 also sets forth the expiration
period of the SIE. Based on the content covered on the SIE, the
Exchange is proposing that a passing result on the SIE be valid for
four years. Therefore, under the proposed rule change, an individual
who passes the SIE and is an associated person of a firm at the time
would have up to four years from the date he or she passes the SIE to
pass a representative-level examination to register as a representative
with that firm, or a subsequent firm, without having to retake the SIE.
In addition, an individual who passes the SIE and is not an associated
person at the time would have up to four years from the date he or she
passes the SIE to become an associated person of a firm, pass a
representative-level examination and register as a representative
without having to retake the SIE.
Moreover, an individual holding a representative-level registration
who leaves the industry after the operative date of the proposed rule
change would have up to four years to re-associate with a firm and
register as a representative without having to retake the SIE. However,
the four-year expiration period in the proposed rule change extends
only to the SIE, and not the representative- and principal-level
[[Page 50988]]
registrations. The representative- and principal-level registrations
would continue to be subject to a two year expiration period as is the
case today.
J. Waiver of Examinations for Individuals Working for a Financial
Services Industry Affiliate of a Member (Proposed Rule 1210.09)
The Exchange is proposing Rule 1210.09 to provide a new process
whereby individuals who would be working for a financial services
industry affiliate of a member \42\ would terminate their registrations
with the member and would be granted a waiver of their requalification
requirements upon re-registering with a member, provided the firm that
is requesting the waiver and the individual satisfy the criteria for a
Financial Services Affiliate (``FSA'') waiver.\43\ The purpose of the
FSA waiver is to provide a firm greater flexibility to move personnel,
including senior and middle management, between the firm and its
financial services affiliate(s) so that they may gain organizational
skills and better knowledge of products developed by the affiliate(s)
without the individuals having to requalify by examination each time
they returned to the firm.
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\42\ Proposed Rule 1210.09 defines a ``financial services
industry affiliate of a member'' as a legal entity that controls, is
controlled by or is under common control with a member and is
regulated by the SEC, Commodity Futures Trading Commission
(``CFTC''), state securities authorities, federal or state banking
authorities, state insurance authorities, or substantially
equivalent foreign regulatory authorities.
\43\ There is no counterpart to proposed Rule 1210.09 in the
Exchange's existing rules. FINRA Rule 1210.09 was recently adopted
as a new waiver process for FINRA registrants, as part of the FINRA
Rule Changes.
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Under the proposed waiver process, the first time a registered
person is designated as eligible for a waiver based on the FSA
criteria, the member with which the individual is registered would
notify the Exchange of the FSA designation. The member would
concurrently file a full Form U5 terminating the individual's
registration with the firm, which would also terminate the individual's
other SRO and state registrations.
To be eligible for initial designation as an FSA-eligible person by
a member, an individual must have been registered for a total of five
years within the most recent 10-year period prior to the designation,
including for the most recent year with that member.\44\ An individual
would have to satisfy these preconditions only for purposes of his or
her initial designation as an FSA-eligible person, and not for any
subsequent FSA designation(s). Thereafter, the individual would be
eligible for a waiver for up to seven years from the date of initial
designation \45\ provided that the other conditions of the waiver, as
described below, have been satisfied. Consequently, a member other than
the member that initially designated an individual as an FSA-eligible
person may request a waiver for the individual and more than one member
may request a waiver for the individual during the seven-year
period.\46\
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\44\ For purposes of this requirement, a five year period of
registration with the Exchange, with FINRA or with another self-
regulatory organization would be sufficient.
\45\ Individuals would be eligible for a single, fixed seven-
year period from the date of initial designation, and the period
would not be tolled or renewed.
\46\ The following examples illustrate this point:
Example 1. Firm A designates an individual as an FSA-eligible
person by notifying the Exchange and files a Form U5. The individual
joins Firm A's financial services affiliate. Firm A does not submit
a waiver request for the individual. After working for Firm A's
financial services affiliate for three years, the individual
directly joins Firm B's financial services affiliate for three
years. Firm B then submits a waiver request to register the
individual.
Example 2. Same as Example 1, but the individual directly joins
Firm B after working for Firm A's financial services affiliate, and
Firm B submits a waiver request to register the individual at that
point in time.
Example 3. Firm A designates an individual as an FSA-eligible
person by notifying the Exchange and files a Form U5. The individual
joins Firm A's financial services affiliate for three years. Firm A
then submits a waiver request to reregister the individual. After
working for Firm A in a registered capacity for six months, Firm A
re-designates the individual as an FSA-eligible person by notifying
FINRA and files a Form U5. The individual rejoins Firm A's financial
services affiliate for two years, after which the individual
directly joins Firm B's financial services affiliate for one year.
Firm B then submits a waiver request to register the individual.
Example 4. Same as Example 3, but the individual directly joins
Firm B after the second period of working for Firm A's financial
services affiliate, and Firm B submits a waiver request to register
the individual at that point in time.
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An individual designated as an FSA-eligible person would be subject
to the Regulatory Element of CE while working for a financial services
industry affiliate of a member. The individual would be subject to a
Regulatory Element program that correlates to his or her most recent
registration category, and CE would be based on the same cycle had the
individual remained registered. If the individual fails to complete the
prescribed Regulatory Element during the 120-day window for taking the
session, he or she would lose FSA eligibility (i.e., the individual
would have the standard two-year period after termination to re-
register without having to retake an examination). The Exchange is
making corresponding changes to Rule 640, Continuing Education
(proposed to be renumbered as Rule 1240).
Upon registering an FSA-eligible person, a firm would file a Form
U4 and request the appropriate registration(s) for the individual. The
firm would also submit an examination waiver request to the
Exchange,\47\ similar to the process used today for waiver requests,
and it would represent that the individual is eligible for an FSA
waiver based on the conditions set forth below. The Exchange would
review the waiver request and make a determination of whether to grant
the request within 30 calendar days of receiving the request. The
Exchange would summarily grant the request if the following conditions
are met:
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\47\ The Exchange would consider a waiver of the representative-
level qualification examination(s), the principal-level
qualification examination(s) and the SIE, as applicable.
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(1) Prior to the individual's initial designation as an FSA-
eligible person, the individual was registered for a total of five
years within the most recent 10- year period, including for the most
recent year with the member that initially designated the individual as
an FSA-eligible person;
(2) The waiver request is made within seven years of the
individual's initial designation as an FSA-eligible person by a member;
(3) The initial designation and any subsequent designation(s) were
made concurrently with the filing of the individual's related Form U5;
(4) The individual continuously worked for the financial services
affiliate(s) of a member since the last Form U5 filing;
(5) The individual has complied with the Regulatory Element of CE;
and
(6) The individual does not have any pending or adverse regulatory
matters, or terminations, that are reportable on the Form U4, and has
not otherwise been subject to a statutory disqualification while the
individual was designated as an FSA-eligible person with a member.
Following the Form U5 filing, an individual could move between the
financial services affiliates of a member so long as the individual is
continuously working for an affiliate. Further, a member could submit
multiple waiver requests for the individual, provided that the waiver
requests are made during the course of the seven-year period.\48\ An
individual
[[Page 50989]]
who has been designated as an FSA-eligible person by a member would not
be able to take additional examinations to gain additional
registrations while working for a financial services affiliate of a
member.
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\48\ For example, if a member submits a waiver request for an
FSA-eligible person who has been working for a financial services
affiliate of the member for three years and re-registers the
individual, the member could subsequently file a Form U5 and re-
designate the individual as an FSA-eligible person. Moreover, if the
individual works with a financial services affiliate of the member
for another three years, the member could submit a second waiver
request and re-register the individual upon returning to the member.
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K. Status of Persons Serving in the Armed Forces of the United States
(Proposed Rule 1210.10)
Current Rule 53, Inactive Status of Currently Registered Persons,
provides specific relief to registered persons serving in the Armed
Forces of the United States. Among other things, the rule permits a
registered person of a member or member organization who volunteers for
or is called into active duty in the Armed Forces of the United States
to be placed, after proper notification to the Exchange, upon inactive
status and remain eligible to receive ongoing transaction-related
compensation. The rule also includes specific provisions regarding the
deferment of the lapse of registration requirements in Rules 611, 613
and 3228 for formerly registered person serving in the Armed Forces of
the United States.
The Exchange is proposing to adopt Rule 53 as Rule 1210.10 with
certain changes. To enhance the efficiency of the current notification
process for registered persons serving in the Armed Forces, proposed
Rule 1210.10 requires that the member with which such person is
registered promptly notify the Exchange of such person's return to
employment with the member. A sole proprietor must similarly notify the
Exchange of his or her return to participation in the securities
business. Further, proposed Rule 1210.10 provides that the Exchange
would also defer the lapse of the SIE for formerly registered persons
serving in the Armed Forces of the United States.\49\
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\49\ Proposed Rule 1210.10 tracks FINRA Rule 1210.10 except for
the statement that inactive registered persons are not to be
included within the definition of ``Personnel'' for purposes of dues
or assessments as provided in Article VI of the FINRA By-Laws.
Instead, proposed Rule 1210.10 incorporates language from existing
Nasdaq and BX IM-1002-2, stating that inactive persons under the
rule are not included within the scope of fees, if any, charged by
the Exchange with respect to registered persons.
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L. Impermissible Registrations (Proposed Rule 1210.11)
Existing Rule 611(a) and 613(a) prohibit a member organization from
maintaining a principal or representative registration with the
Exchange for any person who is no longer active in the member
organization's investment banking or securities business, who is no
longer functioning in the registered capacity, or where the sole
purpose is to avoid an examination requirement. The rules also prohibit
a member organization from applying for the registration of a person as
representative or principal where the member organization does not
intend to employ the person in its investment banking or securities
business. These prohibitions do not apply to the current permissive
registration categories identified in Rules 611(a) and 613(a).\50\
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\50\ Rules 611(a) allows for permissive principal registration
of individuals who perform legal, compliance, internal audit, back-
office operations, or similar duties for the member organization or
a person engaged in the investment banking or securities business of
a foreign securities affiliate or subsidiary of the member
organization. Rule 613(a) permits permissive registration as a
representative of an individual who performs legal, compliance,
internal audit, back-office operations, or similar responsibilities
for the member organization, or a person who performs administrative
support functions for registered personnel, or a person engaged in
the investment banking or securities business of a foreign
securities affiliate or subsidiary of the member organization.
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In light of proposed Rule 1210.02, Permissive Registrations,
discussed above the Exchange is proposing to delete these provisions of
Rule 611(a) and 613(a) and instead adopt Rule 1210.11 prohibiting a
member from registering or maintaining the registration of a person
unless the registration is consistent with the requirements of proposed
Rule 1210.\51\
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\51\ As discussed above, the Exchange is also proposing Rule
1210, Supplementary Material .12, Application for Registration and
Jurisdiction, which is not included in FINRA Rule 1210. Proposed
Exchange Rule 1210, Supplementary Material .12, is based upon
portions of existing Nasdaq Rule 1031.
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M. Registration Categories (Proposed Rule 1220)
The Exchange is proposing to adopt new and revised registration
category rules and related definitions in proposed Rule 1220,
Registration Categories.\52\
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\52\ For ease of reference, the Exchange proposes to adopt as
Rule 1220, Supplementary Material .07, in chart form, a Summary of
Qualification Requirements in chart form for each of the Exchange's
permitted registration categories discussed below.
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1. Definition of Principal (Proposed Rule 1220(a)(1))
Current Rule 611(b) defines ``principal'' to include sole
proprietors, officers, partners, managers of offices of supervisory
jurisdiction and directors who are actively engaged in the management
of the member organization's investment banking or securities business,
such as supervision, solicitation, conduct of business or the training
of persons associated with a member organization for any of these
functions. The Exchange is proposing to streamline and adopt Rule
611(b) as Rule 1220(a)(1).
For the reason discussed above in connection with proposed Rule
1210, proposed Rule 1220(a)(1) would not apply to individuals who are
not engaged in the management of the member's securities business even
if they are engaged in the management of the member's investment
banking business. Proposed Rule 1220(a)(1) clarifies that a member's
chief executive officer (``CEO'') and chief financial officer (``CFO'')
(or equivalent officers) are considered principals based solely on
their status. The proposed rule further clarifies that the term
``principal'' includes any other associated person who is performing
functions or carrying out responsibilities that are required to be
performed or carried out by a principal under Exchange rules. In
addition, the proposed rule provides that the phrase ``actively engaged
in the management of the member's securities business'' includes the
management of, and the implementation of corporate policies related to,
such business as well as managerial decision-making authority with
respect to the member's securities business and management-level
responsibilities for supervising any aspect of such business, such as
serving as a voting member of the member's executive, management or
operations committees.
2. General Securities Principal (Proposed Rule 1220(a)(2))
Current Rule 612(a) currently requires that an associated person
who meets the definition of ``principal'' under Rule 611 and each
person designated as Chief Compliance Officer (``CCO'') on Schedule A
of the member's Form BD (Uniform Application for Broker-Dealer
Registration) register as a General Securities Principal. A person
registering as a General Securities Principal must pass the General
Securities Principal examination. The rule, however, provides that such
person is not required to register as a General Securities Principal if
the person's activities are so limited as to qualify such person for
one or more of the limited principal categories specified in Rules
611(b)-(e). Further, the rule does not preclude individuals registered
in a limited principal category from registering as General Securities
Principals. Rule 612(a) also
[[Page 50990]]
includes transitioning and grandfathering provisions for CCO's.
Rule 612(a) requires individuals seeking to register and qualify as
a General Securities Principal, prior to or concurrent with such
registration, to become registered as a General Securities
Representative. It also includes a grandfathering provision for persons
who were registered as principals before the adoption of the General
Securities Principal registration category. Finally, it provides that
an associated person registered solely as a General Securities
Principal is not qualified to function as a Limited Principal--
Financial and Operations, Limited Principal--General Securities Sales
Supervisor or Securities Trader Principal.
The Exchange is proposing to more clearly set forth the obligation
to register as a General Securities Principal. Specifically, proposed
Rule 1220(a)(2)(A) states that each principal as defined in proposed
Rule 1220(a)(1) is required to register with the Exchange as a General
Securities Principal, except that if a principal's activities are
limited to the functions of a Compliance Official, a Financial and
Operations Principal, a Securities Trader Principal, a Securities
Trader Compliance Officer, or a Registered Options Principal, then the
principal shall appropriately register in one or more of these
categories.\53\ Proposed Rule 1220(a)(2)(A) further provides that if a
principal's activities are limited solely to the functions of a General
Securities Sales Supervisor, then the principal may appropriately
register in that category in lieu of registering as a General
Securities Principal, provided that if the principal is engaged in
options sales activities he or she would be required to register as a
General Securities Sales Supervisor or as a Registered Options
Principal.\54\
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\53\ The Exchange is proposing to recognize the Compliance
Official and Securities Trader Compliance Officer registration
categories for the first time as a result of this proposed rule
change.
\54\ The Exchange's proposed Rule 1220(a)(2)(A) deviates
somewhat from the counterpart FINRA rule in that it does not offer
various limited registration categories provided for in FINRA's new
Rule 1220(a)(2)(A). It therefore proposes to reserve Rules
1220(a)(2)(A)(ii) and (iv).
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Proposed Rule 1220(a)(2)(B) requires that an individual registering
as a General Securities Principal satisfy the General Securities
Representative prerequisite registration and pass the General
Securities Principal qualification examination.
In conjunction with the elimination of the Corporate Securities
Representative registration category by FINRA, the Exchange is
proposing that Rule 1220(a)(2)(B) provide that, subject to the lapse of
registration provisions in proposed Rule 1210.08, General Securities
Principals who obtained the Corporate Securities Representative
prerequisite registration on the Exchange in lieu of the General
Securities Representative prerequisite registration and individuals who
had been registered as such within the past two years prior to the
operative date of the proposed rule change, may continue to supervise
corporate securities activities as currently permitted.\55\ Proposed
Rule 1220(a)(2)(B) requires all other individuals registering as
General Securities Principals after October 1, 2018, to first become
registered as a General Securities Representative pursuant to Rule
1220(b)(2).\56\
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\55\ The Exchange itself does not recognize the Corporate
Securities Representative registration category, but understands
that FINRA and Nasdaq currently accept Corporate Securities
Representative registration as a prerequisite to General Securities
Principal registration.
\56\ The Exchange is not adopting the FINRA Rule 1220(a)(2)(B)
language permitting an individual registering as a General
Securities Principal after October 1, 2018 to register as a General
Securities Sales Supervisor and to pass the General Securities
Principal Sales Supervisor Module qualification examination. The
Exchange believes that individuals registering as General Securities
Principals should be required to demonstrate their competence for
that role by passing the General Securities Principal qualification
examination.
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The Exchange is also proposing to eliminate the grandfathering
provision for individuals who were registered as principals prior to
the adoption of the General Securities Principal registration category
because it no longer has any practical application. Finally, the
Exchange is proposing to delete the provision that persons eligible for
registration in other principal categories are not precluded from
registering as General Securities Principals because it is
superfluous.\57\
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\57\ Proposed Rule 1220(a)(2) generally tracks FINRA Rule
1220(a)(2), except that it omits references to a number of
registration categories which FINRA recognizes but that the Exchange
does not, and it includes a reference to the Securities Trader
Compliance Officer category which the Exchange proposes to
recognize, but which FINRA does not. Additionally, proposed Rule
1220(a)(2)(A)(i) extends that provision's exception to the General
Securities Principal registration requirement to certain principals
whose activities are ``limited to'' (rather than ``include'') the
functions of a more limited principal. The Exchange believes that
activities ``limited to'' expresses the intent of that exception
more accurately than activities that ``include.'' Finally, proposed
Rule 1220(a)(2)(B) specifies that registration as a Corporate
Securities Representative must be with the Exchange in order to
fulfill the Corporate Securities Representative registration
prerequisite for General Securities Principal registration pursuant
to that rule.
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3. Compliance Official (Proposed Rule 1220(a)(3))
Current Rule 612(a) provides that each person designated as a Chief
Compliance Officer on Schedule A of Form BD of a member organization to
which Rule 611 applies, 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 Rule 612(b)-
(e).\58\ The Exchange proposes to delete this provision.
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\58\ The limited registration categories identified in Rule
612(b)-(e) are Limited Principal--Financial and Operations, Limited
Principal--General Securities Sales Supervisor, Limited Principal--
Registered Options Principal, and Securities Trader Principal.
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In its place, the Exchange proposes to adopt Rule 1220(a)(3)
providing that 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, provided that such person may
instead register as a Compliance Official if his or her duties do not
include supervision of trading. All individuals registering as
Compliance Official would be required, prior to or concurrent with such
registration, to pass the Compliance Official qualification
examination. An individual designated as a Chief Compliance Officer on
Schedule A of Form BD of a member that is engaged in limited securities
business could also be registered in a principal category under Rule
1220(a) that corresponds to the limited scope of the member's business.
Additionally, Rule 1220(a)(3) would provide that an individual
designated as a Chief Compliance Officer on Schedule A of Form BD may
register and qualify as a Securities Trader Compliance Officer if, with
respect to transactions in equity, preferred or convertible debt
securities, or options such person is engaged in proprietary trading,
the execution of transactions on an agency basis, or the direct
supervision of such activities other than a person associated with a
member whose trading activities are conducted principally on behalf of
an investment company that is registered with the SEC pursuant to the
Investment Company Act and that controls, is controlled by, or is under
common control with a member. All individuals registering as Securities
Trader Compliance Officers would be required to first become registered
[[Page 50991]]
pursuant to paragraph (b)(4) as a Securities Trader, and to pass the
Compliance Official qualification exam.\59\
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\59\ Proposed Rule 1220(a)(3) differs from FINRA Rule
1220(a)(3), Compliance Officer. The Exchange does not recognize the
Compliance Officer registration category. Similarly, FINRA does not
recognize the Compliance Official or the Securities Trader
Compliance Officer registration categories which the Exchange
proposes to recognize. However, FINRA Rule 1220(a)(3), like proposed
Rule 1220(a)(3), offers an exception pursuant to which a Chief
Compliance Officer designated on Schedule A of Form BD may register
in a principal category that corresponds to the limited scope of the
member's business.
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4. Financial and Operations Principal (Proposed Rule 1220(a)(4))
Existing Rule 612(b) provides that every member organization to
which Rule 611 applies and that is operating pursuant to the provisions
of SEC Rule 15c3-1(a)(1)(ii), (a)(2)(i) or (a)(8) shall designate as
Limited Principal--Financial and Operations those persons associated
with it, at least one of whom shall be its chief financial officer, who
perform the duties described in Rule 612(b)(ii).\60\ It requires each
person associated with a member organization who performs such duties
to be registered as a Limited Principal--Financial and Operations with
the Exchange and to pass the Series 27 examination before such
registration may become effective.
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\60\ Those duties include (A) final approval and responsibility
for the accuracy of financial reports submitted to any duly
established securities industry regulatory body; (B) final
preparation of such reports; (C) supervision of individuals who
assist in the preparation of such reports; (D) 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; (E) supervision and/or performance
of the member organization's responsibilities under all financial
responsibility rules promulgated pursuant to the provisions of the
Act; (F) 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 (G) any
other matter involving the financial and operational management of
the member organization. A person registered solely as a Limited
Principal--Financial and Operations shall not be qualified to
function in a Principal capacity with responsibility over any other
area of business activity.
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The Exchange is proposing to delete Rule 612(b) and to adopt in its
place Rule 1220(a)(4), substituting the word ``and'' for the current
word ``or'' found in Rule 612(b)(ii)(F) in order to conform to FINRA
Rule 1220(a)(4)(A) in describing the duties of a Financial and
Operations Principal.\61\
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\61\ FINRA Rule 1220(a)(4) differs from proposed Rule 1220(a)(4)
in that it includes an Introducing Broker-Dealer Financial and
Operations Principal registration requirement. Additionally,
proposed Rule 1220(a)(4) contains a requirement, which the FINRA
rule does not, that each person associated with a member who
performs the duties of a Financial and Operations Principal must
register as such with the Exchange. Further, as discussed above, the
Exchange is not adopting a Principal Financial Officer or Principal
Operations Officer requirement like FINRA Rule 1220(a)(4)(B), as it
believes the Financial and Operations Principal requirement is
sufficient. Finally, proposed Rule 1220(a)(4)(B)(v) and (vi) contain
minor wording variations from the FINRA rule.
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5. Investment Banking Principal (Proposed Rule 1220(a)(5))
The Exchange does not recognize the Investment Banking Principal
registration category and is reserving Rule 1220(a)(5), retaining the
caption solely to facilitate comparison with FINRA's rules.
6. Research Principal (Proposed Rule 1220(a)(6))
The Exchange does not recognize the Research Principal registration
category and is reserving Rule 1220(a)(6), retaining the caption solely
to facilitate comparison with FINRA's rules.
7. Securities Trader Principal (Proposed Rule 1220(a)(7))
Existing Rule 612(e) provides that each person associated with a
member who is included within the definition of principal in Rule
611(b) and who will have supervisory responsibility over the securities
trading activities described in Rule 613(f) shall become qualified and
registered as a Securities Trader Principal. To qualify for
registration as a Securities Trader Principal, such person must become
qualified and registered as a Securities Trader under Rule 613(f) and
pass the General Securities Principal qualification examination. A
person who is qualified and registered as a Securities Trader Principal
under this provision may only have supervisory responsibility over the
Securities Trader activities specified in Rule 613(f), unless such
person is separately qualified and registered in another appropriate
principal registration category, such as the General Securities
Principal registration category. Conversely, a person who is registered
as a General Securities Principal is not qualified to supervise the
trading activities described in Rule 613(f), unless such person has
also become qualified and registered as a Securities Trader under Rule
613(f) by passing the Securities Trader qualification examination and
become registered as a Securities Trader Principal.
The Exchange is proposing to delete Rule 612(e) and to adopt in its
place Rule 1220(a)(7), Securities Trader Principal. Proposed Rule
1220(a)(7) requires that a principal responsible for supervising the
securities trading activities specified in proposed Rule 1220(b)(4)
\62\ register as a Securities Trader Principal. The proposed rule
requires individuals registering as Securities Trader Principals to be
registered as Securities Traders and to pass the General Securities
Principal qualification examination.
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\62\ Proposed Rule 1220(b)(4), discussed below, provides for
registration in the representative-level ``Securities Trader''
category.
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8. Registered Options Principal (Proposed Rules 1220(a)(8))
Rule 612(d) provides that each person associated with a member
organization to which Rule 611 applies and who is included in the
definition of principal in Rule 611 may register with the Exchange as a
Limited Principal--Registered Options Principal if: (A) His or her
supervisory responsibilities in the investment banking and securities
business are limited exclusively to the options activities of a member
organization, (B) he or she is registered pursuant to Exchange rules as
a General Securities Representative, and (C) he or she is qualified to
be so registered by passing the Series 4 examination. It also provides
that a person registered in this category solely on the basis of having
passed the Series 4 examination for Limited Principal--Registered
Options Principal shall not be qualified to function in a principal
capacity with responsibility over any area of business activity not
described in paragraph (d)(i)(A).
The Exchange is proposing to delete Rule 612(d) and to adopt Rule
1220(a)(8)(A), Registered Options Principal, which would require under
its section (a)(8)(A) that each member that is engaged in transactions
in options with the public to have at least one Registered Options
Principal.\63\
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\63\ Proposed Rule 1220(a)(8) differs from FINRA Rule 1220(a)(8)
in that it omits certain references to other specific FINRA rules.
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In addition, each principal as defined in paragraph (a)(1) of the
rule who is responsible for supervising a member's options sales
practices with the public would be required to register with the
Exchange as a Registered Options Principal, subject to the following
exception. If a principal's options activities are limited solely to
those activities that may be supervised by a General Securities Sales
Supervisor, then such person may register as a General Securities Sales
Supervisor pursuant to paragraph (a)(10) of the Rule in lieu of
registering as a Registered Options Principal.\64\
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\64\ Current Exchange Rule 1024, Conduct of Accounts for Options
Trading, provides that members, member organizations and individuals
associated with member organizations shall not be approved to
transact options business with the public until such persons, who
are designated as Options Principals, have been approved by and
registered with the Exchange. Further, persons engaged in the
supervision of options sales practice or a person to whom the
designated general partner or executive officer (pursuant to Rule
1025) or another Registered Options Principal delegates the
authority to supervise options sales practices shall be designated
as options principals. Rule 1024, Commentary .06 provides that
individuals engaged in the supervision of options sales practices
and designated as Options Principals are required to qualify as an
Options Principal by passing the Registered Options Principal
Qualification Examination (Series 4) or the Sales Supervisor
Qualification Examination (Series 9/10), and is proposed to be
deleted in view of new Rule 1220(a)(8)(a). Under Rule 1024.07,
individuals who are delegated responsibility pursuant to Rule 1025
for the acceptance of discretionary accounts, for approving
exceptions to a member's criteria or standards for uncovered options
accounts, and for approval of communications, shall be designated as
Options Principals and are required to qualify as an Options
Principal by passing the Registered Options Principal Qualification
Examination (Series 4). Further, Exchange Rule 1024.08 states that a
person accepting orders from non-member customers (unless such
customer is a broker-dealer registered with the Securities and
Exchange Commission) is required to register with the Exchange and
to be qualified by passing the General Securities Registered
Representative Examination (Series 7). Except for Rule 1024,
Commentary .06, the foregoing provisions of Rule 1024 are specific
to conducting an options business with the public and are not
proposed to be amended in this proposed rule change. However, Rule
1024(a) also contains provisions regarding submission of Forms U4
and U5 to WebCRD that are duplicative of the proposed 1200 Series of
rules, in particular proposed Rules 1210.12, Application for
Registration and Jurisdiction, and 1250, Electronic Filing
Requirements for Electronic Forms, and are therefore proposed to be
deleted.
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[[Page 50992]]
Pursuant to proposed Rule 1220(a)(8)(B), subject to the lapse of
registration provisions in Rule 1210.08, each person registered as a
Registered Options Principal on October 1, 2018 and each person who was
registered as a Registered Options Principal within two years prior to
October 1, 2018 would be qualified to register as a Registered Options
Principal without passing any additional qualification examinations.
All other individuals registering as Registered Options Principals
after October 1, 2018 would, prior to or concurrent with such
registration, be required to become registered pursuant to paragraph
Rule 1220(b)(2) of the Rule as a General Securities Representative and
pass the Registered Options Principal qualification examination.\65\
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\65\ The Exchange is also proposing to adopt Rule 1220,
Supplementary Material .02, which provides that each person who is
registered with the Exchange as a Registered Options Principal (or
as a General Securities Representative, Options Representative, or
General Securities Sales Supervisor) shall be eligible to engage in
security futures activities as a principal provided that such
individual completes a Firm Element program as set forth in proposed
Rule 1240 that addresses security futures products before such
person engages in security futures activities. Unlike FINRA Rule
1220.02, proposed Exchange Rule 1220.02 omits references to United
Kingdom Securities Representatives and Canada Securities
Representatives, which are registration categories the Exchange does
not recognize. In any event, the Exchange does not currently offer
security futures products for trading. In addition, the Exchange is
also proposing to adopt Rule 1220, Supplementary Material .03 which
requires notification to the Exchange in the event such person is
terminated, resigns, becomes incapacitated or is otherwise unable to
perform the duties of a Registered Options Principal, and imposes
certain restrictions on the member's options business in that event.
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9. Government Securities Principal. [sic] (Rule 1220(a)(9))
The Exchange does not recognize the Government Securities Principal
registration category and is reserving Rule 1220(a)(9), retaining the
caption solely to facilitate comparison with FINRA's rules.
10. General Securities Sales Supervisor (Proposed Rules 1220(a)(10) and
1220.04)
Current Rule 612(c) provides that each person associated with a
member organization to which Rule 611 applies and who is included in
the definition of Principal in Rule 611 may register with the Exchange
as a Limited Principal--General Securities Sales Supervisor if: (A) His
or her supervisory responsibilities in the investment banking and
securities business are limited to the securities sales activities of a
member organization, including the training of sales and sales
supervisory personnel and the maintenance of records of original entry
and/or ledger accounts of the member organization required to be
maintained in branch offices by SEC record keeping rules; (B) he or she
is registered pursuant to Exchange Rules as a General Securities
Representative; and (C) he or she is qualified to be so registered by
passing the Series 9 or Series 10 examination. Under the rule a person
registered in this category solely on the basis of having passed the
Series 9 or Series 10 examination for Limited Principal--General
Securities Sales Supervisor is not qualified to: (A) Function in a
Principal capacity with responsibility over any area of business
activity not described in paragraph (c)(i)(A); (B) be included for
purposes of the Principal numerical requirements of Rule 611(e); or (C)
perform for a member organization any or all of the following
activities: (1) Supervision of the origination and structuring of
underwritings; (2) supervision of market making commitments; (3) final
approval of advertisements as these are defined in Rule 605; (4)
supervision of the custody of firm or customer funds and/or securities
for purposes of SEC Rule 15c3-3; or (5) supervision of overall
compliance with financial responsibility rules for broker/dealers
promulgated pursuant to the provisions of the Act. Rule 612(c)(iii)
explains the purpose of the General Securities Sales Supervisor
registration category.
The Exchange is proposing to adopt Rule 612(c)(i) and (ii) and Rule
612(c)(iii), with changes, as Rules 1220(a)(10) and 1220.04,
respectively.\66\ Rule 1220(a)(10), however, omits the current Rule
1022(g) prohibition against supervision of the origination and
structuring of underwritings, as that activity does not fall within the
new, more limited scope of ``securities trading'' covered by the new
1200 Series of rules.
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\66\ The Exchange is not proposing to carry over into proposed
Rule 1220(a)(10) the current Rule 612(c)(ii)(C)(3) prohibition
against final approval of advertisements by General Securities Sales
Supervisors. The Exchange notes that FINRA removed this prohibition
several years ago from NASD Rule 1022(g) (Limited Principal--General
Securities Sales Supervisor) and NASD IM-1022-2 (Limited Principal--
General Securities Sales Supervisor). See Securities Exchange Act
Release No. 68918 (February 13, 2013), 78 FR 11925 (February 20,
2013) (SR-FINRA-2013-014). Also, unlike FINRA Rule 1220.04, proposed
Exchange Rule 1220.04 refers to ``multiple exchanges'' rather than
listing the various exchanges where a sales principal might be
required to qualify in the absence of the General Securities Sales
Supervisor registration category. It also omits FINRA internal
cross-references.
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Each person seeking to register as a General Securities Sales
Supervisor would be required, prior to or concurrent with such
registration, to become registered pursuant to Rule 1220(b)(2) of the
rule as a General Securities Representative and pass the General
Securities Sales Supervisor qualification examinations.
11. Investment Company and Variable Contracts Products Principal and
Direct Participation Programs Principal (Rules 1220(a)(11) and (a)(12))
The Exchange does not recognize the Investment Company and Variable
Contracts Products Principal and the Direct Participation Programs
Principal registration categories and is reserving Rule 1220(a)(11) and
(a)(12), retaining the captions solely to facilitate comparison with
FINRA's rules.
12. Private Securities Offerings Principal (Rule 1220(a)(13))
The Exchange does not recognize the Private Securities Offerings
Principal registration category and is reserving Rule 1220(a)(13),
retaining the caption solely to facilitate comparison with FINRA's
rules.
[[Page 50993]]
13. Supervisory Analyst (Rule 1220(a)(14))
The Exchange does not recognize the Supervisory Analyst
registration category and is reserving Rule 1220(a)(14), retaining the
caption solely to facilitate comparison with FINRA's rules.
14. Definition of Representative (Proposed Rule 1220(b)(1))
Current Rule 1(a)(ee) defines ``Representative'' 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.
The Exchange now proposes to amend Exchange Rule 1(a)(ee) to
incorporate by reference a new definition of ``representative'' in
proposed Rule 1220(b)(1). Proposed 1220(b)(1) would define the term
representative as any person associated with a member, including
assistant officers other than principals, who is engaged in the
member's securities business, such as supervision, solicitation,
conduct of business in securities or the training of persons associated
with a member for any of these functions.
15. General Securities Representative (Proposed Rule 1220(b)(2))
Under Rule 613(a), except for 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 who 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 under PHLX in the category of registration
appropriate to the function to be performed as specified in paragraph
(e),\67\ Categories of Representative Registration--General Securities
Representative or (f), Securities Trader.
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\67\ Rule 613(e) provides that individuals required to register
with the Exchange as a General Securities Representative under the
rule must pass the Series 7 examination before such registration may
become effective.
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The Exchange proposes to delete those provisions of Rule 613(a) and
to adopt new Rule 1220(b)(2), General Securities Representative.
Proposed Rule 1220(b)(2)(A) states that each representative as defined
in proposed Rule 1220(b)(1) is required to register with the Exchange
as a General Securities Representative, subject to the exception that
if a representative's activities include the functions of a Securities
Trader, as specified in Rule 1220(b)(2), then such person shall
appropriately register as a Securities Trader.
Further, consistent with the proposed restructuring of the
representative-level examinations, proposed Rule 1220(b)(2)(B) would
require that individuals registering as General Securities
Representatives pass the SIE and the General Securities Representative
examination except that individuals registered as a General Securities
Representatives within two years prior to October 1, 2018 would be
qualified to register as General Securities Representatives without
passing any additional qualification examinations.\68\
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\68\ Proposed Rule 1220(b)(2)(B) differs from FINRA Rule
1220(b)(2)(B) in that it omits references to various registration
categories which FINRA recognizes but which the Exchange does not
propose to recognize.
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In addition, the Exchange is proposing to adopt Rule 1220.01 to
provide individuals who are associated persons of firms and who hold
foreign registrations an alternative, more flexible, process to obtain
an Exchange representative-level registration. The Exchange believes
that there is sufficient overlap between the SIE and these foreign
qualification requirements to permit them to act as exemptions to the
SIE. Under proposed Rule 1220.01, individuals who are in good standing
as representatives with the Financial Conduct Authority in the United
Kingdom or with a Canadian stock exchange or securities regulator would
be exempt from the requirement to pass the SIE, and thus would be
required only to pass a specialized knowledge examination to register
with the Exchange as a representative. The proposed approach would
provide individuals with a United Kingdom or Canadian qualification
more flexibility to obtain an Exchange representative-level
registration.
16. Operations Professional, Securities Trader, Investment Banking
Representative, Research Analyst, Investment Company and Variable
Contracts Products Representative, Direct Participation Programs
Representative and Private Securities Offerings Representative (Rules
1220(b)(3), 1220(b)(4), 1220(b)(5), 1220(b)(6), 1220(b)(7), 1220(b)(8),
1220(b)(9) and 1220.05)
Operations Professional, Investment Banking Representative,
Research Analyst, Investment Company and Variable Products
Representative, Direct Participation Programs Representative and
Private Securities Offerings Representative. The Exchange does not
recognize these registration categories for its associated persons. The
Exchange is therefore reserving Rules 1220(b)(3)--Operations
Professional, and related Rule 1220.05, Scope of Operations
Professional Requirement; 1220(b)(5)--Investment Banking
Representative; 1220(b)(6)--Research Analyst; 1220(b)(7)--Investment
Company and Variable Products Representative; 1220(b)(8)--Direct
Participation Programs Representative; and 1220(b)(9)--Private
Securities Offerings Representative, retaining the captions for each of
them solely to facilitate comparison with FINRA's rules.
Securities Trader--Proposed Rule 1220(b)(4). Pursuant to current
Exchange Rule 613(f)(1) and (2), associated persons must pass the
qualification examination for Securities Trader (the Series 57
examination) and register with the Exchange as a Securities Trader if,
with respect to transactions in equity, preferred or convertible debt
securities, or foreign currency options on the Exchange, such person is
engaged in proprietary trading, the execution of transactions on an
agency basis, or the direct supervision of such activities, other than
any person associated with a member whose trading activities are
conducted principally on behalf of an investment company that is
registered with the Commission pursuant to the Investment Company Act
of 1940 and that controls, is controlled by or is under common control,
with the member.\69\
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\69\ Rule 613(f)(3) provides that a person registered as a
Securities Trader is not qualified to function in any other
registration category, unless he or she is also qualified and
registered in such other registration category.
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The Exchange now proposes to delete Exchange Rule 613(f) and to
replace it with proposed Rule 1220(b)(4).\70\ Rule
[[Page 50994]]
1220(b)(4) would require each representative as defined in Rule
1220(b)(1) of the rule to register with the Exchange as a Securities
Trader if, with respect to transactions in equity, preferred or
convertible debt securities, or options \71\ such person is engaged in
proprietary trading, the execution of transactions on an agency basis,
or the direct supervision of such activities other than a person
associated with a member whose trading activities are conducted
principally on behalf of an investment company that is registered with
the SEC pursuant to the Investment Company Act and that controls, is
controlled by, or is under common control with a member. Rule
1220(b)(4) would require individuals registering as Securities Traders
to pass the SIE as well as the Securities Trader qualification exam.
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\70\ Proposed Rule 1220(b)(4)(A) differs from FINRA Rule
1220(b)(4)(A) in that it applies to trading on the Exchange while
the FINRA rule is limited to the specified trading which is
``effected otherwise than on a securities exchange.'' Additionally,
the FINRA rule does not specifically extend to options trading.
\71\ Current Rule 613(f) refers to transactions in foreign
currency options. Proposed Rule 1220(b)(4) would instead refer to
``options'' generally, to clarify that equity options as well as
foreign currency options are products with respect to which
Securities Trader registration requirements would apply.
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Additionally, proposed Rule 1220(b)(4)(A) would require each person
associated with a member who is: (i) Primarily responsible for the
design, development or significant modification of an algorithmic
trading strategy relating to equity, preferred or convertible debt
securities or options; or (ii) responsible for the day-to-day
supervision or direction of such activities to register with the
Exchange as a Securities Trader.\72\
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\72\ As noted above, this new registration requirement was
recently added to the FINRA rulebook. The Exchange has determined to
add a parallel requirement to its own rules, but also to add options
to the scope of products within the proposed rule's coverage. See
Securities Exchange Act Release No. 77551 (April 7, 2016), 81 FR
21914 (April 13, 2016) (Order Approving File No. SR-FINRA-2016-007).
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For purposes of this proposed new registration requirement an
``algorithmic trading strategy'' is an automated system that generates
or routes orders (or order-related messages) but does not include an
automated system that solely routes orders received in their entirety
to a market center. The proposed registration requirement applies to
orders and order related messages whether ultimately routed or sent to
be routed to an exchange or over the counter. An order router alone
would not constitute an algorithmic trading strategy. However, an order
router that performs any additional functions would be considered an
algorithmic trading strategy. An algorithm that solely generates
trading ideas or investment allocations--including an automated
investment service that constructs portfolio recommendations--but that
is not equipped to automatically generate orders and order-related
messages to effectuate such trading ideas into the market--whether
independently or via a linked router--would not constitute an
algorithmic trading strategy.\73\
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\73\ See Securities Exchange Act Release No. 77551 (April 7,
2016), 81 FR 21914 (April 13, 2016) (Order Approving File No. SR-
FINRA-2016-007).
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The associated persons covered by the expanded registration
requirement would be required to pass the requisite qualification
examination and be subject to the same continuing education
requirements that are applicable to individual Securities Traders. The
Exchange believes that potentially problematic conduct stemming from
algorithmic trading strategies--such as failure to check for order
accuracy, inappropriate levels of messaging traffic, and inadequate
risk management controls--could be reduced or prevented, in part,
through improved education regarding securities regulations for the
specified individuals involved in the algorithm design and development
process.
The proposal is intended to ensure the registration of one or more
associated persons that possesses knowledge of, and responsibility for,
both the design of the intended trading strategy and the technological
implementation of the strategy, sufficient to evaluate whether the
resulting product is designed to achieve regulatory compliance in
addition to business objectives. For example, a lead developer who
liaises with a head trader regarding the head trader's desired
algorithmic trading strategy and is primarily responsible for the
supervision of the development of the algorithm to meet such objectives
must be registered under the proposal as the associated person
primarily responsible for the development of the algorithmic trading
strategy and supervising or directing the team of developers.
Individuals under the lead developer's supervision would not be
required to register under the proposal if they are not primarily
responsible for the development of the algorithmic trading strategy or
are not responsible for the day-to-day supervision or direction of
others on the team. Under this scenario, the person on the business
side that is primarily responsible for the design of the algorithmic
trading strategy, as communicated to the lead developer, also would be
required to register. In the event of a significant modification to the
algorithm, members, likewise, would be required to ensure that the
associated person primarily responsible for the significant
modification (or the associated person supervising or directing such
activity), is registered as a Securities Trader.
A member employing an algorithm is responsible for the algorithm's
activities whether the algorithm is designed or developed in house or
by a third-party. Thus, in all cases, robust supervisory procedures,
both before and after deployment of an algorithmic trading strategy,
are a key component in protecting against problematic behavior stemming
from algorithmic trading. In addition, associated persons responsible
for monitoring or reviewing the performance of an algorithmic trading
strategy must be registered, and a member's trading activity must
always be supervised by an appropriately registered person. Therefore,
even where a firm purchases an algorithm off-the-shelf and does not
significantly modify the algorithm, the associated person responsible
for monitoring or reviewing the performance of the algorithm would be
required to be registered.
Pursuant to proposed Rule 1220(b)(4)(B) each person registered as a
Securities Trader on October 1, 2018 and each person who was registered
as a Securities Trader within two years prior to October 1, 2018 would
be qualified to register as a Securities Trader without passing any
additional qualification examinations. All other individuals
registering as Securities Traders after October 1, 2018 would be
required, prior to or concurrent with such registration, to pass the
SIE and the Securities Trader qualification examination.
17. Eliminated Registration Categories (Proposed Rule 1220.06)
Proposed Rule 1220.06 has no practical relevance to the Exchange,
but is included because the Nasdaq Affiliated Exchanges are also
proposing to adopt the new 1200 Series, on a uniform basis. Proposed
Rule 1220.06 will be relevant to Nasdaq and BX which, unlike the
Exchange, are proposing to eliminate a number of existing registration
categories that are not currently recognized by the Exchange.\74\
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\74\ See SR-Nasdaq-2018-078.
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Proposed Rule 1220.06 provides that, subject to the lapse of
registration provisions in proposed Rule 1210.08, individuals who are
registered with the Exchange in any capacity recognized by
[[Page 50995]]
the Exchange immediately prior to October 1, 2018, and each person who
was registered with the Exchange in such categories within two years
prior to October 1, 2018, shall be eligible to maintain such
registrations with the Exchange. However, if individuals registered in
such categories terminate their registration with the Exchange and the
registration remains terminated for two or more years, they would not
be able to re-register in that category. In addition, proposed Rule
1220.06 would include the current restrictions to which Order
Processing Assistant Representatives are subject under Nasdaq
rules.\75\ As stated above, Rule 1220.06 would have no application to
the Exchange as a practical matter.\76\
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\75\ See Nasdaq Rule 1042.
\76\ Proposed Exchange Rule 1220.06 omits references to a number
of registration categories it does not propose to recognize, but
which FINRA refers to in its own Rule 1220.06.
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18. Grandfathering Provisions
In addition to the grandfathering provisions in proposed Rule
1220(a)(2) (relating to General Securities Principals) and proposed
Rule 1220.06 (relating to the eliminated registration categories), the
Exchange is proposing to include grandfathering provisions in proposed
Rule 1220(a)(8) (Registered Options Principal), 1220(b)(2) (General
Securities Representative), and 1220(b)(4) (Securities Trader).
Specifically, the proposed grandfathering provisions provide that,
subject to the lapse of registration provisions in proposed Rule
1210.08, individuals who are registered in specified registration
categories on the operative date of the proposed rule change and
individuals who had been registered in such categories within the past
two years prior to the operative date of the proposed rule change would
be qualified to register in the proposed corresponding registration
categories without having to take any additional examinations.
N. Associated Persons Exempt From Registration (Proposed Rules 1230 and
1230.01)
Existing Rule 614 currently provides that the following persons
associated with a member organization are not required to register:
(i) Persons associated with a member organization whose functions
are solely and exclusively clerical or ministerial;
(ii) persons associated with a member organization who are not
actively engaged in the investment banking or securities business;
(iii) persons associated with a member organization whose functions
are related solely and exclusively to the member organization's need
for nominal corporate officers or for capital participation; and
(iv) persons associated with a member organization whose functions
are related solely and exclusively to effecting transactions on the
floor of another national securities exchange and who are registered as
floor members with such exchange; transactions in municipal securities;
transactions in commodities; transactions in security futures, provided
that any such person is registered with FINRA or a registered futures
association; transactions in variable contracts and insurance premium
funding programs and other contracts issued by an insurance company;
transactions in direct participation programs; transactions in
government securities; or effecting sales as part of a primary offering
of securities not involving a public offering pursuant to Section 3(b),
4(2), or 4(6) of the Securities Act of 1933 and the rules and
regulations thereunder.
The Exchange is proposing to adopt Rule 614 as Rule 1230 subject to
certain changes. Rule 614 exempts from registration those associated
persons who are not actively engaged in the securities business. It
also exempts from registration those associated persons whose functions
are related solely and exclusively to a member's need for nominal
corporate officers or for capital participation.\77\ The Exchange
believes that the determination of whether an associated person is
required to register must be based on an analysis of the person's
activities and functions in the context of the various registration
categories. The Exchange does not believe that categorical exemptions
for associated persons who are not ``actively engaged'' in a member's
securities business, associated persons whose functions are related
only to a member's need for nominal corporate officers or associated
persons whose functions are related only to a member's need for capital
participation is consistent with this analytical framework. The
Exchange therefore is proposing to delete these exemptions. Rule
614(a)(iv)(a) further exempts from registration associated persons
whose functions are related solely and exclusively to effecting
transactions on the floor of another national securities exchange as
long as they are registered as floor members with such exchange.
Because exchanges have registration categories other than the floor
member category, proposed Rule 1230 clarifies that the exemption
applies to associated persons solely and exclusively effecting
transactions on the floor of another national securities exchange,
provided they are appropriately registered with such exchange.\78\
Additionally, the Exchange proposes to add Section 3 of Rule 1230,
pursuant to which persons associated with a member that are not
citizens, nationals, or residents of the United States or any of its
territories or possessions, that will conduct all of their securities
activities in areas outside the jurisdiction of the United States, and
that will not engage in any securities activities with or for any
citizen, national or resident of the United States need not register
with the Exchange.\79\
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\77\ These exemptions generally apply to associated persons who
are corporate officers of a member in name only to meet specific
corporate legal obligations or who only provide capital for a
member, but have no other role in a member's business.
\78\ Proposed Rule 1230 differs from FINRA Rule 1230 in that it
includes a number of exemptions based upon current Nasdaq Rule
1060(a) which are not found in FINRA Rule 1230.
\79\ Individuals described by Section 3 of Rule 1230 who are
associated with FINRA members may be registered with FINRA as
Foreign Associates pursuant to FINRA Rule 1220.06. FINRA is
eliminating this registration category effective October 1, 2018,
and the Exchange has never recognized it.
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The Exchange proposes to adopt Rule 1230.01 to clarify that the
function of accepting customer orders is not considered a clerical or
ministerial function and that associated persons who accept customer
orders under any circumstances are required to be appropriately
registered. However, the proposed rule provides that an associated
person is not accepting a customer order where occasionally, when an
appropriately registered person is unavailable, the associated person
transcribes the order details and the registered person contacts the
customer to confirm the order details before entering the order.
O. Changes to Continuing Education Requirements (Proposed Rule 1240)
As described above, existing Rule 640, Continuing Education for
Registered Persons, includes a Regulatory Element and a Firm Element.
The Regulatory Element applies to registered persons and consists of
periodic computer-based training on regulatory, compliance, ethical,
supervisory subjects and sales practice standards. The Firm Element
consists of at least annual, member-developed and administered training
programs designed to keep covered registered persons current regarding
securities products, services and strategies offered by the member. The
CE requirements set forth in Rule 640 have been reorganized and
renumbered,
[[Page 50996]]
and are now proposed to be adopted with amendments as new Rule
1240.\80\
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\80\ Proposed Rule 1240 also differs slightly from FINRA Rule
1240 in that it omits references to certain registration categories
which the Exchange does not recognize as well as an internal cross
reference to FINRA Rule 4517.
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1. Regulatory Element
The Exchange is proposing to replace the term ``registered person''
in current Rule 640 with the term ``covered person'' and make
conforming changes to proposed Rule 1240(a). For purposes of the
Regulatory Element, the Exchange is proposing to define the term
``covered person'' in Rule 1240(a)(5) as any person registered pursuant
to proposed Rule 1210, including any person who is permissively
registered pursuant to proposed Rule 1210.02, and any person who is
designated as eligible for an FSA waiver pursuant to proposed Rule
1210.09. The purpose of this change is to ensure that all registered
persons, including those with permissive registrations, keep their
knowledge of the securities industry current. The inclusion of persons
designated as eligible for an FSA waiver under the term ``covered
persons'' corresponds to the requirements of proposed Rule 1210.09. In
addition, consistent with proposed Rule 1210.09, proposed Rule 1240(a)
provides that an FSA-eligible person would be subject to a Regulatory
Element program that correlates to his or her most recent registration
category, and CE would be based on the same cycle had the individual
remained registered. The proposed rule also provides that if an FSA-
eligible person fails to complete the Regulatory Element during the
prescribed time frames, he or she would lose FSA eligibility.
Further, the Exchange is proposing to add a rule to address the
impact of failing to complete the Regulatory Element on a registered
person's activities and compensation. Specifically, proposed Rule
1240(a)(2) provides that any person whose registration has been deemed
inactive under the rule may not accept or solicit business or receive
any compensation for the purchase or sale of securities. However, like
the FINRA rule, the proposed rule provides that such person may receive
trail or residual commissions resulting from transactions completed
before the inactive status, unless the member with which the person is
associated has a policy prohibiting such trail or residual commissions.
2. Firm Element
The Exchange believes that training in ethics and professional
responsibility should apply to all covered registered persons.
Therefore, proposed Rule 1240(b)(2)(B), which provides that the Firm
Element training programs must cover applicable regulatory
requirements, would also require that a firm's training program cover
training in ethics and professional responsibility.
P. Electronic Filing Rules
Existing Rule 616 states that forms required to be filed under the
Rule 600 Series shall be filed electronically through WebCRD, including
initial filings and amendments of Forms U4 and U5. It also provides for
prompt filing of amendments, and that records of filed documents be
retained 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. Electronic filing requirements are also found in a number of
other rules.
The Exchange is proposing to delete existing Rule 616 and to
replace it with new Rule 1250, Electronic Filing Requirements for
Uniform Forms, which will consolidate Form U4 and U5 electronic filing
requirements in a single location.\81\ The new rule provides that all
forms required to be filed under the Exchange's registration rules
including the Rule 1200 series shall be filed through an electronic
process or such other process as the Exchange may prescribe to the
Central Registration Depository. It also would impose certain new
requirements.
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\81\ Proposed Rule 1250 is based upon current Nasdaq Rule 1140.
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Under Rule 1250(b) members would be required to designate
registered principal(s) or corporate officer(s) who are responsible for
supervising a firm's electronic filings. The registered principal(s) or
corporate officer(s) who has or have the responsibility to review and
approve the forms filed pursuant to the rule would be required to
acknowledge, electronically, that he is filing this information on
behalf of the member and the member's associated persons. Under Rule
1250, Supplementary Material .01, the registered principal(s) or
corporate officer(s) could delegate filing responsibilities to an
associated person (who need not be registered) but could not delegate
any of the supervision, review, and approval responsibilities mandated
in Rule 1250(b). The registered principal(s) or corporate officer(s)
would be required to take reasonable and appropriate action to ensure
that all delegated electronic filing functions were properly executed
and supervised.
Under Rule 1250(c)(1), initial and transfer electronic Form U4
filings and any amendments to the disclosure information on Form U4
must be based on a manually signed Form U4 provided to the member or
applicant for membership by the person on whose behalf the Form U4 is
being filed. As part of the member's recordkeeping requirements, it
would be required to retain the person's manually signed Form U4 or
amendments to the disclosure information on Form U4 in accordance with
Rule 17a-4(e)(1) under the Act and make them available promptly upon
regulatory request. An applicant for membership must also retain every
manually signed Form U4 it receives during the application process and
make them available promptly upon regulatory request. Rule 1250(c)(2)
and Supplementary Material .03 and 04 provide for the electronic filing
of Form U4 amendments without the individual's manual signature,
subject to certain safeguards and procedures.
Rule 1250(d) provides that upon filing an electronic Form U4 on
behalf of a person applying for registration, a member must promptly
submit fingerprint information for that person and that the Exchange
may make a registration effective pending receipt of the fingerprint
information.\82\ It further provides that if a member fails to submit
the fingerprint information within 30 days after filing of an
electronic Form U4, the person's registration will be deemed inactive,
requiring the person to immediately cease all activities requiring
registration or performing any duties and functioning in any capacity
requiring registration. Under the rule the Exchange must
administratively terminate a registration that is inactive for a period
of two years. A person whose registration is administratively
terminated could reactivate the registration only by reapplying for
registration and meeting the qualification requirements of the
applicable provisions of proposed Exchange Rule 1220. Upon application
and a showing of good cause, the Exchange could extend the 30-day
period.
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\82\ Proposed Rule 1250(d) covers the same subject matter as
current Rules 616, Electronic Filing Requirements for Uniform Forms,
and 623, Fingerprinting, which would be deleted.
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Rule 1250(e) would require initial filings and amendments of Form
U5 to be submitted electronically. As part of the member's
recordkeeping requirements, it would be required to retain such records
for a period of not less than three years, the first two years
[[Page 50997]]
in an easily accessible place, in accordance with Rule 17a-4 under the
Act, and to make such records available promptly upon regulatory
request.
Finally, under proposed Rule 1250, Supplementary Material .02, a
member could enter into an agreement with a third party pursuant to
which the third party agrees to file the required forms electronically
on behalf of the member and the member's associated persons.
Notwithstanding the existence of such an agreement, the member would
remain responsible for complying with the requirements of the Rule.
Q. Trading Floor Registration (Rule 1260)
Currently, Rules 620(a) and (b) govern trading floor member
registration and non-member clerk registration. Rule 620(a) requires
each Floor Broker, Specialist and Registered Options Trader on the
Exchange trading floor to be registered as ``Member Exchange'' (``ME'')
under ``PHLX'' on Form U4, and to successfully complete the appropriate
floor trading examination(s), if prescribed by the Exchange, in
addition to requirements imposed by other Exchange rules. Under the
rule the Exchange may also require periodic examinations due to changes
in trading rules, products or automated systems. Rule 620(b) requires
all trading floor personnel, including clerks, interns, stock execution
clerks and any other associated persons, of a member organization not
required to register pursuant to Rule 620(a) to be registered as
``Floor Employee'' (``FE'') under ``PHLX'' on Form U4. Under the rule
the Exchange may require these individuals to also successfully
complete an examination, and may require periodic examinations due to
changes in trading rules, products or automated systems. To consolidate
these registration rules into the new Rule 1200 series, Rule 620 is
being renumbered as Rule 1260.\83\
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\83\ Exhibit 5 simply reflects the proposed new rule number of
current Rule 620 rather than the deletion of the entire rule and the
subsequent reinsertion of the entire rule following Rule 1250. In
the rulebook, Rule 1260 will appear immediately following Rule 1250.
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The Exchange proposes to adjust internal cross references as
required by this proposed rule change, but not to make substantive
changes to Rule 620(a) and (b). However, the Exchange proposes to adopt
new section (c) to exempt certain individuals on the Exchange's trading
floor from the representative registration requirements of proposed
rules 1210 and 1220. Rule 1260(c) would provide that members \84\ whose
activities are limited to the Exchange's options trading floor and who
are registered pursuant to Rule 1260(a), as well as associated persons
whose activities are limited to the Exchange's options trading floor
and are registered pursuant to Rule 1260(b) are exempt from the
representative registration requirements (but not the principal
registration requirements, including any prerequisite representative
registration requirement) of Rules 1210 and 1220. Rule 1260(c) is
intended to preserve the current exclusion of these individuals from
the representative registration requirements of Rule 613.\85\
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\84\ In Rule 1260, unlike the other 1200 Series of proposed
rules, the word ``member'' is not used to mean ``member
organization.''
\85\ Current Rule 613(a) imposes representative registration
requirements upon persons engaged or to be engaged in the investment
banking or securities business of a member organization 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).
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R. Other Rules
The Exchange is deleting Rule 614, Persons Exempt from
Registration, as explained above. Rule 614(b), however, contains
provisions dealing with Nonregistered Foreign ``Finders'' and is simply
being relocated with nonsubstantive changes to new Rule 2040.\86\ The
remaining rules identified above under ``Overview'' which are to be
amended in this proposed rule change simply update citations and/or
make technical or nonsubstantive changes to the proposed new rules.
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\86\ The FINRA counterpart to Rule 614(b) occupies a similar
location in the FINRA rulebook. See FINRA Rule 2040(c),
Nonregistered Foreign Finders.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\87\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\88\ in particular, in that it is designed 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.
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\87\ 15 U.S.C. 78f(b).
\88\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change will
streamline, and bring consistency and uniformity to, the registration
rules, which will, in turn, assist members and their associated persons
in complying with these rules and improve regulatory efficiency. The
proposed rule change will also improve the efficiency of the
examination program, without compromising the qualification standards,
by eliminating duplicative testing of general securities knowledge on
examinations and by removing examinations that currently have limited
utility. In addition, the proposed rule change will expand the scope of
permissive registrations, which, among other things, will allow members
to develop a depth of associated persons with registrations to respond
to unanticipated personnel changes and will encourage greater
regulatory understanding. Further, the proposed rule change will
provide a more streamlined and effective waiver process for individuals
working for a financial services industry affiliate of a member, and it
will require such individuals to maintain specified levels of
competence and knowledge while working in areas ancillary to the
securities business. The proposed rule change will improve the
supervisory structure of firms by imposing an experience requirement
for representatives that are designated by firms to function as
principals for a 120-day period before having to pass an appropriate
principal qualification examination. The proposed rule change will also
prohibit unregistered persons from accepting customer orders under any
circumstances, which will enhance investor protection.
The Exchange believes that, with the introduction of the SIE and
expansion of the pool of individuals who are eligible to take the SIE,
the proposed rule change has the potential of enhancing the pool of
prospective securities industry professionals by introducing them to
securities laws, rules and regulations and appropriate conduct before
they join the industry in a registered capacity.
The extension of the Securities Trader registration requirement to
developers of algorithmic trading strategies requires associated
persons primarily responsible for the design, development or
significant modification of an algorithmic trading strategy or
responsible for the day-to-day supervision or direction of such
activities to register and meet a minimum standard of knowledge
regarding the securities rules and regulations applicable to the member
employing the algorithmic trading strategy. This minimum standard of
knowledge is identical to the standard of knowledge currently
applicable to traditional securities traders. The Exchange believes
that improved
[[Page 50998]]
education of firm personnel may reduce the potential for problematic
market conduct and manipulative trading activity.
Finally, the proposed rule change makes organizational changes to
the Exchange's registration and qualification rules to align them with
registration and qualification rules of the Nasdaq Affiliated
Exchanges, in order to prevent unnecessary regulatory burdens and to
promote efficient administration of the rules. The change also makes
minor updates and corrections to the Exchange's rules which improve
readability.
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. The proposed rule change is
designed to ensure that all associated persons of members engaged in a
securities business are, and will continue to be, properly trained and
qualified to perform their functions, will be supervised, and can be
identified by regulators. The proposed new 1200 Series of rules, which
are similar in many respects to the registration-related requirements
adopted by FINRA effective October 1, 2018, should enhance the ability
of member firms to comply with the Exchange's rules as well as with the
Federal securities laws. Additionally, as described above, the Exchange
intends the amendments described herein to eliminate inconsistent
registration-related requirements across the Nasdaq Affiliated
Exchanges, thereby promoting uniformity of regulation across markets.
The new 1200 Series should in fact remove administrative burdens that
currently exist for members seeking to register associated persons on
multiple Nasdaq Affiliated Exchanges featuring varying registration-
related requirements. Additionally, all similarly-situated associated
persons of members will be treated similarly under the new 1200 Series
in terms of standards of training, experience and competence for
persons associated with Exchange members.
With respect in particular to registration of developers of
algorithmic trading strategies, the Exchange recognizes that the
proposal would impose costs on member firms employing associated
persons engaged in the activity subject to the registration
requirement. Specifically, among other things, additional associated
persons would be required to become registered under the proposal, and
the firm would need to establish policies and procedures to monitor
compliance with the proposed requirement on an ongoing basis. However,
given the prevalence and importance of algorithmic trading strategies
in today's markets, the Exchange believes that associated persons
engaged in the activities covered by this proposal must meet a minimum
standard of knowledge regarding the applicable securities rules and
regulations. To mitigate the costs imposed on member firms, the
proposed rule change limits the scope of registration requirement by
excluding technological or development support personnel who are not
primarily responsible for the covered activities. It also excludes
supervisors who are not responsible for the ``day-to-day'' supervision
or direction of the covered activities.
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
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \89\ and Rule 19b-
4(f)(6) thereunder.
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\89\ 15 U.S.C. 78s(b)(3)(A).
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A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative for 30 days from the date of filing. However, Rule
19b-4(f)(6)(iii) \90\ permits the Commission to designate a shorter
time if such action is consistent with the protection of investors and
the public interest. The Exchange has asked the Commission to waive the
30-day operative delay so that the proposal may become operative on
October 1, 2018 to coincide with the effective date of FINRA's proposed
rule change on which the proposal is based.\91\ The waiver of the
operative delay would make the Exchange's qualification requirements
consistent with those of FINRA, as of October 1, 2018. Therefore, the
Commission believes that the waiver of the 30-day operative delay is
consistent with the protection of investors and the public interest and
hereby waives the 30-day operative delay and designates the proposal
operative on October 1, 2018.\92\
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\90\ 17 CFR 240.19b-4(f)(6)(iii).
\91\ See supra note 7. As discussed above, the Exchange has
stated that the new registration requirements for developers of
algorithmic trading strategies would become operative on April 1,
2019.
\92\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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 [email protected]. Please include
File Number SR-Phlx-2018-61 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2018-61. This file
number should be included on the 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 website (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 website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official
[[Page 50999]]
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. Persons submitting comments are cautioned that we do
not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
Phlx-2018-61 and should be submitted on or before October 31, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\93\
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\93\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-21902 Filed 10-9-18; 8:45 am]
BILLING CODE 8011-01-P